<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1996
REGISTRATION NO. 333-4490
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 5
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
ALL AMERICAN FOOD GROUP, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEW JERSEY 5461 22-3259558
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
9 LAW DRIVE
FAIRFIELD, NEW JERSEY 07006
(201) 244-9336
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
------------------
ANDREW THORBURN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
ALL AMERICAN FOOD GROUP, INC.
9 LAW DRIVE
FAIRFIELD, NEW JERSEY 07006
(201) 244-9336
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------
Copies to:
<TABLE>
<S> <C>
DAVID J. LEVENSON, ESQ. HANK GRACIN, ESQ.
ANITA J. FINKELSTEIN, ESQ. LEHMAN & EILEN
VENABLE, BAETJER, HOWARD & CIVILETTI, LLP 50 CHARLES LINDBERGH BLVD., SUITE 505
1201 NEW YORK AVENUE, N.W. UNIONDALE, NY 11553
WASHINGTON, DC 20005 (516) 222-0888
(202) 962-4800
</TABLE>
------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as possible after the Registration Statement becomes effective.
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, please 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 registration statement for the same
offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE(1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value(2)............... 1,265,000 Shares $ 3.50 $ 4,427,500 $ 1,526.72
Common Stock, no par value(3)............... 886,951 Shares $ 3.50 $ 3,104,328.50 $ 1,070.40
Underwriter's Warrants(4)................... -- -- $ 110 $ .04
Common Stock issuable upon exercise of
Underwriter's Warrants(4)(5).............. 110,000 Shares(6) $ 4.90(6) $ 539,000(6) $ 185.86
TOTAL................................... -- -- $ 8,032,438.50 $ 2,783.02(7)
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 165,000 shares which the Underwriters have the right to purchase
from the Company solely to cover over-allotments, if any.
(3) The Registrant is registering for resale by certain securityholders shares
of Common Stock issued in connection with the Registrant's private
placements.
(4) The Registrant is registering, for resale by the Underwriters, the
Underwriter's Warrants issuable upon the completion of this Offering and
shares of Common Stock underlying such Underwriter's Warrants.
(5) Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
also are being registered hereby such additional shares of Common Stock as
may become issuable pursuant to anti-dilution provisions upon exercise of
the Underwriter's Warrants.
(6) Computed based on the exercise price of the Underwriters' Warrants.
(7) A registration fee in the amount of $5,227.15 was paid in connection with
the filing of the Registration Statement on May 3, 1996.
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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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement covers the registration of (i) up to 1,265,000
shares, including shares to cover over-allotments, if any, of Common Stock, no
par value per share ("Common Stock"), of All American Food Group, Inc., a New
Jersey corporation (the "Company"), for sale by the Company in an underwritten
public offering; (ii) an additional 886,951 shares of Common Stock for resale
from time to time by the holders thereof, who acquired such shares in the
Company's prior private placements, subject to the contractual restrictions that
the holders may not sell, transfer, assign, pledge or hypothecate their shares
in any manner until the later of 180 days from the effective date of this
Registration Statement or 365 days from the date of initial purchase of such
shares from the Company in such private placements and, in addition, that
certain such holders who are not officers or directors of the Company (holding,
in the aggregate 622,643 shares of Common Stock) are subject to an Underwriters'
lock-up for a period of 12 months following the closing of the underwritten
offering, while holders of Common Stock who are officers or directors are
subject to a 24-month Underwriters' lock-up; (iii) for resale, warrants (the
"Underwriters' Warrants") exercisable to purchase 110,000 shares of Common Stock
at a price of $ per share (140% of the initial public offering price in
the underwritten offering) to be issued to the Underwriters in connection with
the underwritten offering; and (iv) 110,000 shares of Common Stock underlying
the Underwriters' Warrants. The shares of Common Stock issued by the Company in
its private placements are referred to collectively as the "Selling
Securityholder Securities" and the holders thereof as the "Selling
Securityholders."
The complete Prospectus relating to the underwritten offering follows
immediately after this Explanatory Note. Following the Prospectus for the
underwritten offering are pages of the Prospectus relating solely to the Selling
Securityholder Securities, including alternative front and back cover pages and
sections entitled "Concurrent Public Offering," "Plan of Distribution," and
"Selling Securityholders," to be used in lieu of the sections entitled
"Concurrent Offering" and "Underwriting" in the Prospectus relating to the
underwritten offering. Certain sections of the Prospectus for the underwritten
offering, such as "Use of Proceeds" and "Dilution," will not be used in the
Prospectus relating to the Selling Securityholder Securities.
<PAGE> 3
ALL AMERICAN FOOD GROUP, INC.
------------------
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM SB-2 ITEM CAPTION IN PROSPECTUS
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<C> <S> <C>
PART I
1. Front of Registration Statement and Outside Front
Cover of Prospectus............................ Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover
Prospectus..................................... Page of Prospectus
3. Summary Information and Risk Factors............. Prospectus Summary; Risk Factors
4. Use of Proceeds.................................. Use of Proceeds
5. Determination of Offering Price.................. Underwriting
6. Dilution......................................... Dilution
7. Selling Security Holders......................... Concurrent Offering; Selling
Securityholders
8. Plan of Distribution............................. Underwriting; Plan of Distribution
9. Legal Proceedings................................ Business -- Legal Proceedings
10. Director, Executive Officers, Promoters and
Control Persons................................ Management
11. Security Ownership of Certain Beneficial Owners
and Management................................. Principal Shareholders
12. Description of Securities........................ Description of Securities
13. Interest of Named Experts and Counsel............ Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act Management -- Limitation of Liability
Liabilities.................................... and Indemnification Matters
15. Organization Within Last Five Years.............. Business
16. Description of Business.......................... Business
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis
Operation...................................... or Plan of Operation
18. Description of Property.......................... Business -- Properties
19. Certain Relationships and Related Transactions... Certain Transactions
20. Market for Common Equity and Related Stockholder Risk Factors -- No Prior Public
Matters........................................ Market for the Common Stock;
Dividend Policy; Description of
Securities
21. Executive Compensation........................... Management -- Executive Compensation
22. Financial Statements............................. Financial Statements
23. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure............ Not Applicable
</TABLE>
<PAGE> 4
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.
SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1996
PROSPECTUS
1,100,000 SHARES
ALL AMERICAN FOOD GROUP, INC.
COMMON STOCK
(NO PAR VALUE)
------------------------
The 1,100,000 shares of Common Stock (the "Shares") of All American Food
Group, Inc. (the "Company") offered hereby are being sold by the Company.
The initial public offering price of the Shares will be determined by
negotiation between the Company and the Underwriters. It currently is
anticipated that the initial public offering price per Share will be $3.50. For
information regarding factors to be considered in determining the initial public
offering price see "Underwriting." Prior to this offering (this "Offering"),
there has been no public market for the Common Stock and there can be no
assurance that any significant trading market will develop or be sustained.
Application has been made to list the Shares, and it is anticipated that, upon
completion of the Offering the Shares will be approved for listing on the Nasdaq
SmallCap Market ("Nasdaq").
The present directors, executive officers and principal shareholders of the
Company will beneficially own approximately 21.09% of the outstanding Common
Stock (assuming no exercise of the option granted to the Underwriters to cover
over-allotments) upon completion of the Offering. See "Risk
Factors -- Concentration of Stock Ownership."
The registration statement of which this Prospectus forms a part (the
"Registration Statement") also covers the offering for resale by certain
securityholders (the "Selling Securityholders") of up to 886,951 shares of
Common Stock (the "Selling Securityholder Securities"), 110,000 Underwriters'
Warrants and the 110,000 shares of Common Stock underlying the Underwriters'
Warrants. The Selling Securityholders have agreed not to transfer any of the
Selling Securityholder Securities until the later of 180 days from the effective
date of the Registration Statement of which this Prospectus forms a part or 365
days from the date of initial purchase of such securities from the Company and
certain such Selling Securityholders have agreed to an Underwriters' lock-up for
a period of 12 months following the closing of the Offering. The Company will
not receive any proceeds from the sale of securities by the Selling
Securityholders or the Underwriters. See "Concurrent Offering" and
"Underwriting."
------------------------
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK AND SUBSTANTIAL DILUTION. AN INVESTMENT IN THESE SECURITIES SHOULD BE
MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
POTENTIAL PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH
UNDER "RISK FACTORS" BEGINNING ON PAGE 7 AND "DILUTION".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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ESTIMATED UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share....................................................... $ $ $
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Total(3)........................................................ $ $ $
</TABLE>
(1) Does not include additional compensation to be received by one of the
Underwriters in the form of (i) a non-accountable expense allowance of 3% of
the gross proceeds of this Offering, or $0.105 per share (for an aggregate
amount of $115,500, or $132,825 if the over-allotment option described in
note 3 below is exercised in full), of which $65,000 has been paid to date;
(ii) warrants to purchase 110,000 shares of Common Stock (the "Underwriter's
Warrants") to be sold to such Underwriter for nominal consideration; (iii)
the retention of one of the Underwriters pursuant to a Merger and
Acquisition Agreement providing that such Underwriter will receive a
finder's fee of from 2% to 10% of the consideration in any transaction
involving the Company and introduced by such Underwriter which is
consummated within three years following the closing of the Offering; and
(iv) the retention of one of the Underwriters by the Company to provide
financial consulting services for a period of three years commencing upon
closing of the Offering for a fee of $90,000 payable upon completion of the
Offering. In addition, the Company has agreed to indemnify the Underwriters
against certain liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering (including the Underwriters'
non-accountable expense allowance) estimated at $438,000 ($0.40 per share),
or $462,750 ($0.37 per share), if the over-allotment option described in
note 3 below is exercised in full, payable by the Company. See "Use of
Proceeds."
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 165,000 additional shares of Common Stock on the same terms
set forth above, solely to cover over-allotments, if any. If the
Underwriters' over-allotment option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, and Proceeds to Company will
be $ , $ and $ , respectively.
------------------------
The Shares are offered by the Underwriters on a "firm commitment" basis,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to the right of the Underwriters to reject any order in
whole or in part. It is expected that delivery of certificates representing the
Shares will be made at the offices of R.T.G. Richards & Company, Inc., 100
Quentin Roosevelt Boulevard, Garden City, N.Y. 11530, on or about ,
1996.
------------------------
R.T.G. RICHARDS & COMPANY, INC.
------------------------
The date of this Prospectus is , 1996
<PAGE> 5
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, ANY SUCH INFORMATION OR REPRESENTATION NOT CONTAINED
HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO PURCHASE,
ANY OF THE SECURITIES OFFERED BY THIS PROSPECTUS, IN ANY JURISDICTION TO OR FROM
ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF
AN OFFER, IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE
ISSUANCE OR SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH HEREIN SINCE THE DATE HEREOF.
THE INSIDE FRONT COVER OF THE PROSPECTUS CONTAINS FOUR PHOTOGRAPHS -- (1) BAGELS
SURROUNDING A CUP OF GOLDBERG'S COFFEE; (2) A BAGEL SANDWICH; (3) A DELI
PLATTER; AND (4) A FRONT VIEW OF ONE OF THE COMPANY'S GOLDBERG'S
STORES -- SURROUNDING THE "GOLDBERG'S" LOGO.
The Company currently is not a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). As a result of the
offering made hereby, the Company will become subject to the periodic and other
informational requirements of the Exchange Act. The Company intends to
distribute to its shareholders Annual Reports containing audited financial
statements and may distribute quarterly reports as determined by the Board of
Directors of the Company. The Company's fiscal year ends October 31.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
Investors should carefully consider the information set forth under the heading
"Risk Factors." Unless otherwise indicated, (i) the information presented in
this Prospectus gives effect to a one-for-two reverse split of the Company's
Common Stock that, as of the date of this Prospectus, has been approved by the
Board of Directors and shareholders, completion of which is a condition to the
closing of the Offering; (ii) the information presented in this Prospectus
assumes that the Underwriters' over-allotment option will not be exercised;
(iii) references to the number of shares of Common and Preferred Stock
outstanding after the Offering give effect to the issuance of 65,000 shares of
Common Stock to Howard Goldberg upon conversion of 65,000 shares of Series A
Preferred Stock pursuant to a Modification and Settlement Agreement dated August
12, 1996; and (iv) references to the Company's Preferred Stock include both
redeemable and non-redeemable preferred stock.
THE COMPANY
All American Food Group, Inc. (together with its wholly owned subsidiaries,
the "Company") franchises two distinct bagel store concepts, distributes bagel
bakery equipment and currently operates four retail bagel stores. All of the
Company's bagels are prepared using the Company's proprietary bagel mix and
dough conditioner, in the "Old World" style, by first boiling and then baking
the dough using the Company's bagel kettle and bagel oven. The Company believes
that this process and the use of its proprietary ingredients and its equipment
ensure the consistent preparation of premium quality bagels with a shine, crust,
texture and overall flavor that distinguish its products from those of its
competitors.
The Company franchises its concepts and operates its bagel stores under the
names "Goldberg's Original Old World Bagels" ("Goldberg's") and "Sammy's New
York Bagels" ("Sammy's"). Stores franchised under the Goldberg's name and
concept offer a traditional bagel/delicatessen menu, consisting of bagels,
spreads, sandwiches, salads, soups and "appetizing" bakery items. Sammy's stores
differ from Goldberg's stores in that they offer bagels and related dairy items
in a kosher store, under national Kof-K Kosher Supervision. Management believes
that Sammy's is the only franchised food chain subject to national kosher
certification currently available in the United States.
The Company's operations are based on those of a group of bagel shops
operating in New York and New Jersey under variations of the "Goldberg" name
since 1938. In October 1993, the Company acquired two such restaurants (one of
which subsequently was sold), together with exclusive franchise rights to their
recipes, flours, mixes and equipment and the prior owners' related bagel bakery
equipment business. (The Goldberg family continues to operate ten bagel stores
that are not affiliated with the Company and, subject to certain noncompetition
covenants, may open additional stores in the future.) In September 1994, the
Company acquired three Sammy's stores (one of which subsequently was sold) and a
commissary. Since its acquisition of the Goldberg's and Sammy's stores, the
Company has engaged in an extensive process of analyzing, standardizing and
documenting all aspects of its retail bagel operations, preparing franchise
materials and developing its franchise system and program. In addition, it
retrofitted one of the Goldberg's locations to serve as a prototype store for
purposes of marketing franchises and training personnel. As of October 31, 1996,
the Company's retail system consisted of five Goldberg's and six Sammy's stores
located in four states, including two Goldberg's and two Sammy's stores owned
and operated by the Company and three Goldberg's and four Sammy's stores
operated under franchise or license arrangements with the Company. As of October
31, 1996, one additional Goldberg's and two additional Sammy's stores to be
operated under franchise or license arrangements with the Company, and one
Company-owned Goldberg's store, were under development and scheduled to open by
December 31, 1996.
The Company also distributes and services its bagel bakery equipment for
use by its franchisees and by unaffiliated purchasers. During the years 1990
through 1995, the Company and its predecessor provided equipment and other
services to over 100 stores. The Company specializes in providing equipment and
services to restaurants and bakeries utilizing the old-fashioned method of
boiling, then baking bagels utilizing revolving
3
<PAGE> 7
tray ovens. Management believes that the Company is the only franchiser of bagel
stores that provides its equipment directly to its franchisees.
The Company intends to expand its retail operations primarily through
franchising. Management believes that food service franchising in general, and
the franchising of bagel restaurants in particular, present a unique opportunity
for success in the current consumer and franchise markets. According to industry
and government statistics, U.S. per capita bagel consumption (currently an
average of eight bagels per person annually) is growing at the rate of 8%
annually and rose 45% over the last five years. Management believes that this
increased demand for bagels arises primarily from increased consumer demand for
healthier, low-fat food products and that the versatility, convenience and
relatively low price of bagels add to their appeal. In keeping with this growing
consumer demand, bagel shops were selected by Entrepreneur magazine as among the
"hottest new franchises" for both 1995 and 1996.
Management believes that the Company has a unique combination of
characteristics that will help it to build a successful nationwide chain of
franchised bagel restaurants under both of its concepts. The Company's key
competitive strengths include the following:
- Quality Products. Management believes that the key to the Company's
success lies with the quality of its products. Therefore, all of the
Company's bagels are prepared in the old-fashioned style, using the
Company's proprietary bagel mix and dough conditioner, by first boiling and
then baking the dough using the Company's bagel kettle and bagel oven. The
Company believes that this process and the use of its proprietary
ingredients and its equipment ensure the consistent preparation of premium
quality bagels with a shine, crust, texture and overall flavor that
distinguish its products from those of its competitors.
- Experience. The Company's products and operating systems are based
on those developed by the Goldberg family during the 58 years of operation
of its family-owned bagel shops. The Company's products and operating
systems are the product of this half-century of experience.
- Complementary Concepts. Management believes that the Company's
franchise program is unique in offering two complementary bagel concepts.
Management also believes that the availability of these two concepts
uniquely positions the Company to benefit from economies of scale in
purchasing, while permitting it to penetrate distinct segments of the bagel
market.
- Kosher Concept and Production Facilities. Management believes that
Sammy's is the only franchised food chain subject to national kosher
certification currently available in the United States. In addition to the
market for kosher products by consumers requiring kosher food by reason of
dietary restrictions in connection with their religious faith, management
believes that a market for kosher products also exists among consumers who
are not subject to such restrictions, but who view kosher certification as
a sign of high quality, authenticity and careful preparation.
- Equipment Business. Management believes that the Company is unique
in designing, manufacturing and distributing its bagel bakery equipment and
providing consulting services in connection with the sale and installation
of such equipment. Management believes that this capability provides the
Company with a distinct advantage in equipping and advising its franchise
outlets and in ensuring the quality of its products.
The Company was incorporated under the laws of the State of New Jersey on
September 27, 1993, under the name "Jutland Food Group, Inc." for the purpose of
establishing a chain of franchised bagel restaurants using the recipes,
procedures, experience and expertise of an existing, well-seasoned bagel
restaurant and bakery operation. The Company changed its name to "All American
Food Group, Inc." on October 24, 1995. Its executive offices are located at 9
Law Drive, Fairfield, New Jersey 07006 and its telephone numbers are (201)
244-9336 and (800) 922-4350.
4
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company..... 1,100,000 shares
Common Stock Outstanding Before the
Offering.............................. 1,867,661 shares
Common Stock to be Outstanding After the
Offering(1)........................... 3,032,661 shares
Proposed Nasdaq SmallCap Symbol(2)...... "AAFG"
Use of Proceeds......................... Mandatory redemption of 175,000 currently
outstanding shares of Preferred Stock; opening of
Company-owned flagship stores; expansion of
equipment inventory; consolidation, integration and
expansion of existing facilities including the
expansion or relocation of commissary facilities
and the relocation of corporate headquarters;
marketing and promotional activities; reduction of
accounts payable and accrued expenses; development
of the Company's franchise system; and working
capital and general corporate purposes.
Risk Factors............................ The securities offered hereby involve a high degree
of risk and immediate and substantial dilution.
Investors should purchase the securities offered
hereby only if they can afford the loss of their
entire investment. See "Risk Factors" and
"Dilution."
</TABLE>
- ---------------
(1) Includes (i) 1,100,000 shares of Common Stock offered hereby and (ii) 65,000
shares of Common Stock to be issued pursuant to the Modification and
Settlement Agreement between the Company and Howard Goldberg. See
"Underwriting" and "Business -- Renegotiation of Certain Acquisition Terms."
(2) The Company has applied to list the Common Stock on the Nasdaq SmallCap
Market. However, there can be no assurance as to when, if ever, the Common
Stock will be approved for listing or that, if listed, such listing will be
maintained or any significant trading market will develop or be sustained.
See "Risk Factors -- Arbitrary Offering Price," "-- No Prior Public Market
for the Common Stock; Possible Volatility of Stock Price" and "-- Continued
Nasdaq Listing; Potential Adverse Effects of Delisting."
5
<PAGE> 9
SUMMARY OF FINANCIAL DATA
The summary financial data set forth below are derived from the
Consolidated Financial Statements of the Company and its subsidiaries appearing
elsewhere in this Prospectus. The Consolidated Financial Statements of the
Company as of, and for the nine months ended, July 31, 1996 and 1995, for the
three months ended January 31, 1996 and the year ended January 31, 1996, as
aggregated, are unaudited. The summary financial data should be read in
conjunction with, and are qualified in their entirety by reference to, the
Consolidated Financial Statements of the Company and the Notes thereto, and
"Management's Discussion and Analysis or Plan of Operation," included elsewhere
in this Prospectus. At the time of its formation in September 1993, the
Company's fiscal year end was January 31. During calendar year 1995, the Company
changed its fiscal year end to October 31. The financial data set forth below
gives effect to a one-for-two reverse split of the Company's Common Stock that,
as of the date of this Prospectus, has been approved by the Board of Directors
and shareholders, completion of which is a condition to the closing of the
Offering.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE
MONTHS YEAR
NINE ENDED ENDED
MONTHS JANUARY JANUARY 31, NINE MONTHS ENDED JULY 31,
YEAR ENDED ENDED 31, 1996 ------------------------------------
JANUARY 31, OCTOBER 31, 1996 (AGGREGATED)(1)/ 1996 1995
1995 1995 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- --------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................... $ 1,982,978 $ 2,350,268 $ 493,424 $ 2,843,692 $ 1,712,541 $ 2,026,836
Net loss................... $(1,062,621) $(1,151,545) $(385,705) $ (1,537,250) $ (1,204,571) $ (1,201,282)
Net loss per share......... $ (0.75) $ (0.84) $ (0.28) $ (1.12) $ (1.40) $ (0.79)
Weighted average number of
common shares
outstanding.............. 1,413,642 1,373,708 1,373,708 1,373,708 1,373,708 1,512,573
</TABLE>
- ---------------
(1) Represents the total of results for the nine-month fiscal period ended
October 31, 1995 and the three-month interim period ended January 31, 1996.
BALANCE SHEET DATA (UNAUDITED):
<TABLE>
<CAPTION>
JULY 31, 1996
-----------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
<S> <C> <C>
Current assets.................................................... $ 719,807 $ 2,371,807
Current liabilities............................................... 993,614 543,614
Working capital (deficit)......................................... (273,807) 1,741,193
Total assets...................................................... 2,155,255 4,407,255
Total long term debt.............................................. $ 40,114 $ 40,114
Deferred franchising revenue...................................... 177,282 177,282
Redeemable preferred stock........................................ $ 714,426 $ 220,384
Common stock...................................................... $ 3,360,136 $ 6,413,786
Non-redeemable preferred stock.................................... $ 386,157 $ 528,549
Accumulated deficit............................................... $(3,516,474) $ (3,516,474)
</TABLE>
- ---------------
(1) As adjusted to give effect to the sale, by the Company, of the 1,100,000
Shares of Common Stock offered hereby, the application of the estimated net
proceeds therefrom, and the terms of the Modification and Settlement
Agreement between the Company and Howard Goldberg. See "Use of Proceeds" and
"Business -- Renegotiation of Certain Acquisition Terms."
6
<PAGE> 10
RISK FACTORS
The securities offered hereby are highly speculative and involve a high
degree of risk and substantial dilution. An investment in these securities
should be made only by investors who can afford the loss of their entire
investment. In addition to the factors set forth elsewhere in this Prospectus,
prospective investors should give careful consideration to the following risk
factors in evaluating the Company and its business before purchasing the
securities offered hereby.
LIMITED OPERATING HISTORY; OPERATING LOSSES
The Company has been in existence for approximately three years, the four
stores owned and operated by the Company have been in operation under the
Company's management for 37, 24, 22 and 10 months, respectively, and five of the
seven stores currently in operation under franchise or license arrangements have
been in operation for less than 12 months. Further, the Company incurred net
losses of $1,062,621 and $1,537,250 in its fiscal year ended January 31, 1995
and the 12-month period ended January 31, 1996, respectively (the two 12-month
fiscal periods since its formation) and, as of July 31, 1996, had an accumulated
deficit since inception of approximately $3,516,000. Such operating losses and
deficits reflect the cost of developmental and other start-up activities
including, in particular, the acquisition of the Company's initial retail stores
and equipment business and the development of its franchise program. See
"Business -- Overview" and "-- History of the Company." The Company expects to
continue to incur significant losses in the future as it implements its
expansion program. See "Management's Discussion and Analysis or Plan of
Operation" and "Business -- Plan of Operations."
The Company's operations are subject to numerous risks associated with
establishing any new business, including unforeseen expenses, delays and
complications, as well as specific risks of the food service and franchising
industries. There can be no assurance that the Company will achieve or sustain
profitable operations or that it will be able to remain in business. In
particular, there can be no assurance that the Company-owned and operated stores
will operate profitably, that the Company will succeed in opening additional
stores successfully, that stores currently operating under franchise or license
arrangements will operate successfully or that the Company will be successful in
selling additional franchises.
NEED FOR ADDITIONAL WORKING CAPITAL
The Company anticipates that its capital resources, including the net
proceeds from this Offering, will be adequate to satisfy its capital
requirements for at least 12 months following completion of the Offering. See
"Use of Proceeds" and "Management's Discussion and Analysis or Plan of
Operation -- Liquidity and Capital Resources." During that time, the Company
intends to expand through the sale of additional franchises and to seek
additional customers for its bagel bakery equipment, which expansion will
require the expenditure of working capital. The Company's future capital
requirements will depend upon many factors, including the Company's ability to
market its franchises and operate its own stores successfully, as well as market
developments and cash flow from operations. To the extent that the net proceeds
of this Offering and cash generated from operations are insufficient to fund the
Company's activities, the Company will be required to raise additional funds
through bank borrowings or equity or debt financings. There can be no assurance
that additional financing, if required, will be available at all or in amounts
or on terms acceptable to the Company. In addition, any equity financing could
result in dilution to the Company's existing shareholders. Failure to obtain
additional working capital in a timely manner or on acceptable terms could have
a material adverse effect on the Company, its operations, financial results and
prospects. See "Business," "Management's Discussion and Analysis or Plan of
Operation -- Liquidity and Capital Resources" and the Consolidated Financial
Statements of the Company included elsewhere herein.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding an
aggregate of 3,032,661 shares of Common Stock which includes the 1,100,000
Shares offered hereby and the 65,000 shares to be issued pursuant to the
Modification and Settlement Agreement between the Company and Howard Goldberg.
See "Business -- Renegotiation of Certain Acquisition Terms" and "Underwriting."
Upon completion of the Offering, the 1,100,000 Shares issued in the Offering
will be freely transferable without restriction under the
7
<PAGE> 11
Securities Act (excluding any Shares purchased in the Offering by any person who
is or thereby becomes an "affiliate" of the Company). The 65,000 shares to be
issued pursuant to the Modification and Settlement Agreement also will be freely
transferable. All of the 1,867,661 shares outstanding immediately prior to the
Offering were issued in private placements without registration under the
Securities Act and are "restricted securities" as that term is defined in Rule
144 under the Securities Act.
Of the 1,867,661 shares outstanding immediately prior to the Offering,
886,951 shares (the "Private Placement Shares") were issued in the Company's
private placements prior to April 30, 1996 (the "Private Placements") and,
pursuant to registration rights granted in connection therewith, all of the
Private Placement Shares are being registered for resale pursuant to the
Registration Statement of which this Prospectus forms a part. So long as such
shares remain subject to an effective registration statement, and following any
sale pursuant thereto, such shares will be freely transferable without
restriction under the Securities Act (subject to the contractual restrictions
that the holders may not sell, transfer, assign, pledge or hypothecate their
shares until the later of 180 days after the effective date of the Registration
Statement of which this Prospectus forms a part or 365 days from the date of
initial purchase of such shares from the Company and, in addition, that certain
such holders who are not officers or directors of the Company (holding, in the
aggregate, 622,643 shares of Common Stock, representing approximately 20.53% of
the shares to be outstanding immediately after the Offering) are subject to an
Underwriters' lock-up for a period of 12 months following the closing of the
Offering, while holders who are officers or directors are subject to a 24-month
Underwriters' lock-up). See "Underwriting" and "Concurrent Offering." The
remaining 980,710 shares of Common Stock outstanding prior to this Offering are
"restricted securities." In addition, 120,000 shares underlying currently
outstanding options to purchase Common Stock will, upon issuance, be "restricted
securities" and any shares of Common Stock issued upon conversion of the
1,112,503 shares of Preferred Stock expected to be outstanding subsequent to the
completion of the Offering, the performance of the Modification and Settlement
Agreement, and the initial mandatory redemption of Preferred Stock (representing
a total of 621,252 shares of Common Stock), prior to the expiration of the
applicable holding period with respect thereto, likewise will be "restricted
securities."
The Company is unable to predict the effect that sales of Private Placement
Shares, the Underwriter's Warrants or the shares underlying such Underwriters'
Warrants or sales under Rule 144 may have on the then prevailing market price of
the Common Stock, but such sales may have a substantial depressing effect on
such market price. However, holders of the 886,951 Private Placement Shares have
agreed not to sell, transfer, assign or hypothecate any of their shares of
Common Stock until the later of 180 days from the effective date of the
Registration Statement of which this Prospectus forms a part or 365 days from
the date of initial purchase of such shares from the Company. In addition,
certain holders of Private Placement Shares who are not officers or directors of
the Company (holding, in the aggregate, 622,643 shares of Common Stock) are
subject to the foregoing restriction as well as to an Underwriters' lock-up for
a period of 12 months following the closing of the Offering. The officers and
directors of the Company are subject to an Underwriters' lock-up for a period of
24 months following the closing of the Offering. The remaining 980,710 shares of
Common Stock that will be "restricted securities" immediately subsequent to the
Offering will become eligible for sale at various times beginning in February
1998. See "Underwriting."
NO PRIOR PUBLIC MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering there has been no public market for the Company's
Common Stock and there can be no assurance that an active public trading market
for the Company's Common Stock will develop or be sustained. The absence of an
active trading market would adversely affect the liquidity of the Common Stock
and, consequently purchasers of Shares in the Offering could experience
substantial difficulty in selling these securities. The initial public offering
price will be determined by negotiation between the Company and the Underwriters
and may not bear any relationship to the market price for the Common Stock
subsequent to the Offering. See "-- Arbitrary Offering Price" and
"Underwriting." In addition, the trading price for the Common Stock may be
highly volatile and could be subject to significant fluctuations in response to
variations in the Company's quarterly operating results, general conditions in
the food service industry or the general economy, and other factors. In
addition, the stock market is subject to price and volume fluctuations affecting
the market price for public companies generally, or within broad industry
groups, which fluctuations may be
8
<PAGE> 12
unrelated to the operating results or other circumstances of a particular
company. Such fluctuations may adversely affect the liquidity of the Common
Stock, as well as the price that holders may achieve for their shares upon any
future sale.
CONTINUED NASDAQ LISTING; POTENTIAL ADVERSE EFFECTS OF DELISTING
The standards for initial listing on the Nasdaq SmallCap Market require
that a company must have (i) at least $4,000,000 in total assets; (ii) at least
$2,000,000 in capital and surplus; (iii) a minimum bid price of $3.00 per share;
(iv) "public float" (the market value of Common Stock held by non-insiders) of
at least $2,000,000; and (v) at least two market makers in its listed security.
Once listed, a company must maintain (i) at least $2,000,000 in total assets;
(ii) $1,000,000 in capital and surplus; (iii) a minimum bid price of $1.00 per
share; (iv) public float of at least $1,000,000; and (v) at least two market
makers. If a company falls below the bid price maintenance standard, it may
maintain its listing on Nasdaq if the market value of public float is at least
$1,000,000 and the company has at least $2,000,000 in capital and surplus. The
Company has applied to list the Common Stock on the Nasdaq SmallCap Market and
anticipates that the Common Stock will be eligible for listing upon completion
of the Offering and upon official notice of issuance. However, there can be no
assurance that the Company will be able to maintain the standards for continued
listing of the Common Stock. Delisting of the Common Stock would adversely
affect the price of the Common Stock and the ability of holders to sell their
shares. In addition, in order to be relisted on Nasdaq, the Company would be
required to comply with the initial listing requirements, which are
substantially more onerous than the maintenance standards.
If the Company were unable to satisfy the Nasdaq maintenance requirements
for continued listing and the share price for Common Stock were to remain below
$5.00 per share, unless the Company satisfies certain asset or revenue tests (at
least $5,000,000 in net tangible assets if in business less than three years, at
least $2,000,000 in net tangible assets if in business at least three years, or
average revenues of at least $6,000,000 for the last three years), the Common
Stock would become subject to the so-called "penny stock" rules promulgated by
the Securities and Exchange Commission (the "Commission"). Under the penny stock
rules, a broker or dealer selling penny stock to anyone other than an
established customer or "accredited investor" (generally, an individual with net
worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with his or her spouse) must make a special suitability determination
for the purchaser and must receive the purchaser's written consent to the
transaction prior to sale, unless the broker or dealer or the transaction
otherwise is exempt. In addition, the penny stock rules require the broker or
dealer to deliver, prior to any transaction, a disclosure schedule prepared by
the Commission relating to the penny stock market, unless the broker or dealer
or the transaction otherwise is exempt. A broker or dealer also is required to
disclose commissions payable thereto and to the registered representative and
current quotations for the securities. In addition, a broker or dealer is
required to send monthly statements disclosing recent price information with
respect to the penny stock held in a customer's account and information with
respect to the limited market in penny stocks. These additional sales practice
and disclosure requirements could adversely effect the level of trading activity
in the secondary market and could impede the sale of the Company's Common Stock
in that market, with a concomitant adverse effect on the price of the Common
Stock in the secondary market.
SUBSTANTIAL DILUTION; DISPROPORTIONATE RISK OF LOSS
Assuming an initial public offering price of $3.50 per share, purchasers of
the Shares offered hereby will incur immediate dilution in the net tangible book
value from the Offering price of $2.47 per share, or 71% of the initial public
offering price. The Company's current shareholders acquired their equity
investments at an average per share cost substantially less than the initial
public offering price. Accordingly, purchasers in the Offering will bear a
disproportionate portion of losses incurred by the Company in the future. See
"Dilution."
ARBITRARY OFFERING PRICE
The initial public offering price of the Common Stock will be determined by
negotiation between the Company and the Underwriters. See "Underwriting." Such
price will not necessarily relate to the Company's
9
<PAGE> 13
asset value, earnings, net worth, financial condition or any other established
criteria of value and should not be regarded as an indication of the actual
value or future market price of the Common Stock.
DISCRETION IN USE OF PROCEEDS DESIGNATED FOR WORKING CAPITAL
The Company will have broad discretion with respect to the application of
approximately $1,052,000, or 34.7%, of the net proceeds of this Offering. While
such funds are to be applied for working capital and general corporate purposes
in furtherance of the Company's business, investors will be reliant on
management as to the specific application of these amounts. See "Use of
Proceeds."
NO DIVIDENDS
The Company has not paid any cash or other dividends on its Common Stock
since its inception and does not anticipate paying any such dividends in the
foreseeable future. It is anticipated that earnings, if any, will be used in the
Company's operations and to finance the expansion of its business. See "Dividend
Policy" and "Management's Discussion, Analysis or Plan of Operation -- Liquidity
and Capital Resources" and "Business -- Plan of Operations."
SEASONAL AND QUARTERLY FLUCTUATIONS
The Company's interim results of operations may be affected by the timing
of the sale of franchises and the opening of new stores, receipt of franchise
and market area developer fees and seasonal factors, such as weather conditions,
in the areas where stores are located. In addition, the Company's results may be
affected by the timing of expenses associated with its expansion.
DEPENDENCE ON FRANCHISEES
The Company will realize a substantial portion of its revenues from initial
franchise fees, ongoing royalty payments from its franchisees and the sale of
foodstuffs and equipment to its franchisees. The Company is therefore
substantially dependent upon its ability to attract, retain and contract with
suitable franchisees, and the ability of these franchisees to open and operate
their stores successfully. Should the Company experience difficulty in
attracting suitable franchisees, or should the Company's franchisees encounter
business or operational difficulties, the Company's revenues will be adversely
affected. Such a reduction in revenues may also have an adverse effect on the
Company's ability to sell new franchises and on its financial results and
prospects. Consequently, the Company's financial prospects are directly related
to the success of its franchisees, over which the Company has no direct control.
There can be no assurance that either the Company or its franchisees will be
able to develop new franchises, or operate the Company's bagel stores,
successfully.
EXPANSION
The opening and success of the Company's bagel stores will depend on
various factors, including the availability of suitable sites; the ability of
franchisees to negotiate acceptable lease terms for new locations, to obtain
construction and any other necessary permits in a timely manner, and to meet
construction and opening schedules; the Company's ability to manage its
anticipated expansion and to hire and train personnel; and general and local
economic and business conditions. The foregoing factors are not within the
control of the Company.
The Company's proposed expansion also will require the implementation of
enhanced operational and financial systems and will require additional
management, operational and financial resources. Failure to implement these
systems and add these resources could have a material adverse effect on the
Company's operations, financial results and prospects. There can be no assurance
that the Company will be able to manage its expanding operations effectively or
that it will be able to maintain or accelerate its growth. In addition, there
can be no assurance of the viability of the Company's concepts in new geographic
regions or particular local markets.
10
<PAGE> 14
COMPETITION; EASE OF ENTRY INTO BUSINESS
The food service industry, in general, and the fast-food and take-out
sectors in particular, are intensely competitive. The Company competes, and can
be anticipated to compete, against well established food service companies with
substantially greater product and name recognition and with substantially
greater financial, marketing and distribution capabilities than the Company's,
as well as against a large number of local food establishments that offer
similar or competitive products. In addition, management believes that the
start-up costs associated with opening a retail food establishment offering
similar products on a stand-alone basis are comparable to the start-up costs of
the Company's bagel stores and, accordingly, such start-up costs are not an
impediment to entry into the retail bagel business. Further, as the demand for
bagels increases and consumers become more familiar with the product, they also
may be expected to become increasingly discriminating in selecting bagels based
on quality and value. There can be no assurance that the Company can compete
successfully in this complex and changing market.
FOOD SERVICE INDUSTRY
Food service businesses often are affected by changes in consumer and
competitive conditions, including changes in consumer tastes; national,
regional, and local economic conditions and demographic trends; traffic
patterns, and the type, number, and location of competing businesses. Adverse
publicity resulting from food quality, illness, injury, or other health concerns
or operating issues stemming from one store or a limited number of stores also
may adversely affect multi-unit chains such as the Company. In addition, factors
such as inflation, increased food, labor, and employee benefit costs, regional
weather conditions and the unavailability of experienced management and hourly
employees also may adversely affect the food service industry in general, and
the Company's operations, financial results and prospects in particular.
GOVERNMENT REGULATION
The Company's franchise operations are subject to regulation by the Federal
Trade Commission (the "FTC") in compliance with the Uniform Franchise Act which
requires, among other things, that the Company prepare and update a
comprehensive disclosure document in connection with the sale and operation of
its franchises. The Company and its franchisees also must comply with state
franchising laws and a wide range of other state and local rules and regulations
applicable to their businesses. See "Business -- Government Regulation."
Compliance with this broad federal, state and local regulatory network is
essential and costly, and the failure to comply could have a material adverse
effect on the Company and its franchisees. Violations of franchising laws and/or
state laws and regulations governing substantive aspects of doing business in a
particular state could subject the Company and its affiliates to rescission
offers, monetary damages, penalties, imprisonment and/or injunctive proceedings.
In addition, under court decisions in certain states, absolute vicarious
liability may be imposed upon franchisers based upon claims made against
franchisees. The Company currently does not carry insurance against such claims,
although it intends to obtain such coverage in the future. However, there can be
no assurance that the Company will be able to obtain such coverage or that such
coverage will be sufficient to cover potential claims against the Company.
This Prospectus does not constitute, and shall not be construed as, an
offer to sell a Goldberg's or Sammy's franchise. Such offers may be made only by
an Offering Circular in compliance with applicable state law and the Federal
Trade Commission Disclosure Rule. The description of the franchises set forth in
this Prospectus is not intended to be a complete description of a Goldberg's or
Sammy's franchise business.
LACK OF TRADEMARK AND PATENT PROTECTION
The Company intends to file an application to register the trademark
"Goldberg's New York Bagels est. 1938" on the United States Patent and Trademark
Office principal register. Otherwise, the Company has no registered trademark or
service mark protection under federal trademark law. While management believes
that, in the food service industry, trademarks, service marks and the "look"
("trade dress"), of a retail chain can be adequately protected by common law,
there can be no assurance that the absence of protected, registered marks will
not have an adverse effect on the Company's competitive position, business or
prospects. Further, although the Company modifies and installs certain bagel
bakery equipment in a proprietary manner, the Company does not believe these
refinements are patentable. Therefore, there can be no assurance as to
11
<PAGE> 15
whether, to what extent, or for what period of time the Company may enjoy a
competitive advantage based on the availability of its equipment. In addition,
it is the Company's practice to protect its proprietary dough conditioner, bagel
mix and bagel dough by relying on trade secret laws and confidentiality
agreements. There can be no assurance that the confidentiality of its trade
secrets will be maintained or that others will not independently develop or
obtain access to the same, comparable or improved recipes and formulas. See
"Business -- Trademarks and Service Marks."
DEPENDENCE ON KEY PERSONNEL
The Company is substantially dependent upon the personal efforts and
abilities of its senior management. See "Management." The loss of any of the
Company's senior management personnel could adversely affect the Company until
such time, if any, as a suitable replacement is found. The Company's ability to
develop and market its products and to achieve and maintain its competitive
position depends, in large part, on its ability to attract and retain qualified
personnel. Competition for such personnel is intense and there can be no
assurance that the Company will be able to attract and retain such personnel.
CONCENTRATION OF STOCK OWNERSHIP
Upon completion of this Offering, the Company's present directors,
executive officers and principal shareholders will beneficially own
approximately 21.09% of the Common Stock of the Company. Although other
shareholders will have the opportunity to consider and vote upon those matters
affecting the Company that are submitted to a vote of the shareholders, they
will not have the ability to approve or disapprove any such matters without the
concurrence of the majority of shareholders. Consequently, the Company's current
shareholders will continue to have a substantial voice in decisions regarding
the management and operations of the Company and purchasers of Common Stock in
this Offering may be able to influence the management of the Company and its
business only to a limited degree. Because they may not be able to control the
decisions made by current shareholders with respect to management and operations
of the Company, no one should invest in the Company unless he or she is willing
to entrust the Company's business to the discretion of such shareholders. See
"Management" and "Principal Shareholders."
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY
As permitted pursuant to the corporate law of the State of New Jersey, the
Company's state of incorporation, the Company's Amended and Restated Certificate
of Incorporation (the "Charter") and Amended and Restated By-Laws (the
"By-Laws") require that the Company indemnify its directors and officers against
certain liabilities incurred in their service in such capacities. In addition,
the Charter provides that the personal liability of directors and officers of
the Company to the Company and its shareholders shall be limited under certain
circumstances. See "Management -- Limitation of Liability and Indemnification
Matters."
POTENTIAL ADVERSE EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The corporate law of the State of New Jersey, the Company's state of
incorporation, and the Company's Charter, contain provisions that may discourage
proposals or bids to acquire the Company. Such provisions authorize the issuance
of a maximum of 4,000,000 shares of Preferred Stock (of which 1,352,503 shares
were outstanding as of November 15, 1996) on terms which may be fixed by the
Company's Board of Directors without shareholder action. The terms of any series
of Preferred Stock, which may include priority claims to assets and dividends,
and special voting rights, could adversely affect the rights of holders of the
Common Stock. The issuance of Preferred Stock could make the takeover of the
Company or the removal of management of the Company more difficult, discourage
hostile bids for control of the Company in which shareholders may receive
premiums for their shares of Common Stock, or otherwise dilute the rights of
holders, and the market price of the Common Stock. See "Description of
Securities -- Preferred Stock."
LIMITED OFFERING EXPERIENCE OF THE MANAGING UNDERWRITER
R.T.G. Richards & Company, Inc. ("R.T.G. Richards"), Managing Underwriter,
has not previously acted as an underwriter in a public offering and there can be
no assurance that R.T.G. Richards' lack of experience will not adversely affect
the Offering and the subsequent development, if any, of a trading market for the
Company's Common Stock. See "Underwriting."
12
<PAGE> 16
DILUTION
Dilution represents the difference between the public offering price per
share paid by investors who purchase in this Offering and the pro forma net
tangible book value per share immediately after completion of the Offering. Pro
forma net tangible book value per share is determined by dividing the difference
between total tangible assets and total liabilities by the total number of
outstanding shares of Common Stock. At July 31, 1996, the Company's net tangible
book value per share of Common Stock was $(0.04).
After giving effect to the sale of the 1,100,000 Company Shares offered
hereby, the initial application of the estimated net proceeds therefrom as
described at "Use of Proceeds,"and performance of the Modification and
Settlement Agreement between the Company and Howard Goldberg as described at
"Business -- Renegotiation of Certain Acquisition Terms," the adjusted pro forma
net tangible book value per share of Common Stock would have been $1.03 at July
31, 1996 (after deducting underwriting discounts and commissions and estimated
expenses of the Company in connection with the Offering in the aggregate amount
of $823,000). Investors purchasing Common Stock in the Offering therefore will
experience immediate dilution of $2.47, or 71%, in the net tangible book value
of their Common Stock, while existing shareholders will benefit from an
immediate increase of $1.07 per share in the net tangible book value of their
Common Stock.
The following table illustrates the foregoing calculations:
<TABLE>
<S> <C> <C>
Assumed public offering price per share...................................... $3.50
Net tangible book value per share before Offering.................... $ (0.04)
Increase in net tangible book value per share attributable to new
investors.......................................................... $ 1.07
-----
Pro forma net tangible book value per share after Offering................... $1.03
-----
Dilution per share to new investors(1)....................................... $2.47
=====
</TABLE>
- ---------------
(1) If the Underwriters' over-allotment option is exercised in full, the
adjusted pro forma net tangible book value after the issuance and sale of
the Common Stock would be $1.13 per share, which would result in dilution
to new investors in the Offering of $2.37 per share.
The following table sets forth, as of July 31, 1996, the number of shares
purchased from the Company, the total consideration paid, the average price per
share paid by existing holders of Common Stock and the price per share to be
paid by purchasers in the Offering, based on an assumed initial public offering
price of $3.50 per Share. See "Capitalization" and "Underwriting."
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing common shareholders................ 1,867,661 61.6% $3,360,136 46.4% $1.80
Purchasers in the Offering(2)............... 1,165,000 38.4% 3,876,650 53.6% $3.33
--------- ------ --------- ------
Total.................................. 3,032,661 100.0% $7,236,786 100.0%
========= ====== ========= ======
</TABLE>
- ---------------
(2) Includes 65,000 shares to be issued upon conversion of 65,000 shares of
Series A Preferred Stock under the terms of the Modification and Settlement
Agreement between the Company and Howard Goldberg. See
"Business -- Renegotiation of Certain Acquisition Terms."
13
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares offered hereby
are estimated to be $3,027,000 ($3,522,000 if the Underwriters' over-allotment
option is exercised in full) (after deduction of underwriting discounts and
commissions and Offering expenses in the estimated amount of $438,000) ($462,750
if the Underwriters' over-allotment option is exercised in full). The Company
intends to apply the net proceeds approximately as follows:
(i) $325,000, or 10.7%, for the mandatory redemption of shares of
Preferred Stock redeemable 30 days after the completion of this Offering.
(ii) $400,000, or 13.2%, to open two additional Company-owned flagship
stores;
(iii) $150,000, or 5.0%, to expand the Company's inventory of
equipment for resale;
(iv) $200,000, or 6.6%, to relocate the Company's corporate
headquarters in order to consolidate and integrate the Company's
headquarters and commissary facilities at one location;
(v) $100,000, or 3.3%, for marketing, promotional, advertising and
public relations activities directed toward both retail customers and
potential franchisees;
(vi) $450,000, or 14.9%, to reduce accounts payable and accrued
expenses;
(vii) $350,000, or 11.6%, to develop the Company's franchising system;
and
(viii) $1,052,000, or 34.7%, for working capital and general corporate
purposes, which may include, among other things, salaries of additional
management personnel and the costs of possible acquisition of businesses
complementary to the Company's operations. Currently, the Company has no
plans, intentions, commitments, understandings or arrangements with respect
to any such acquisitions.
The Company anticipates, based on current plans and assumptions relating to
its operations, that the proceeds of this Offering, together with existing
resources and cash generated from operations, if any, will be sufficient to
satisfy the Company's contemplated cash requirements for at least the 12-month
period subsequent to completion of the Offering. There can be no assurance,
however, that the Company's cash requirements during this period will not exceed
its available resources. See "Risk Factors -- Need for Additional Working
Capital."
The allocation of the net proceeds of this Offering set forth above
represents the Company's best estimates based upon its current plans and certain
assumptions regarding industry and general economic conditions and the Company's
future revenues and expenditures. If any of these factors changes, the Company
may find it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use a portion thereof for other purposes. See
"Risk Factors -- Discretion in Use of Proceeds Designated for Working Capital."
Proceeds not immediately required for the purposes described above will be
invested in short-term United States government securities, short-term bank
certificates of deposit, money market funds or other investment grade
short-term, interest bearing instruments.
14
<PAGE> 18
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
July 31, 1996 (giving effect to performance of the Modification and Settlement
Agreement between the Company and Howard Goldberg), and as adjusted to give
effect to the sale of the Common Stock offered hereby, and application of the
net proceeds of the Offering as set forth at "Use of Proceeds." This table
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JULY 31, 1996
(UNAUDITED)
-----------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
<S> <C> <C>
Current liabilities (including current portion of long-term
debt)........................................................... $ 993,614 $ 543,614
Long term debt and other liabilities (excluding current
portion)........................................................ $ 217,396 $ 217,396
Redeemable preferred stock, no par value; Series A, 40,000 shares
issued and outstanding (actual) and 0 shares issued and
outstanding (as adjusted); Series B, 120,000 shares issued and
outstanding (actual), 60,000 shares issued and outstanding (as
adjusted)(2).................................................... $ 714,426 $ 220,384
Non-redeemable convertible preferred stock, no par value; Series
A, 150,000 shares authorized, 150,000 shares issued and
outstanding (actual) and 10,000 shares issued and outstanding
(as adjusted)(2); Series B 180,000 shares authorized, 60,000
shares issued and outstanding; Series C, 1,600,000 shares
authorized, 982,503 shares issued and outstanding............... $ 386,157 $ 528,549
Common Stock, no par value; 20,000,000 shares authorized,
1,867,661 shares issued and outstanding, actual; 3,032,661
shares outstanding, as adjusted(1).............................. $ 3,360,136 $ 6,413,786
Retained (deficit)................................................ $(3,516,474) $ (3,516,474)
Total common stock, non-redeemable preferred stock and other
stockholders' equity............................................ $ 229,819 $ 3,425,861
=========== ===========
</TABLE>
- ---------------
(1) Gives effect to the sale of 1,100,000 Shares of Common Stock in this
Offering, net of expenses, and the application of the estimated net
proceeds therefrom.
(2) The Company is obligated to redeem 40,000 shares of Series A Preferred Stock
and 60,000 shares of Series B Preferred Stock at a redemption price of
$5.00 per share within 30 days following completion of the Offering. Up to
an additional 60,000 shares of Series B Preferred Stock are redeemable at a
redemption price of $5.00 per share 24 months following completion of the
Offering. See "Use of Proceeds" and "Description of Securities." On August
12, 1996, the Company and Howard Goldberg entered into a Modification and
Settlement Agreement pursuant to which, among other things, Mr. Goldberg
agreed to convert 65,000 shares of Series A Preferred Stock to an equal
number of shares of Common Stock and to surrender his remaining 115,000
Series A Shares. See "Business -- Renegotiation of Certain Acquisition
Terms."
DIVIDEND POLICY
The Company has not paid any cash or other dividends on its Common Stock
since its inception and does not anticipate paying any such dividends in the
foreseeable future. The Company intends to retain any earnings for use in the
Company's operations and to finance the expansion of its business. See "Risk
Factors -- No Dividends."
15
<PAGE> 19
SELECTED FINANCIAL DATA
The following information is qualified by reference to, and should be read
in conjunction with, the Company's Consolidated Financial Statements and the
Notes thereto and "Management's Discussion and Analysis or Plan of Operation"
contained elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE
MONTHS YEAR ENDED NINE MONTHS ENDED THREE MONTHS ENDED
NINE MONTHS ENDED JANUARY 31, JULY 31, JULY 31,
YEAR ENDED ENDED JANUARY 31, 1996 ------------------------- -----------------------
JANUARY 31, OCTOBER 31, 1996 (AGGREGATED)(1)/ 1996 1995 1996 1995
1995 1995 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- ---------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Store
sales...... $ 1,178,638 $ 1,422,341 $ 305,992 $ 1,728,333 $ 1,028,726 $ 1,603,053 $ 382,409 $ 557,807
Franchising
revenue.... 0 377,201 29,949 407,150 237,223 93,170 41,584 93,170
Equipment and
product
sales...... 804,340 550,726 157,483 708,209 446,592 330,613 149,593 41,132
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
1,982,978 2,350,268 493,424 2,843,692 1,712,541 2,026,836 573,586 692,109
Operating
expenses:
Cost of
sales -- equipment
costs and
store
operations,
exclusive
of
depreciation
and
amortization... 1,602,538 1,739,147 327,685 2,066,832 1,094,082 1,624,230 358,814 476,323
Cost of
sales -- franchising
activities... 0 213,408 0 213,408 0 0 0 0
Selling,
general and
administrative
expenses..... 1,100,919 1,146,365 422,277 1,568,642 1,435,132 1,151,976 541,702 423,753
Depreciation
and
amortization... 197,347 211,463 59,195 270,658 190,113 226,179 63,521 71,483
Acquisition
costs........ 74,256 170,352 56,784 227,136 170,352 170,352 56,784 56,784
Impairment of
assets....... 676,038 0 0 0 0 0 0 0
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
3,651,098 3,480,735 865,941 4,346,676 2,889,679 3,172,737 1,020,821 1,028,343
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Operating
loss......... (1,668,120) (1,130,467) (372,517) (1,502,984) (1,177,138) (1,145,901) (447,235) (336,234)
Interest
expense...... 38,651 21,078 13,188 34,266 27,433 55,381 4,382 8,392
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Loss before
extraordinary
item......... $(1,706,771) $(1,151,545) $ (385,705) $ (1,537,250) $(1,204,571) $(1,201,282) $ (451,617) $ (344,626)
Extraordinary
item -- Gain
from
extinguishment
of debt...... 644,150 0 0 0 0 0 0 0
---------- ---------- ---------- ----------- ----------- ----------- ----------- -----------
Net loss....... $(1,062,621) $(1,151,545) $ (385,705) $ (1,537,250) $(1,204,571) $(1,201,282) $ (451,617) $ (344,626)
Net loss per
share(2)..... $ (0.75) $ (0.84) $ (0.28) $ (1.12) $ (1.40) $ (0.79) $ (0.33) $ (0.25)
Weighted
average
number of
common shares
outstanding(2)... 1,413,642 1,373,708 1,373,708 1,373,708 1,373,708 1,512,573 1,373,708 1,373,708
BALANCE SHEET
DATA:
<CAPTION>
1/31/95 10/31/95 1/31/96 4/30/95 4/30/96 7/31/96
---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Working capital
(Deficit).... (539,020) (902,720) (903,338) (758,359) 181,282 (273,807)
Total assets... 1,743,561 1,338,794 1,820,082 1,656,902 2,701,582 2,155,255
Total
liabilities... 1,170,207 1,386,967 1,493,960 1,324,848 1,305,720 1,211,010
Redeemable
preferred
stock........ 0 0 0 0 707,540 714,426
Common stock... 1,277,000 876,150 1,606,150 874,400 3,360,136 3,360,136
Non-redeemable
preferred
stock........ 54,000 1,022,580 1,052,580 656,600 393,043 386,157
Additional paid
in capital... 365,000 365,000 365,000 365,000 0 0
Accumulated
deficit...... (1,122,646) (2,311,903) (2,697,608) (1,563,946) (3,064,857) (3,516,474)
</TABLE>
- ---------------
(1) Represents the total of results for the nine-month fiscal period ended
October 31, 1995 and the three-month interim period ended January 31, 1996.
(2) Gives effect to a one-for-two reverse split of the Company's Common Stock
that, as of the date of this Prospectus, has been approved by the Company's
Board of Directors and shareholders, completion of which is a condition to
the closing of the Offering.
16
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus. The discussion of results, causes and trends
should not be construed to imply any conclusion that such results or trends will
necessarily continue in the future. For purposes of the following discussion,
the Company's results for the nine months ended October 31, 1995, as reflected
in its audited financial statements for the period then ended, have been
combined with its unaudited, interim results for the three months ended January
31, 1996 to reflect results for the 12-month period ended January 31, 1996
("Fiscal 1996"), which have been compared to the results for the full fiscal
year ended January 31,1995 ("Fiscal 1995").
RESULTS OF OPERATIONS -- THREE-MONTH PERIODS ENDED JULY 31, 1996 AND 1995
Sales revenues for the three months ended July 31, 1996 (the "1996
Quarter") were $573,586, a decrease of $118,523, or 17%, from $692,109 for the
three months ended July 31, 1995 (the "1995 Quarter"). This decrease is
attributable to (i) a decrease in store sales of $175,398, or 31%, to $382,409
in the 1996 Quarter from $557,807 in the 1995 Quarter, as a result of a
reduction from five to four stores operated by the Company and (ii) a decrease
in franchising activities of $51,586, or 55%, to $41,584 in the 1996 Quarter
from $93,170 in the 1995 Quarter. Franchising revenues in the 1996 Quarter of
$41,584 consisted of initial, non-recurring franchise and market development
fees of $23,000 and $2,500 respectively, and $16,084 of ongoing royalties.
Franchising revenues in the 1995 Quarter of $93,170 consisted of initial,
non-recurring market development fees. The decreases in revenues were
substantially offset by (i) an increase in equipment sales of $11,898, or 36%,
to $44,509 in the 1996 Quarter, from $32,611 in the 1995 Quarter, and (ii) an
increase in commissary sales of $96,563, or 1,133%, to $105,084 during the 1996
Quarter from $8,521 in the 1995 Quarter, as a consequence of a greater number of
franchise stores and a concomitant increase in demand for product during the
1996 Quarter.
Management anticipates that future equipment and commissary sales will be
dependent upon the Company's franchising activities rather than on sales to
unaffiliated purchasers and that such sales will increase or decrease in direct
proportion to the Company's success in expanding its system of franchise stores.
Cost of sales decreased by $117,509, or 25%, to $358,814 in the 1996
Quarter from $476,323 in the 1995 Quarter, primarily as a result of decreased
store sales. Cost of sales as a percentage of product sales decreased to 67% in
the 1996 Quarter from 79% in the 1995 Quarter, reflecting the net effect of a
decrease in cost of sales attributable to the sale of two Company-owned stores
(partially offset by the opening of one additional store) and an increase
attributable to the upgrading of the Company's Lodi, New Jersey commissary and
production facility and increases in payroll and fixed overhead costs associated
with expansion of this facility.
Selling, general and administrative expenses increased by $117,949, or 28%,
to $541,702 in the 1996 Quarter from $423,753 in the 1995 Quarter. This increase
is primarily due to (i) an increase in salaries and related costs of $80,233, or
55%, to $224,898 in the 1996 Quarter from $144,665 in the 1995 Quarter as a
consequence of expansion of the Company's workforce and, to a lesser degree,
increases in compensation to its continuing employees and (ii) an increase in
selling expenses of $31,239, or 32%, to $128,641 in the 1996 Quarter from
$97,402 in the 1995 Quarter, primarily due to increased travel expenses related
to franchise sales efforts, visits to proposed retail locations and provision of
on-site store training and assistance.
In the future, management anticipates that selling expenses will continue
to be directly related to the level of the Company's franchising activities.
Depreciation and amortization decreased by $7,962, or 11%, to $63,521 in
the 1996 Quarter from $71,483 in the 1995 Quarter, primarily as a consequence of
the fact that the Company owned and operated one fewer store during the 1996
Quarter than during the 1995 Quarter.
Interest expense decreased by $4,010, or 48%, to $4,382 in the 1996 Quarter
from $8,392 in the 1995 Quarter as a consequence of a reduction in the Company's
outstanding debt between those two periods.
17
<PAGE> 21
The net loss for the 1996 Quarter was $451,617, which represented an
increase of 31%, as compared to the net loss of $344,626 for the 1995 Quarter.
To date, the Company has operated at a loss as a result of the application of
resources in excess of revenues to develop its operating infrastructure in
anticipation of additional franchise sales, Company-store growth and commissary
sales. Consequently, total revenues are not yet sufficient to support the
Company's overhead. Management anticipates that, during the fiscal year ending
October 31, 1997, the Company's revenues will increase due to additional
franchise sales, increased royalty income from existing, as well as new,
franchises, increased commissary revenues generated by sales to franchise
stores, increased sales in existing Company-owned stores and sales revenues from
newly opened, Company-owned stores. There can be no assurance, however as to
whether, and to what extent, the Company will actually experience additional
revenues from any of these sources. The Company's ability to operate profitably
in the future is substantially dependent upon its ability to sell store and area
development franchises and to open additional franchise stores. See "Risk
Factors -- Limited Operating History; Operating Losses," "-- Expansion,"
"-- Dependence on Franchisees" and "Business -- Plan of Operations."
RESULTS OF OPERATIONS -- NINE-MONTH PERIODS ENDED JULY 31, 1996 AND 1995
Sales revenues for the nine months ended July 31, 1996 (the "1996 Interim
Period") were $1,712,541, a decrease of $314,295, or 16% from $2,026,836 for the
nine months ended July 31, 1995 (the "1995 Interim Period"). This decrease is
attributable to (i) a decrease in store sales of $574,327, or 36%, to $1,028,726
in the 1996 Interim Period from $1,603,053 in the 1995 Interim Period, as a
result of a reduction from five to three stores operated by the Company during
the first three months and from five to four stores operated by the Company
during the last six months of the 1996 Interim Period, and (ii) a decrease in
equipment sales of $72,936, or 25%, to $216,689 in the 1996 Interim Period, from
$289,625 in the 1995 Interim Period, which decreases were substantially offset
by (i) an increase in franchising activities of $144,053, or 155%, to $237,223
in the 1996 Interim Period from $93,170 in the 1995 Interim Period. (Franchising
activities commenced in the last three months of the 1995 Interim Period.)
Franchising revenues in the 1996 Interim Period of $237,223 consisted of
initial, non-recurring franchise and market development fees of $45,500 and
$156,200 respectively, and $35,523 of ongoing royalties. Franchising revenues in
the 1995 Interim Period of $93,170 consisted of initial, non-recurring market
development fees. The decreases were further offset by (ii) an increase in
commissary sales of $188,915, or 461%, to $229,903 during the 1996 Interim
Period from $40,988 in the 1995 Interim Period, as a consequence of a greater
number of franchise stores and a concomitant increase in demand for product
during the 1996 Interim Period.
Management anticipates that future equipment and commissary sales will be
dependent upon the Company's franchising activities rather than on sales to
unaffiliated purchases and that such sales will increase or decrease in direct
proportion to the Company's success in expanding its system of franchise stores.
Cost of sales decreased by $530,148, or 33%, to $1,094,082 in the 1996
Interim Period from $1,624,230 in the 1995 Interim Period. This decrease is
primarily due to decreased store and equipment sales. Cost of sales as a
percentage of product sales decreased to 74% in the 1996 Interim Period from 84%
in the 1995 Interim Period, reflecting the net effect of a decrease in equipment
sales and an increase attributable to the upgrading of the Company's Lodi, New
Jersey commissary and production facility and increases in payroll and fixed
overhead costs associated with expansion of this facility. To the extent that
future increases in the Company's total revenues are attributable to franchise
fees, market development fees and franchise royalties, cost of sales can be
expected to decrease as a percentage of revenues.
Selling, general and administrative expenses increased by $283,156, or 25%,
to $1,435,132 in the 1996 Interim Period from $1,151,976 in the 1995 Interim
Period. This increase is primarily due to (i) an increase in salaries and
related costs of $210,897, or 59%, to $565,908 in the 1996 Interim Period from
$355,011 in the 1995 Interim Period and (ii) an increase in selling expenses of
$69,323, or 29%, to $310,045 in the 1996 Interim Period from $240,722 in the
1995 Interim Period, primarily due to increased travel expenses related to
franchise sales efforts, visits to proposed retail locations and provision of
on-site store training and assistance.
Depreciation and amortization decreased by $36,066, or 16%, to $190,113 in
the 1996 Interim Period from $226,179 in the 1995 Interim Period, primarily as a
consequence of the fact that the Company owned
18
<PAGE> 22
and operated two fewer stores during first three months and one fewer store
during the last six months of the 1996 Interim Period than during the comparable
periods of 1995 Interim Period.
Interest expense decreased by $27,948, or 50%, to $27,433 in the 1996
Interim Period from $55,381 in the 1995 Interim Period as a consequence of a
reduction in the Company's outstanding debt between those two periods.
The net loss for the 1996 Interim Period was $1,204,571, which was
substantially unchanged from the net loss of $1,201,282 for the 1995 Interim
Period. To date, the Company has operated at a loss as a result of the
application of resources in excess of revenues to develop its operating
infrastructure in anticipation of additional franchise sales, Company-store
growth and commissary sales. Consequently, total revenues are not yet sufficient
to support the Company's overhead. Management anticipates that, during the
fiscal year ending October 31, 1997, the Company's revenues will increase due to
additional franchise sales, increased royalty income from existing, as well as
new, franchises, increased commissary revenues generated by sales to franchise
stores, increased sales in existing Company-owned stores and sales revenues from
newly opened, Company-owned stores. There can be no assurance, however as to
whether, and to what extent, the Company will actually experience additional
revenues from any of these sources. The Company's ability to operate profitably
in the future is substantially dependent upon its ability to sell store and area
development franchises and to open additional franchise stores. See "Risk
Factors -- Limited Operating History; Operating Losses," "-- Expansion,"
"-- Dependence on Franchisees" and "Business -- Plan of Operations."
On August 12, 1996, the Company entered into a Modification and Settlement
Agreement with Howard Goldberg which, among other things, increased from 40,000
to 115,000 the number of shares of Series A Preferred Stock that the Company is
obligated to redeem in the event of an initial public offering and reduced the
aggregate redemption amount from $200,000 to $25,000. See
"Business -- Renegotiation of Certain Acquisition Terms." As of July 31, 1996,
the Company's financial statements include within Redeemable Preferred Stock an
accretion in the amount of $194,042, representing the present value of the
original $200,000 redemption amount. In addition, the net loss for the nine
months ended July 31, 1996 has been increased by $194,042 in the calculation of
earnings per share. The Company's financial statements for its fiscal year
ending October 31, 1996 will reflect a reduction in Redeemable Preferred Stock
in the amount of $169,402 and a like increase in Non-redeemable Preferred Stock
representing an adjustment to amounts previously accreted and the amount added
to the Company's net loss to determine earnings per share will be reduced by the
same amount.
RESULTS OF OPERATIONS -- 12-MONTH PERIODS ENDING JANUARY 1996 AND 1995
Sales revenues for Fiscal 1996 were $2,843,692, an increase of $860,714, or
43%, from revenues of $1,982,978 for Fiscal 1995. This increase is primarily
attributable to the commencement of franchising activities during Fiscal 1996,
resulting in revenues of $407,150 in that year (consisting of initial,
non-recurring market development and single unit franchise fees of $117,824 and
$30,000, respectively; initial, non-recurring revenues from the sale of Company
stores to franchisees in the amount of $247,777; and ongoing royalties of
$11,549), and to an increase of $708,362, or 60% ($1,887,000 in Fiscal 1996 from
$1,178,638 in Fiscal 1995) as a consequence of having a full year of retail and
wholesale operations under the Company's ownership in Fiscal 1996, as compared
to only four months of operations under the Company's ownership subsequent to
the acquisition of the Sammy's stores on September 29, 1994 in Fiscal 1995.
These increases were partially offset by a decrease in revenues from equipment
sales to $549,542 in Fiscal 1996 from $804,340 in Fiscal 1995. This decrease of
$254,798, or 32%, is attributable primarily to the fact that, during Fiscal
1996, the Company focused on franchising activities rather than on sales of
equipment to unaffiliated purchasers. During Fiscal 1996, the Company entered
into 11 single-store franchise agreements and three multi-unit Market
Development Agreements, representing commitments to build an aggregate of 28
stores over a period of 60 months. See "Business -- Franchising."
Cost of sales increased by $677,702, or 42%, to $2,280,240 in Fiscal 1996
(including $213,408 attributable to cost of sales in connection with franchising
activities) from $1,602,538 in Fiscal 1995. This increase is primarily due to
increased product sales. In addition, cost of sales as a percentage of product
sales
19
<PAGE> 23
increased to 85% in Fiscal 1996 from 81% in Fiscal 1995 as a consequence of (i)
the write down of certain equipment inventory below cost in the amount of
$107,000 to reflect current market value and (ii) the upgrading of the Company's
Lodi, New Jersey commissary and production facility and increases in payroll and
fixed overhead costs associated with expansion of this facility.
Selling, general and administrative expenses increased by $467,723, or 43%,
to $1,568,642 in Fiscal 1996 from $1,100,919 in Fiscal 1995. This increase is
primarily due to (i) an increase in salaries and related costs of $226,513, or
73%, to $536,500 in Fiscal 1996 from $309,987 in Fiscal 1995 as a consequence of
expansion of the Company's workforce during Fiscal 1996 and, to a lesser degree,
increases in compensation to its continuing employees; (ii) an increase in
occupancy costs of $133,806, or 90%, to $284,344 in Fiscal 1996 from $148,538 in
Fiscal 1995, due to the rental of new and larger administrative offices and
additional storage space, and the payment of a full year of rent for the
Company-owned stores and Lodi, New Jersey commissary for Fiscal 1996; and (iii)
an increase in selling expenses of $36,218, or 12%, to $347,390 in Fiscal 1996
from $311,172 in 1995, primarily due to increased travel expenses related to
franchise sales efforts, visits to proposed retail locations and provision of
on-site store training and assistance.
Depreciation and amortization increased by $73,331, or 37%, to $270,658 in
Fiscal 1996 from $197,347 in Fiscal 1995 and deferred acquisition costs
increased by $152,880, or 206%, in Fiscal 1996 as compared to $74,256 in Fiscal
1995. Both of these increases are directly attributable to the fact that the
Company's operations for Fiscal 1996 included a full year of operations of
Sammy's, while in Fiscal 1995 the Company operated Sammy's for only four months.
During Fiscal 1995, the Company recognized an impairment of certain
long-lived assets acquired in connection with the acquisition of the Goldberg
Companies in September 1993, resulting in a charge to operations of $676,038.
Also during Fiscal 1995, the Company recorded an extraordinary item in the
amount of $644,150, resulting from the early extinguishment of debt. This debt
originally was issued in connection with the acquisition of the Goldberg
Companies and was renegotiated during Fiscal 1995 as a consequence of the
impairment of certain assets acquired in that transaction. See
"Business -- History of the Company" and "-- Renegotiation of Certain
Acquisition Terms." The Company recorded no comparable impairment or early
extinguishment during Fiscal 1995.
The net loss for Fiscal 1996 was $1,537,250, which represented an increase
of 45%, as compared to the net loss of $1,062,621 for Fiscal 1995. To date, the
Company has operated at a loss as a result of the application of resources in
excess of revenues to develop its operating infrastructure in anticipation of
additional franchise sales, Company-store growth and commissary sales.
Consequently, total revenues are not yet sufficient to support the Company's
overhead. Management anticipates that, during the fiscal year ending October 31,
1996, the Company's revenues will increase due to additional franchise sales,
increased royalty income from existing, as well as new, franchises, increased
commissary revenues generated by sales to franchise stores, increased sales in
existing Company-owned stores and sales revenues from newly opened,
Company-owned stores. There can be no assurance, however as to whether, and to
what extent, the Company will actually experience additional revenues from any
of these sources. The Company's ability to operate profitably in the future is
substantially dependent upon its ability to sell store and area development
franchises and to open additional franchise stores. See "Risk Factors -- Limited
Operating History; Operating Losses," "-- Expansion," "-- Dependence on
Franchisees" and "Business -- Plan of Operations."
In addition, management anticipates that the costs and expenses of
operating the Company and its business will increase with the expansion of the
business. While management anticipates that most of such costs will increase in
proportion to increased sales and other business activity and, in some instances
may decline as a consequence of the Company's ability to avail itself of volume
discounts for both products and services, certain expenses may be expected to
increase more than proportionately. In particular, members of senior management
historically have been compensated at levels that the Company deems appropriate
for a development stage enterprise, but that management believes are
substantially below compensation levels in operating companies in the Company's
business. See "Management -- Executive Compensation." As the Company grows, it
is anticipated that executive compensation will be increased to levels
competitive with those of senior executives in operating companies comparable in
size to the Company.
20
<PAGE> 24
RECENT EVENTS
Although financial statements for the three month period ended October 31,
1996 (the "Fourth Quarter"), are not available as of the date of this
Prospectus, the following summary reflects management's current expectations
regarding overall results and trends in the Company's operations during that
period.
Management anticipates that the results of the Company's operations for the
Fourth Quarter will be consistent with the losses experienced in the quarter
ended July 31, 1996. The Company's principal source of income during the Fourth
Quarter was sales from its four Company-owned stores. Sales from the Company's
newest location, at 197 Bleecker Street, New York, are expected to show a
significant increase for the Fourth Quarter over prior periods since its
acquisition in February 1996, while sales from the Company's other three stores
are expected to be substantially unchanged. In addition, the Company realized
revenues from the sales of its bagels and approved flour mix, franchising
activities, equipment sales and consulting fees during the Fourth Quarter. With
the exception of sales of bagels and flour mix, management believes that none of
such other sources of revenue contributed materially to total revenues for the
Fourth Quarter.
The Company anticipates that its costs of sales and selling, general and
administrative expense will remain relatively unchanged as a percentage of sales
and that interest expense and amortization will remain relatively constant.
The Company's franchising activities and equipment sales were negligible
during the Fourth Quarter. While the Company has developed a substantial backlog
of franchise prospects, management has been unsuccessful in selling additional
franchises and development areas in recent months. The Company believes that it
will continue to encounter difficulty in consummating franchise and development
area sales until the Offering is completed and uncertainties surrounding the
Company's financial condition are resolved. Because equipment sales are
substantially dependent upon the sale and development of new franchised stores,
management anticipates that equipment sales will remain at their current low
level until such time, if any, as the Offering is completed and sales of
franchises and development areas increase. See "Risk Factors -- Limited
Operating History; Operating Losses" and "-- Need for Additional Working
Capital."
The Company's ability to generate positive cash flow is, and for the
foreseeable future will remain, significantly dependent upon its ability to
generate fees from the sale of new franchised stores and development areas.
Accordingly, management anticipates that the Company will continue to incur
operating losses for at least two to three fiscal quarters following the quarter
in which the Offering is completed. There can be no assurance, however, that
franchise activities will increase significantly or at all following completion
of the Offering or that the Company will not continue to experience losses in
the future. See "Risk Factors -- Limited Operating History; Operating Losses,"
"-- Dependence on Franchisees" and "-- Expansion."
LIQUIDITY AND CAPITAL RESOURCES
The Company requires significant capital to fund its working capital needs
and its planned expansion. Revenues are not yet sufficient to support the
Company's operating expenses and are not expected to reach such levels during
the next year. Cash used by operating activities for the 1996 Interim Period was
$1,484,115. Cash and cash equivalents at July 31, 1996 aggregated $185,585 and
the Company had a working capital deficit of $273,807.
The aggregate amount of accounts payable and accrued expenses was $791,437
at July 31, 1996. It is the Company's policy to pay its vendors within 30 days
(unless alternative payment terms are available on advantageous terms). The
Company has been able to purchase inventory as required.
Since its formation in 1993, the Company has funded its operations and
capital expenditures primarily through capital contributions from its founders
and private placements of its equity securities and by utilizing vendor credit.
In April 1996, the Company completed the Private Placements of its Common
Stock pursuant to which it received proceeds of $2,413,986, net of expenses of
$48,514. Of the net proceeds, $410,000 consisted of property in the form of two
unopened retail bagel stores in the final stages of construction. The proceeds
from
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the Private Placements to date have been used to fund (i) the Company's
operations; (ii) the voluntary redemption of shares of the Company's Preferred
Stock; (iii) a reduction in trade payables; and (iv) the acquisition of capital
assets. The Company intends to apply the remainder of these proceeds for working
capital purposes.
The Company intends to apply the net proceeds from this Offering, estimated
to be $3,027,000 ($3,522,000 if the Underwriters' over-allotment option is
exercised in full) to redeem Preferred Stock ($325,000), open additional
Company-owned flagship stores ($400,000), expand the Company's equipment
inventory ($150,000), relocate and consolidate its headquarters and commissary
facilities ($200,000), expand its marketing and promotional activities
($100,000), reduce accounts payable and accrued expenses ($450,000), develop its
franchising system ($350,000) and for working capital and general corporate
purposes ($1,052,000). See "Use of Proceeds."
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BUSINESS
OVERVIEW
All American Food Group, Inc. (together with its wholly owned subsidiaries,
the "Company") franchises two distinct bagel store concepts, distributes bagel
bakery equipment and currently operates four retail bagel stores. All of the
Company's bagels are prepared using the Company's proprietary bagel mix and
dough conditioner, in the "Old World" style, by first boiling and then baking
the dough using the Company's own bagel kettle and bagel oven. The Company
believes that this process and the use of its proprietary ingredients and its
equipment ensure the consistent preparation of premium quality bagels with a
shine, crust, texture and overall flavor that distinguish its products from
those of its competitors.
The Company franchises its concepts and operates its bagel stores under the
names "Goldberg's Original Old World Bagels" ("Goldberg's") and "Sammy's New
York Bagels" ("Sammy's"). Stores franchised under the Goldberg's name and
concept offer a traditional bagel/delicatessen menu, consisting of bagels,
spreads, sandwiches, salads, soups and "appetizing" bakery items. Sammy's stores
differ from Goldberg's stores in that they offer bagels and related dairy items
in a kosher store, under national Kof-K Kosher Supervision. Management believes
that Sammy's is the only franchised food chain subject to national kosher
certification currently available in the United States.
As of October 31, 1996, the Company's retail system consisted of five
Goldberg's and six Sammy's stores located in four states, including two
Goldberg's stores and two Sammy's stores owned and operated by the Company and
three Goldberg's and four Sammy's stores operated under franchise or license
arrangements with the Company. As of October 31, 1996, one additional Goldberg's
and two additional Sammy's stores to be operated under franchise or license
arrangements with the Company, and one Company-owned Goldberg's store, were
under development and expected to open by December 31, 1996.
The Company also distributes and services its bagel bakery equipment for
use by its franchisees and by unaffiliated purchasers. During the years 1990
through 1995, the Company or its predecessor provided equipment and other
services to over 100 separate stores. The Company specializes in providing
equipment and services to restaurants and bakeries utilizing the "Old World"
method of boiling then baking bagels utilizing revolving tray ovens. Management
believes that the Company is the only franchiser of bagel stores that provides
its equipment to its franchisees.
The Company intends to expand its retail operations primarily through
franchising. Management believes that food service franchising in general, and
the franchising of bagel restaurants in particular, present a unique opportunity
for success in the current consumer and franchise markets. See "-- The Bagel
Business."
PLAN OF OPERATIONS
The Company anticipates increasing its revenue, thereby generating
operating cash flow in the future, by implementing the following actions:
- Expanding franchise operations. The Company expects to increase the
sale of franchises by (i) advertising in national and regional publications
and business magazines and (ii) upgrading its promotional material. In
addition, depending upon the availability and utilization of existing
staff, the Company may hire additional sales personnel. The Company also
expects to increase its sale of franchises by opening additional
Company-owned flagship stores to generate interest from experienced
multi-store developers to enter into multi-unit Market Development
Agreements. Management anticipates that the sale of additional franchise
territories and the opening of additional stores in such territories should
result in increases in franchise revenues.
- Increasing product sales. The Company intends to open new
Company-owned retail stores and expects increased sales from its commissary
to new franchise stores. The Company continuously develops new products,
which management believes will lead to increased sales as the variety of
products grows. The Company has retained an advertising firm to help
increase store revenues, increase franchise sales and promote brand name
recognition. See "-- Advertising."
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- Making acquisitions. The Company intends to acquire other bagel
stores or complementary outlets which provide entry into new markets.
Management anticipates that, over a period of time, these acquisitions will
increase revenues significantly. However, the Company currently has no
plans, intentions, commitments, understandings or arrangements with respect
to any such acquisitions.
HISTORY OF THE COMPANY
The Company was formed for the purpose of establishing a chain of
franchised bagel restaurants using the recipes, procedures, experience and
expertise of an existing, well-seasoned bagel restaurant and bakery operation.
In October 1993, the Company acquired all the assets of Howberg Bakery Equipment
Co., Inc. (the "Equipment Company"), Bagels of New Milford, Inc. and Goldberg's
Famous Bagels of Orangeburg, Inc. (together, the "Goldberg Companies"), each a
retail and wholesale bagel and related foodstuff company. (The Goldberg family
continues to operate ten bagel stores that are not affiliated with the Company
and, subject to certain noncompetition covenants, may open additional stores in
the future.) See "-- Renegotiation of Certain Acquisition Terms."
The assets of the Goldberg Companies consisted of two bagel stores operated
by the Goldberg family of Westwood, New Jersey (one of which subsequently was
sold), including the exclusive franchise rights to the recipes, flour, mixes and
proprietary equipment used in these stores. The Goldberg family has been
operating retail bagel shops for over 50 years under variations of the Goldberg
name.
The Equipment Company was engaged in the manufacture, assembly, sale and
servicing of equipment used in the production of bagels. In connection with the
sale of equipment, the Equipment Company also provided consulting services in
the area of store design, equipment layout, training, food preparation and
virtually all other aspects of the retail food business. The Company currently
operates the business of the Equipment Company under the name "All American
Equipment Company."
On September 29, 1994, the Company completed the acquisition of 100% of the
outstanding stock of four interrelated corporations operating three retail
stores (one of which subsequently was sold) and a commissary under the trade
name "Sammy's New York Bagels."
Since its acquisition of the Goldberg's and Sammy's stores, the Company has
engaged in an extensive process of analyzing, standardizing and documenting all
aspects of its retail bagel operations, preparing franchise materials and
developing its franchise system and program. In addition, it retrofitted one of
the Goldberg's locations to serve as a prototype store for purposes of marketing
franchises and training personnel.
The Company was incorporated as a subsidiary of Jutland Enterprises Inc.
under the laws of the State of New Jersey on September 27, 1993, under the name
"Jutland Food Group, Inc." and changed its name to "All American Food Group,
Inc." on October 24, 1995.
Shortly after the Company's incorporation in 1993, Jutland Enterprises
Inc., a Delaware corporation ("Enterprises"), acquired 468,750 shares of the
Company's Common Stock for consideration consisting of $300,000 in cash and
$277,000 in assets. At the same time, Andrew Thorburn, then Chairman, President,
Chief Executive Officer of both Enterprises and the Company, and a principal
owner of Enterprises, acquired an additional 156,250 shares of the Company's
Common Stock in exchange for 400,000 shares of Enterprises Common Stock.
Enterprises subsequently distributed to its stockholders 412,054 of the shares
of the Company's Common Stock issued to it in 1993, retaining the remaining
74,696 such shares to satisfy any residual liabilities of Enterprises, which no
longer is a significant shareholder of the Company.
The Company's executive offices are located at 9 Law Drive, Fairfield, New
Jersey 07006 and its telephone numbers are (201) 244-9336 and (800) 922-4350.
THE BAGEL BUSINESS
Management believes that food service franchising in general, and the
franchising of bagel restaurants in particular, present a unique opportunity for
success in the current consumer and franchise markets. According to industry and
government statistics, U.S. per capita bagel consumption is growing at the rate
of 8% annually
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and U.S. per capita consumption (currently an average of eight bagels per person
annually) rose 45% over the last five years. Management also believes that this
increased demand for bagels arises primarily from increased consumer demand for
healthier, low-fat food products and that the versatility, convenience and
relatively low price of bagels add to their appeal. In keeping with this growing
consumer demand, bagel shops were selected by Entrepreneur magazine as among the
"hottest new franchises" for both 1995 and 1996.
Inasmuch as most flavors of bagels have no fat or cholesterol, they
represent an attractive alternative to doughnuts, pastries and other breakfast
baked goods, while at the same time offering substantially more versatility and
variety than more traditional bread products. Further, because bagels can be
used in sandwiches, bagel restaurants can be expected to attract customers
throughout the day. Management believes that lunch time business accounts for
approximately 40% of a typical bagel store's daily business. And, since
customers frequently desire to purchase bagels for home consumption, bagel
restaurants also can rely upon take-out trade for a significant portion of their
revenues.
While bagels historically have been a staple ethnic food along the East
Coast and in certain other urban areas throughout the country, management
believes that there is a substantial potential market in smaller urban and
suburban areas. Further, until recently the retail bagel industry has been
composed almost exclusively of one and two-store operations and a few larger
regional chains, some of which have indicated the intention to expand to a
national scope. Management believes that there is a significant market for high
quality bagels and that there is a significant market niche for companies able
to provide such bagels on a consistent basis through a nationwide system of
retail outlets. The Company believes that its system of producing bagels in each
store using proprietary ingredients and its equipment is the optimal method for
delivering fresh, consistently high quality products to a large and
geographically dispersed market.
COMPETITIVE STRENGTHS
Management believes that the Company has a unique combination of
characteristics that will help it to successfully build a nationwide chain of
franchised bagel restaurants under both of its concepts. The Company's key
competitive strengths include the following:
Quality Products. Management believes that the key to the Company's
success lies with the quality of its products. Therefore, all of the
Company's bagels are prepared, in the "Old World" style, using the
Company's proprietary bagel mix and dough conditioner, by first boiling and
then baking the dough using the Company's bagel kettle and bagel oven. The
Company believes that this process and the use of its proprietary
ingredients and its equipment results in premium quality bagels with a
shine, crust, texture and overall flavor that distinguish its products from
those of its competitors. Bagels sold in Goldberg's restaurants are
produced on-site, in order to provide continuous availability of oven-fresh
products. In order to ensure full compliance with the requirements for
kosher certification, the Company produces pre-formed, uncooked bagels for
its Sammy's stores at its central commissary in Lodi, New Jersey and ships
such bagels frozen to the stores on a weekly basis for on-site preparation.
See "-- Kosher Certification and Supervision."
Experience. The Company's products and operating systems were
developed based on the experience of the Goldberg family of Westwood, New
Jersey during the 58 years of operation of its family-owned bagel shops.
Based on this half century of experience and management's experience in
operating and franchising other food concepts, the Company has analyzed,
standardized and documented all aspects of its retail bagel operations to
develop its operating and franchise systems. See "-- Franchising" and
"Management."
Complementary Concepts. Management believes that the Company's
franchise program is unique in offering two complementary bagel
concepts -- Goldberg's, which offers a traditional bagel/ delicatessen
menu, and Sammy's, which offers bagels and related dairy items in a kosher
store. Management believes that the availability of these two complementary
concepts uniquely positions the Company to benefit from economies of scale
in purchasing, while permitting it to penetrate distinct segments of the
bagel market.
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Kosher Concept and Production Facilities. Management believes that
Sammy's is the only franchised food chain subject to national kosher
certification currently available in the United States. Kof-K Kosher
Supervision estimates that the kosher market currently generates over $2
billion in sales annually from 20,000 certified kosher products. With over
6 million Jews nationally, another 6 million Muslims and Seventh Day
Adventists subject to similar dietary restrictions, and a significant
segment of the secular market that views kosher certification as a sign of
high quality, authenticity and careful preparation, this market has
experienced average annual sales growth of 20% or more since 1990. In order
to ensure consistency in the quality of its products and achieve economies
in kosher supervision, the Company operates a central commissary from which
all Sammy's stores receive frozen, pre-formed, uncooked bagels on a weekly
basis for on-premises preparation. Management anticipates that, in the
future, it will utilize this facility for the production of bagels for sale
to Goldberg's as well as Sammy's franchisees. See "-- Properties."
Equipment Business. Management believes that the Company is unique in
designing and distributing its bagel bakery proprietary equipment and in
its ability to provide consulting services in all areas of the retail bagel
business, including store design, equipment layout, training and food
preparation. Management also believes that these unique capabilities
provide the Company with a distinct advantage in equipping and advising its
franchised outlets and in ensuring the quality of its products. In
addition, since the Company continues to provide equipment to unaffiliated
bagel shops and bakeries, equipment sales represent an additional source of
revenue to the Company. Management believes that equipment sales will
benefit from continued demand for bagels nationwide. See "-- Plan of
Operations" and "-- The Bagel Business."
MENUS AND FORMAT
The Company's aim is to provide consumers with superior products,
consisting primarily of fresh bagels, spreads, salads and complementary items,
and superior service in a pleasant and attractive environment. All of the
Company's bagels are prepared using the Company's proprietary bagel mix and
dough conditioner, in the "Old World" style, by first boiling and then baking
the dough, using the Company's bagel kettle and bagel oven. The Company believes
that this process and the use of its proprietary ingredients and its equipment
ensures the consistent preparation of premium quality bagels with a shine,
crust, texture and overall flavor that distinguish its products from those of
its competitors.
Goldberg's offers a traditional bagel/delicatessen menu, consisting of a
variety of flavors of bagels, spreads, sandwiches (served on freshly baked
bagels), salads, soups and "appetizing" bakery items. Sammy's offers bagels and
related dairy items in a kosher store, under National Kof-K Kosher Supervision.
Goldberg's bagels are prepared on-site "from scratch" and Sammy's bagels are
prepared from frozen, pre-formed dough delivered to the stores weekly and baked
on the premises, in each case providing a continuous supply of fresh product and
permitting customers to enjoy the aroma of freshly baked bagels. Both concepts
also offer an array of hot and cold beverages including coffee, tea, juices and
soft drinks. Depending upon local competitive and other conditions, Goldberg's
and Sammy's stores generally are open between the hours of 6 a.m. and 6 p.m.
seven days a week.
The Company's restaurants typically are located in strip-style neighborhood
and community shopping centers or other high-traffic areas and consist of an
overall area of between 750 and 2,600 square feet, including a dining area
providing seating for between eight and 30 customers, a take-out counter, and
kitchen, food preparation and storage areas. Decor is intended to evoke a 1938
bagel shop and includes an original photo montage of New York City scenes from
that era, additional vintage photographs and memorabilia, wainscoting and a tin
ceiling.
KOSHER CERTIFICATION AND SUPERVISION
All of the Sammy's stores have earned certification from the
internationally recognized Kof-K Kosher Supervision ("Kof-K"), ensuring that
they operate in strict compliance with Kashruth, the Orthodox Jewish laws
pertaining to the content and preparation of kosher foods and related matters.
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Kof-K, headquartered in Teaneck, New Jersey, is one of two universally
recognized and accepted organizations responsible for certifying kosher products
and establishments. Founded almost 30 years ago, Kof-K employs more than 150
experts in Kashruth and food service, as well as an international network of
regional and local coordinators and Rabbinical representatives.
Prior to certifying an establishment as meeting Kashruth requirements,
Kof-K supervises and inspects the cleaning of the proposed site and obtains a
complete list of all products and ingredients to be used, as well as all food
handling and preparation procedures to be followed. Once Kof-K has established
that each relevant item complies with the requirements of Kashruth, it issues an
initial certification for the store. Throughout preopening preparations, Kof-K
works with the local religious community to enlist support for the new store and
to provide assurance that it will meet the Kashruth requirements. After opening,
Kof-K representatives inspect the store on a regular basis to ensure continued
compliance with Kashruth standards.
Management believes that the kosher status of the Sammy's stores places
them in a unique niche as the only franchised food chain subject to national
kosher certification currently available in the United States.
FRANCHISING
Neither the following discussion, nor the other information contained in
this Prospectus, constitutes, and neither shall be construed as, an offer to
sell a Goldberg's or Sammy's franchise. Such offers may be made only by an
Offering Circular in compliance with applicable state law and the Federal Trade
Commission Disclosure Rule. The description of the franchises set forth in this
Prospectus is not intended to be a complete description of a Goldberg's or
Sammy's franchise business.
The Company offers single-unit franchises, as well as Market Development
Agreements covering a number of stores to be opened in a designated area within
a specified period of time. The Company currently may sell its franchises in 31
states and expects to receive authorization to sell in an additional 19 states
by December 31, 1996. The Company has entered into a Market Development
Agreement for the State of Ohio, covering 15 retail stores, a Market Development
Agreement for the State of Arizona, covering 15 retail stores, a Market
Development Agreement covering a portion of the State of New York covering 37
retail stores and a licensing agreement covering the country of Israel.
Franchise revenue includes the sale of single unit franchises pursuant to
Single Unit Agreements, the sale of Company-owned stores to franchisees, the
sale of market development franchises pursuant to Market Development Agreements
and ongoing royalty and advertising fees.
Single Unit Agreements provide for payment of a nonrefundable initial
franchising fee (an "Initial Franchise Fee"), a weekly royalty on gross sales,
and a weekly cooperative advertising fund contribution. The Company's material
obligations under the terms of all Single Unit Agreements are assisting in site
selection and franchisee training. Initial Franchise Fees under Single Unit
Agreements are recognized as revenues when the Company has no further material
obligations in respect of the establishment of such franchise, which occurs upon
the opening of the store.
Market Development Agreements provide for the payment, by the Market
Developer, of a nonrefundable initial fee (a "Market Development Fee") based on
the size, population and overall market potential of the territory subject to
the Market Development Agreement (the "Market Area"). The Market Developer
assumes substantially all of the responsibilities that otherwise would be
assumed by the Company, as franchiser within the Market Area. In exchange, the
Market Developer receives (i) the exclusive right to build stores for the Market
Developer's own account or to seek third party franchisees within the Market
Area and (ii) the right to share with the Company, on a 50/50 basis, initial and
ongoing single store fees within the Market Area. The Market Development
Agreement includes a development schedule setting forth the number of stores to
be developed by the Market Developer during the term of the Agreement. If the
Market Developer fails to maintain the store development schedule, the Market
Developer loses the exclusive right to develop the Market Area. Under Market
Development Agreements, the Company's obligations in respect of the development
of single unit franchises within the Market Area are limited to (i) approval of
franchisees presented by the Market Developer and (ii) approval of store sites.
The Company has no further material
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obligations in respect of a Market Development Agreement at the time of
execution of the Agreement. Market Development Fees paid in cash or by
promissory notes fully collateralized by liquid assets or as to which the
Company has obtained an independent third-party valuation are recognized as
revenues by the Company upon execution of the Market Development Agreement and
payment of the fee. In the absence of such collateral or valuation, the Company
recognizes Market Development Fees on a cash basis as payments on such notes are
received.
The Company's portion of the Initial Franchise Fee on single unit
franchises sold within a Market Developer's Market Area is recognized as
revenues when the Company has no further material obligations in respect of the
establishment of such franchise, which occurs upon opening of the store.
The Company seeks franchisees committed to the Company's high standards of
product quality and customer service. All franchised stores must operate in
strict compliance with the standards and procedures set out in the Company's
operations manuals. Each store must be under the management of a manager who has
completed the Company's training program, although franchisees are not required
to participate in the day-to-day management of their stores. The Company
conducts regular inspections (both scheduled and unannounced) to ensure that
franchises are operating in accordance with Company standards and procedures.
The Company provides support to its franchisees covering equipment and technical
issues 24 hours a day and seven days a week through a toll-free hotline.
Exclusivity. Each Single Unit Agreement provides the franchisee with an
exclusive area, within which the Company is not permitted to sell another
franchise. Such exclusive areas, which are determined on a unit-by-unit basis
based on population density, traffic patterns and other relevant considerations,
generally range from a radius of four blocks in densely populated urban areas to
one mile or more in suburban locations.
Market Development Agreements provide that, if the franchisee meets his
development schedule, the Company will not sell other franchises within the
developer's territory ("Market Area").
Real Estate and Local Regulation. Franchisees are obligated to purchase or
lease (for a term of at least ten years) the sites for their units. Franchisees
may designate a specific location or a locality in which they wish to operate,
subject to the exclusivity rights of other Goldberg's and Sammy's franchisees.
The Company provides assistance and guidance in site selection and lease
negotiation, and must approve all sites prior to lease execution. In addition,
the Company provides plans and specifications for a prototype store, as well as
assistance in obtaining financing, permits and licenses, and with construction
of leasehold improvements. Franchisees are expected to bear the expense of any
modification of the prototype plans and specifications required to meet local
building, fire or health codes and lease and other similar requirements, as well
as the costs of remodeling, fireproofing or other leasehold improvements.
Franchises also are responsible for, and expected to bear the expense of, local
licensing matters related to occupancy and operation of the business.
Financing. The Company does not offer direct or indirect financing in
connection with its franchises. Similarly, it does not guarantee the debt, lease
or other obligations of any franchisee. The Company will, however, render
assistance in arranging financing and negotiating leases.
Training and Field Support. Prior to opening, each franchisee (or an owner
thereof) and at least one manager of each franchised Goldberg's or Sammy's
restaurant must complete a 13-day training program including approximately 35
and 70 hours of classroom and on-the-job training, respectively, covering areas
essential to the management and operation of both a retail and wholesale bagel
business, including bagel preparation and production; store operating
procedures; accounting and cost control; employee matters; in-and out-of-store
marketing; ordering; catering; equipment maintenance; and sanitation matters.
All training is conducted by senior Company personnel at the Company's corporate
headquarters in Fairfield, New Jersey, or in nearby Company-owned stores. As of
the date of this Prospectus, the Company had not established a permanent
schedule for its training courses, but instead schedules such courses as needed
to meet the opening schedules of new stores. The Company does not charge for
this training and provides all participants with their midday meal, but
franchisees are expected to defray living expenses for themselves and their
employees during the training sessions. Similar training is required of all new
managers subsequently hired and is provided by the Company.
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Refresher and ongoing training is available to franchisees on an
individualized basis, through consultative meetings at franchise sites, at
corporate stores and at corporate headquarters.
The Company provides on-site and other supervisory guidance and assistance
in connection with the opening of each Goldberg's and Sammy's store. Once open,
the Company conducts regular operational visits and provides ongoing guidance
and assistance based upon the results of such visits and review of reports
submitted to it. Such guidance and assistance may relate to standards, methods
and operating procedures; preparation of authorized food, beverages and other
products and services; selection, purchase and preparation of food, beverage and
other products, as well as fixtures, equipment, signs, materials and supplies;
formulation and implementation of advertising and promotional programs; and
establishment and operation of administrative, bookkeeping, accounting,
inventory control, sales and general operating procedures.
The Company periodically distributes operational bulletins and newsletters
to its franchisees and provides ongoing assistance with technical and equipment
problems through its 24-hour hotline, as well as personal consultations either
at the franchise site or at the Company's executive offices.
Pricing. Prices are set by individual franchisees, pursuant to guidelines
provided by the Company, in light of local competitive and market conditions.
Purchasing. Franchisees are required to purchase bagel mix and/or dough
conditioner, in the case of Goldberg's stores, and prepared dough, in the case
of Sammy's stores, directly from the Company. In addition, all franchisees are
required to purchase the Company's bagel kettle and bagel oven. Management
believes that purchase of these items from the Company is essential to
maintaining the Company's quality control standards, and to ensuring the
consistent high quality of the bagels offered at all of its Goldberg's and
Sammy's stores.
With respect to other items used in the operation of its stores, the
Company designates approved types and brands of products. In certain instances
the Company may designate a single supplier or a limited group of suppliers for
a product or brand of product, in order to increase the volume of purchases from
suppliers and permit the Company's franchisees as a whole to benefit from
discounts associated with quantity purchasing.
In the event that a franchisee proposes to purchase any brand or type of
product not previously approved for purchase by the Company or to purchase
approved items from a supplier not previously approved, the franchisee is
required to submit to the Company information regarding the manufacturer's or
supplier's business reputation, delivery and service performance, reliability,
financial condition and credit worthiness. In addition, in the case of
previously unapproved products, the franchisee must submit samples for review by
the Company to determine compliance with the Company's specifications and
standards. The Company then reviews the submission and, within 30 days, makes a
determination whether or not to approve the supplier or product.
The Company provides its franchisees with operational and accounting forms
for use in the operation of their stores. The Company also provides its
franchisees with promotional and advertising materials and other marketing
tools.
Advertising. Each franchisee is responsible for developing local
advertising and promotional materials, all of which are subject to prior review
and approval by the Company. In addition, the Company administers promotional
funds for the benefit of all of its Goldberg's and Sammy's franchisees.
Franchisees are obligated to contribute to the applicable fund a promotional fee
equal to 1% of gross sales. Franchisees also may be required to participate in
local or regional advertising cooperatives. Contributions to such cooperatives
will be at least 1% of gross sales, and will be controlled by the local
cooperative. See "-- Advertising." Stores owned and operated by the Company are
required to contribute to the promotional funds and to participate in
advertising cooperatives on the same basis as franchised stores.
Franchise Fees and Royalty Payments. Current Single Unit Agreements
provide for an initial single unit payment of $25,000 for either a Goldberg's or
a Sammy's store. If a franchisee opens additional stores, either under a Market
Development Agreement or pursuant to additional Single Unit Agreements, the
initial payment is $17,500 per unit. In addition, franchisees of both concepts
pay a bi-weekly royalty and service fee
29
<PAGE> 33
equal to 5% of gross sales. Franchisees also must contribute a minimum of 1% of
gross sales to a local or regional advertising cooperative.
Start-Up Time and Costs. Franchisees are required to enter into a lease
within 60 days of execution of a Single Unit Agreement and to open within 120
days following first possession of the leased premises. Subject to such factors
as the time to obtain a lease, financing or building permits, zoning and local
ordinances, weather conditions and availability of materials and equipment,
franchise stores generally can be expected to open within four to six months
following execution of a franchise agreement.
While costs vary based on location and type of store, the Company currently
estimates that the cost to a new franchisee to open a typical Goldberg's or
Sammy's restaurant, including initial franchise fees, equipment, signs, opening
inventory and other start-up costs, but exclusive of real estate costs (purchase
price, lease payments and/or improvements) generally is in the range of $105,000
to $177,500 for either a Goldberg's or Sammy's store. In addition, the Company
estimates that rent for a typical Goldberg's or Sammy's store currently is
between $12,000 and $45,000 annually and that a new franchisee will incur
between $30,000 and $80,000 in real estate related expenses with respect to each
store.
Term and Termination. Each Single Unit Agreement runs for an initial term
of ten years, subject to renewal for up to two additional five-year terms upon
agreement of the franchisee to refurbish and redecorate or secure new premises.
The Company has the right to terminate franchise agreements for a variety of
reasons, including failure to open a restaurant or complete training; loss or
surrender of restaurant premises; material misrepresentation; conviction of a
felony; failure to attend required training programs; unauthorized assignment of
a restaurant; unauthorized use of trademarks or confidential information;
failure to comply with Company specifications or procedures; failure to make
payments due to third parties; failure to make payments due to the Company or to
submit required reports; and sanitation problems.
STORE LOCATIONS
The following table sets forth, by location, the number of Company owned,
franchised and licensed Goldberg's and Sammy's restaurants open or under
development, as of October 31, 1996:
COMPANY-OWNED STORES:
<TABLE>
<CAPTION>
DATE OPENED
LOCATION CONCEPT (PROJECTED)
------------------------------------------------------------- ----------- -----------
<S> <C> <C>
60 Dutch Hill Road, Orangeburg, NY........................... Goldberg's 1/93
1443 Queen Anne Road, Teaneck, NJ............................ Sammy's 3/93
40 N. James Road, Columbus, OH............................... Sammy's 11/94
197 Bleecker Street, New York, NY(1)......................... Goldberg's 2/96
Rockland Plaza Space #25, Nanuet, NY(1)...................... Goldberg's (12/96)
</TABLE>
- ---------------
(1) Acquired in exchange for shares of Common Stock in the 1996 Private
Placements. The Nanuet, New York store is projected to open no later than
December 31, 1996. Completion of this store is expected to require
additional expenditures of approximately $20,000. The Company currently has
sufficient resources to complete and open this store. See "Management's
Discussion and Analysis or Plan of Operation -- Liquidity and Capital
Resources."
30
<PAGE> 34
FRANCHISED AND LICENSED STORES:
<TABLE>
<CAPTION>
DATE OPENED
LOCATION CONCEPT (PROJECTED)
------------------------------------------------------------- ----------- -----------
<S> <C> <C>
134 North Avenue, New Rochelle, NY........................... Sammy's 3/92
4951 East Grant Road, Tucson, AZ............................. Goldberg's 9/95
Lane Avenue Shopping Center, Columbus, OH.................... Sammy's 12/95
6449 Oracle Avenue, Tucson, AZ............................... Goldberg's 1/96
21A Wyckoff Avenue, Waldwick, NJ............................. Goldberg's 6/96
Columbus, OH................................................. Sammy's 6/96
1312 Grandview Avenue, Grandview, OH......................... Sammy's 7/96
7111 East 22nd Street, Tucson, AZ............................ Goldberg's (12/96)
Dempster Street, Skokie, IL.................................. Sammy's (12/96)
White Plains, NY............................................. Sammy's (12/96)
</TABLE>
TRADEMARKS AND SERVICE MARKS
The Company intends to file a registration application to register the
trademark "Goldberg's New York Bagels est. 1938" on the United States Patent and
Trademark Office principal register. Members of the Goldberg family currently
operate ten independent bagel bakeries using the name "Goldberg" in northern New
Jersey and Rockland County, New York, which are not affiliated with the Company.
Management believes that, in the food service industry, trademarks and
service marks are most effectively protected by constant, continued and evolving
use of various distinctive identifying symbols. The Company is not dependent
upon particular registered marks and does not believe that the registration of
such marks would materially enhance its competitive position, business or
prospects.
The Company provides bagel ovens and kettles and other bagel bakery
equipment to its franchisees and to unaffiliated purchasers and believes that
this equipment is uniquely suited to the production of high quality bagels.
Although the Company modifies and installs this equipment in a proprietary
manner, the Company does not believe these modifications and refinements are
patentable. It is the Company's practice to protect its proprietary dough
conditioner, bagel mix and bagel dough by relying on trade secret laws and
confidentiality agreements. There can be no assurance that the confidentiality
of its trade secrets will be maintained or that others will not independently
develop or obtain access to the same, comparable or improved recipes and
formulas. See "Risk Factors -- Lack of Trademark and Patent Protection."
COMPETITION
The Company competes, and can be anticipated to compete, against well
established food service companies with greater product and name recognition and
with larger financial, marketing and distribution capabilities than the
Company's, as well as innumerable local food establishments that offer similar
products. The food service industry in general, and the take-out sector in
particular, are intensely competitive with respect to food quality, concept,
location, service and price.
The bagel industry is highly fragmented and has traditionally been
dominated by "mom and pop" operators, which, management believes, creates a
unique growth opportunity for the Company's expansion. In addition, there is a
growing number of national, regional and local chains, operating both owned and
franchised bagel stores, including a number of such chains that have indicated
the intention to expand to a national scope. The Company believes that its most
direct competitors are Manhattan Bagel Company, Inc. ("Manhattan"), Einstein
Brothers Bagel, Inc. ("Einstein Brothers"), Bruegger's Corporation
("Bruegger's") and Big Apple Bagels ("Big Apple"). Management believes, based on
publicly available information, that Manhattan's retail system currently
consists of approximately 264 stores; Einstein Brothers' retail system consists
of approximately 200 stores; Bruegger's retail system consists of approximately
370 stores; and Big Apple's retail system consists of approximately 286 stores.
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<PAGE> 35
Recently, the bagel industry has experienced rapid expansion, with an
estimated 3,000 bagel shops (including chains and independent stores) currently
in operation. In addition, Dunkin' Donuts began selling its own line of
fresh-baked bagels in June 1996 and expects to be selling in almost as many of
its own stores as all other bagel chains combined. A number of bagel companies
also have been involved in initial public offerings and acquisitions, resulting
in the entry of such companies into the public capital markets and of large
public companies into the bagel industry for the first time. For example,
Quality Dining Inc., a public company, acquired Bruegger's, which it continues
to operate as a private unit; BAB Holdings, Inc., which operates Big Apple,
completed its initial public offering in November 1995; and Boston Chicken, Inc.
acquired a majority interest in Einstein Brothers, which completed its initial
public offering in August 1996.
There are also several regional bagel chains and independent bagel shops
which may be expected to compete with the Company. The Company's stores also
compete with take-out and fast-food restaurants, delicatessens and prepared food
stores, bakeries, supermarkets and convenience stores. The Company believes that
the start-up costs associated with opening a retail food establishment offering
similar products on a stand-alone basis are competitive with the start-up costs
associated with commencing a Goldberg's or Sammy's store and accordingly, such
start-up costs are not an impediment to entry into the retail bagel business.
See "Risk Factors -- Competition; Ease of Entry into Business."
As a franchiser, the Company competes for qualified franchisees with a wide
variety of other investment opportunities both within and outside of the food
service industry. Management believes that the consistent quality of its
products, the efficiency of its operating systems, its proprietary ingredients,
its equipment and its franchisee support arrangements will permit it to compete
effectively, particularly against other franchisers of bagel stores.
ADVERTISING
The Company presently advertises and plans to continue advertising, its
franchises in current stores, franchise trade shows, newspapers and business
opportunity magazines. The Company and its franchisees also advertise products
in newspapers, through direct mailing and on radio and television. See
"-- Franchising."
The Company administers promotional funds ("Promotional Funds") to support
promotion and marketing programs designed to expand awareness of and demand for
Goldberg's and Sammy's products. Each Promotional Fund furnishes Goldberg's or
Sammy's franchisees, as the case may be, with promotional, advertising and
marketing materials, which may include such items as direct mail pieces, media
materials and brochures. The Company retains sole discretion over creative
concepts, materials and endorsements used in the Promotional Funds' programs and
over associated geographic, market and media placement and allocation. The
Promotional Funds may pay the cost of preparing materials, employing advertising
agencies and administering regional and local promotional and advertising
programs and public relations activities.
Franchisees are obligated to contribute to the appropriate Promotional Fund
a promotional fee equal to 1% of gross sales.
In the future, franchisees also may be required to participate in local or
regional advertising cooperatives. The cooperatives are expected to be made up
of franchisees within a given Designated Market Area for the purpose of pooling
advertising funds in order to purchase advertising effectively and efficiently.
Each franchisee will be entitled to one vote within the cooperative for each
store owned, and advertising purchases will be determined by majority vote.
Contributions will be determined by the members of each cooperative, and will
range from a required minimum of 1% of gross sales. Stores owned and operated by
the Company are required to contribute to the promotional funds and to
participate in advertising cooperatives on the same basis as franchised stores
within the same Designated Market Areas.
Each franchisee is responsible for developing local advertising and
promotional materials, all of which are subject to prior review and approval by
the Company.
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<PAGE> 36
RENEGOTIATION OF CERTAIN ACQUISITION TERMS
Total consideration for the acquisition of the Goldberg Companies consisted
of cash, a two-year promissory note, stock, and a two-year consulting contract
with Howard Goldberg. In connection with this acquisition, the Company also
agreed to lease certain premises owned by Mr. Goldberg for use as its equipment
warehouse and executive offices, and Mr. Goldberg entered into a noncompetition
agreement with the Company for a term extending for two years after the
termination or expiration of his consulting agreement with the Company. See
"-- History of the Company."
Subsequent to the acquisition of the Goldberg Companies by the Company,
various elements of the transaction were renegotiated by the parties. This
renegotiation reflected a number of intervening events, including Mr. Goldberg's
default under the mortgage on the property occupied by the Company pursuant to
the original acquisition agreement, various financial disputes between the
Company and Mr. Goldberg, Mr. Goldberg's desire to decrease his time commitment
to the Company, and the Company's desire to extend the term of Mr. Goldberg's
noncompetition agreement with the Company.
An additional renegotiation of matters relating to the acquisition of the
Goldberg Companies or arising in connection therewith was concluded in October
1995. The terms of this reconciliation included the satisfaction of certain
alleged defaults by the Company to Mr. Goldberg, the satisfaction of certain
defaults by Mr. Goldberg under the mortgage on the property occupied by the
Company, the reconciliation and settlement of outstanding financial matters,
certain modifications of Mr. Goldberg's consulting agreement and an extension of
Mr. Goldberg's noncompetition agreement with the Company to December 31, 1997.
On August 12, 1996, the Company and Mr. Goldberg entered into certain
additional agreements, reflected in a Modification and Settlement Agreement,
addressing all matters relating to the acquisition of the Goldberg Companies or
arising in connection therewith. Among other things, pursuant to this
Modification and Settlement Agreement Mr. Goldberg has agreed to convert 65,000
shares of his Series A Preferred Stock to an equal number of shares of the
Company's Common Stock and to surrender for cancellation the remaining 115,000
shares of Series A Preferred Stock currently held by him no later than five
business days following the closing of the Offering and the Company has agreed
to pay to Mr. Goldberg the amount of $25,000 and to assign certain claims to,
and provide indemnification for certain claims that may be made against, Mr.
Goldberg and the Goldberg Companies. In addition, the parties have agreed to (i)
a restatement and extension to three years of Mr. Goldberg's noncompetition
agreement and a restatement of prior agreements relating to use of trade dress;
(ii) the grant of mutual releases; and (iii) the termination of the franchise
and consulting agreements currently in effect between the Company and Mr.
Goldberg.
GOVERNMENT REGULATION
The Company and its franchisees are required to comply with federal, state,
and local government regulations applicable to consumer food service businesses
generally, including those relating to the preparation and sale of food, minimum
wage requirements, overtime, working and safety conditions, and citizenship
requirements, as well as regulations relating to zoning, construction, health,
business licensing and employment. The Company believes that it and its
franchisees are in material compliance with these provisions. Continued
compliance with this broad federal, state and local regulatory network is
essential and costly and the failure to comply with such regulations may have an
adverse effect on the Company and its franchisees. See "Risk
Factors -- Government Regulation."
The Company's franchise operations are subject to regulation by the Federal
Trade Commission ("FTC") in compliance with the FTC's rule entitled "Disclosure
Requirements and Prohibitions Concerning Franchising and Business Opportunity
Ventures," which requires, among other things, that the Company prepare and
update periodically a comprehensive disclosure document, known as the Uniform
Franchise Offering Circular ("UFOC"), in connection with the sale and operation
of its franchises. In addition, some states require a franchiser to register its
franchise with the state before it may offer the franchise. The Company believes
that its UFOC, together with any applicable state versions or supplements,
complies with both the FTC guidelines and all applicable state laws regulating
franchising in those states in which it has offered franchises.
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<PAGE> 37
In addition to the rules governing the offer and sale of franchises, the
Company is also subject to a number of state laws, as well as foreign laws (to
the extent it offers franchises outside of the United States), that regulate
substantive aspects of the franchiser-franchisee relationship, including, but
not limited to, those concerning termination and non-renewal. Currently, 18
states, the District of Columbia, Puerto Rico and the Virgin Islands, have
franchise termination and non-renewal laws. These laws govern the termination
and/or non-renewal of the franchise agreement and, by and large, require the
franchiser to have good cause, reasonable cause or just cause in order to
terminate the franchise agreement or not to renew the franchise agreement. In
addition, some of these laws provide for longer cure periods than currently
contemplated by the Company's franchise agreements.
Each store will be subject to regulation by federal agencies and to
licensing and regulation by state and local health, sanitation, safety, fire and
other departments. Difficulties in obtaining or the failure to obtain required
licenses or approvals could delay or prevent the opening of a new store. The
Company believes that it is in substantial compliance with the applicable laws
and regulations governing its operations.
While the Company intends to comply with all federal, state and foreign
laws and regulations, there can be no assurance that it will continue to meet
the requirements of such laws and regulations, which, in turn, could result in a
withdrawal of approval to franchise in one or more jurisdictions. Any such loss
of approval would have a material adverse effect upon the Company's ability to
successfully market its franchises. Violations of franchising laws and/or state
laws and regulations regulating substantive aspects of doing business in a
particular state could subject the Company and its affiliates to rescission
offers, monetary damages, penalties, imprisonment and/or injunctive proceedings.
The state laws and regulations concerning termination and non-renewal of
franchisees are not expected to have a material impact on the Company's
operations. In addition, under court decisions in certain states absolute
vicarious liability may be imposed upon franchisers based upon claims made
against franchisees. The Company currently does not carry insurance against such
claims although it intends to obtain coverage in the future. However, there can
be no assurance that the Company will be able to obtain such coverage or that
such coverage will be sufficient to cover claims against the Company. Further,
there can be no assurance that existing or future franchise regulations will not
have an adverse effect on the Company's ability to expand its franchise program.
PROPERTIES
The Company's executive offices are located at 9 Law Drive, Fairfield, New
Jersey 07006. The Company first occupied this location on January 1, 1995. The
headquarters consist of approximately 3,425 square feet. The Company's lease on
its headquarters location commenced January 1, 1995 and expires on February 28,
2000. The lease provides a renewal option of one five-year term. The Company
also rents 3,800 square feet of industrial space in Lodi, New Jersey, for use as
a bagel producing commissary, and for the distribution and assembly of its
equipment. The commissary operates under kosher supervision and produces bagels
for all Company-owned and franchised Sammy's stores. See "-- Kosher
Certification and Supervision." The Company believes the commissary is adequate
to its production needs through the second quarter of 1997, but thereafter will
be inadequate to fulfill such needs.
The Company purchases bagel bakery equipment from outside vendors for
distribution to Company-owned and franchised stores either directly from the
manufacturer or in one consolidated shipment from the Company's Lodi warehouse.
The Lodi facility currently is operating at full capacity, and management
expects that additional space will be needed for the Company to continue to
distribute equipment to its franchisees effectively.
The Company intends to consolidate its current executive offices,
commissary operations, and equipment warehousing in one central facility as soon
as practicable after the completion of the Offering. The Company is now
investigating several suitable sites in the central New Jersey area, and expects
to lease a facility of approximately 20,000 square feet, of which 5,000 will be
devoted to executive offices, 13,000 to the bagel commissary, and 2,000 to the
warehousing of bagel equipment. Such a facility is expected to be adequate to
the Company's needs for the foreseeable future. See "Use of Proceeds."
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<PAGE> 38
The following table sets forth the location, size and certain information
pertaining to the lease, on each of the Company's three Goldberg's stores (two
of which are operating and one of which is under development and projected to
open no later than December 31, 1996), two Sammy's stores and its commissary.
<TABLE>
<CAPTION>
LEASE TERMS
AREA --------------------------------------
LOCATION CONCEPT (SQ. FT.) COMMENCEMENT EXPIRATION RENEWALS
- --------------------------------------- ----------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
1443 Queen Anne Road, Teaneck, NJ...... Sammy's 750 08/01/91 07/31/03 None
60 Dutch Hill Road, Orangeburg, NY..... Goldberg's 1,400 06/01/92 05/31/97 One five
year term
40 N. James Road, Columbus, Ohio....... Sammy's 2,600 11/01/93 10/31/03 None
10 Dell Glen Avenue, Lodi, NJ.......... Commissary 3,800 10/01/93 04/30/98 One five
year term
197 Bleecker Street, New York, NY...... Goldberg's 1,260 11/01/94 10/31/03 None
Rockland Plaza Space #25, Nanuet, NY... Goldberg's 1,961 07/01/95 06/30/05 None
</TABLE>
EMPLOYEES
At October 31, 1996, the Company had 54 employees, consisting of 39
full-time and 15 part-time employees. The Company has never experienced a work
stoppage and no employees are represented by any labor union. The Company
believes that its employee relations are good.
LEGAL PROCEEDINGS
From time to time the Company is involved in litigation arising in the
ordinary course of its business. The Company is not currently engaged in any
legal proceedings which are expected, individually or in the aggregate, to have
a material adverse effect on the Company.
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<PAGE> 39
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
The current directors, executive officers and key personnel of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- -------------------------------------------------- --- ------------------------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Andrew Thorburn................................... 53 Chairman of the Board, President and
Chief Executive Officer
Chris R. Decker................................... 49 Director, Executive Vice President,
Chief Financial and Administrative
Officer
John Chitvanni.................................... 47 Director
Anthony G. Foster................................. 39 Chief Operating Officer
Guy McNeil........................................ 37 Vice President, Operations
KEY PERSONNEL
Raymond Johnson................................... 30 District Manager
Larry Wiese....................................... 30 Director of Design and Equipment
Tom Lisker........................................ 64 Consulting Advertising Director
</TABLE>
Each director is elected to hold office until the next annual meeting of
shareholders and until his successor is elected and qualified or until his
earlier resignation or removal. All officers serve at the discretion of the
Board of Directors.
Pursuant to the arrangement between the Company and the Underwriters, the
Board of Directors is expected to be expanded from three to no more than five
members within 30 days following the effective date of the Registration
Statement of which this Prospectus forms a part, at least two of which members
will be unaffiliated with the Company. The Underwriters have the right to
designate one member of the Board of Directors for a period of five years
commencing with the closing of the Offering or, at their option, to designate a
non-director observer to the Board of Directors during that period. See
"Underwriting."
The following sets forth certain biographical information with respect to
the directors, executive officers and key personnel of the Company.
DIRECTORS AND EXECUTIVE OFFICERS
ANDREW THORBURN has been President, Chief Executive Officer and Chairman of
the Board of Directors of the Company since October 1993. From 1987 until
October 1993, he was President of All American Enterprises, Inc., Somerset, New
Jersey, an unrelated company that was the franchiser of Treats Bakery Stores
("Treats") and Perkits Frozen Yogurt ("Perkits"). From December 1994 to February
23, 1996, he served as Chairman of the Board (a non-executive position) of Blue
Chip Computerware, Inc. ("Blue Chip"), which became a shareholder on July 1,
1994, but no longer is a shareholder of the Company. He also has served as
Chairman, President and Chief Executive Officer of Jutland Enterprises Inc.,
founder of the Company, commencing in March 1988. He has been in the food
industry since 1985 and prior to that time was Chief Marketing Officer of H.C.
Copeland and Associates, Inc., a subsidiary of the Travelers Insurance Company,
which he helped to develop from a start-up venture into a national sales company
with 600 employees.
CHRIS R. DECKER became Chief Financial and Administrative Officer of the
Company in May 1995, after serving for two years, first as a Divisional
Controller and later Assistant Corporate Controller, for Leslie Fay Corporation,
a leading apparel manufacturer. Previously, Mr. Decker, a certified public
accountant, worked with Mr. Thorburn as a consultant to various franchised food
operations, including Arby's and Schlotsky's. From 1988 to 1993, he and Mr.
Thorburn were chief operating officers and franchisers of Treats and Perkits.
Prior to that time, Mr. Decker had worked for eight years at Deloitte & Touche,
where he served as an audit supervisor during his last two years.
JOHN CHITVANNI joined the Company's Board of Directors in March 1994. He
has been President of National Restaurant Search, a national search firm in the
hospitality industry, since 1981. He has 25 years of
36
<PAGE> 40
experience in the food industry and previously was employed by Brigham's, Inc.
and as a Regional Manager for Dunkin Donuts Corp. Mr. Chitvanni attended Boston
State College. He has served as a guest speaker at industry conventions, written
articles for various industry publications and was a contributing author for the
book "Dining in Corporate America."
ANTHONY G. FOSTER has been Chief Operating Officer of the Company since
January 1, 1996. Prior to that time, he spent five years with Arby's Inc., where
he had most recently been Vice President of Franchising and he previously served
as National Franchise Director for McMaid, Inc. and United Consumers Club of
Mericille, Indiana. From 1982 to 1986, Mr. Foster was with the 7-Eleven Division
of Southland Corporation, where he was responsible for all franchise development
in New England and approximately 40% of the personnel function for the 425
stores and corporate offices in the Northeast Division. He received his BS in
Management and Industrial Relations from the University of Bridgeport.
GUY MCNEIL became Vice President, Operations, of the Company in November
1995. From October 1994 until November 1995, Mr. McNeil was a consultant in the
food service industry and actively involved in personal business ventures for
his own account. Until October, 1994, he was Director of Operations for Mrs.
Field's Cookies, where he supervised 142 stores and 12 district managers in the
Northeastern U.S. and Canada. From 1984 through 1989, he was the East Coast
Director of Village Inn Restaurants, where he was responsible for 26 stores and
four area managers in Eastern and Central Florida. Mr. McNeil earned his
business degree at Muskingum College in New Concord, Ohio.
In addition to the foregoing directors, for a period of five years
following completion of the Offering, the Underwriters have the right, at their
option, to designate one member of the Board of Directors or a nonvoting
representative to the Board. As of the date hereof, the Underwriters had not
made any such designation. See "Underwriting."
KEY PERSONNEL
RAYMOND JOHNSON has been with the Company as District Manager since March
25, 1996. His prior food service experience includes the development and
successful operation of restaurants under the Rainbow Cafe (Charlotte, NC), T.G.
Armadillos (Harrisonburg, VA) and Ball Meade (Harrisonburg, VA) concepts between
1986 and 1995. Mr. Johnson attended James Madison University where he majored in
Hotel and Restaurant Management.
LARRY WIESE has been with the Company as Director of Design and Equipment
since its formation and, from 1990 until 1993 was employed by the Howberg
Equipment Company, one of the Company's predecessor companies, where he was
responsible for purchasing, shipping, and scheduling for construction and
installation of bagel equipment nationally.
TOM LISKER has been associated with the Company and its predecessors since
1986 in his capacity as a principal of LGS, Inc., an advertising agency located
in New York City. Mr. Lisker serves as a consultant to the Company on
advertising and promotional campaigns, public relations and the development of
store design and concepts. He has extensive experience in the food service
industry and has provided advertising, public relations and promotional advice
for a number of clients within the industry, including General Foods, General
Mills, Howard Johnson's and Lum's Restaurants.
DIRECTORS' COMPENSATION
Directors of the Company currently receive no compensation for their
service as such.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted pursuant to the corporate law of the State of New Jersey, the
Company's state of incorporation, the Charter and By-Laws require that the
Company indemnify its directors and officers against certain liabilities
incurred in their service in such capacities to the fullest extent permitted by
applicable law. These provisions would provide indemnification for liabilities
arising under the federal securities laws to the extent that such
indemnification is found to be enforceable under, and to be in accordance with
applicable law. In addition, as permitted by New Jersey law, the Charter
eliminates the personal liability of the directors and officers to the Company
or its shareholders for monetary damages for breaches of such director's or
officer's
37
<PAGE> 41
duty of care or other duties as a director or officer; except liabilities for
any breach of duty based upon an act or omission (a) in breach of such person's
duty of loyalty to the corporation or its shareholders, (b) not in good faith or
involving a knowing violation of law or (c) resulting in receipt by such person
of an improper personal benefit. This limitation on liability could have the
effect of limiting directors' and officers' liabilities for violations of the
federal securities laws.
OMNIBUS STOCK PLAN
The Company has adopted the All American Food Group, Inc. Amended and
Restated Omnibus Stock Plan (the "Plan") to promote the long-term growth and
profitability of the Company by (i) providing key directors, officers and
employees of the Company and its subsidiaries with incentives to improve
shareholder value and contribute to the growth and financial success of the
Company and (ii) enabling the Company to attract, retain and reward the best
available persons for positions of substantial responsibility. As described more
fully below, the Plan provides for grants of options to purchase specified
numbers of shares of Common Stock at predetermined prices.
The following discussion represents only a summary of certain of the Plan
terms and is qualified in its entirety by reference to the complete Plan, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
Shares Available; Maximum Awards; Participants. A total of 350,000 shares
of the Company's Common Stock has been reserved for issuance pursuant to options
granted pursuant to the Plan. The Plan allows the Company to grant options to
employees, officers and directors of the Company and its subsidiaries; provided
that only employees of the Company and its subsidiaries may receive incentive
stock options under the Plan. The Company has not granted, and prior to
completion of the Offering does not expect to grant, any options.
Stock Option Features. Under the Plan, options to purchase the Company's
Common Stock may take the form of incentive stock options ("ISOs") under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code") or
nonqualified stock options ("NQSOs"). As required by Section 422 of the Code,
the aggregate fair market value (as defined in the Plan) of shares of Common
Stock (determined as of the date of grant of the ISO) with respect to which ISOs
granted to an employee are exercisable for the first time in any calendar year
may not exceed $100,000. The foregoing limitation does not apply to NQSOs.
Initially, each option will be exercisable over a period, determined by the
Board of Directors or the Compensation Committee of the Board of Directors of
the Company, in its discretion, of up to ten years from the date of grant.
Options may be exercisable during the option period at such time, in such
amounts, and in accordance with such terms and conditions and subject to such
restrictions as are determined by the Board or the Compensation Committee and
set forth in option agreements evidencing the grant of such options; provided
that no option may be exercisable less than six months from its date of grant.
The exercise price of options granted pursuant to the Plan is determined by
the Board or the Compensation Committee, in its discretion; provided that the
exercise price of an ISO may not be less than 100% of the fair market value (as
defined in the Plan) of the shares of the Company Common Stock on the date of
grant. The exercise price of options granted pursuant to the Plan is subject to
adjustment as provided in the Plan to reflect stock dividends, splits, other
recapitalizations or reclassifications or changes in the market value of the
Company Common Stock. In addition, the Plan provides that, in the event of a
proposed change in control of the Company (as defined in the Plan), the Board or
the Compensation Committee is to take such actions as it deems appropriate to
effectuate the purposes of the Plan and to protect the grantees of options,
which action may include (i) acceleration or change of the exercise dates of any
option; (ii) arrangements with grantees for the payment of appropriate
consideration to them for the cancellation and surrender of any option; and
(iii) in any case where equity securities other than Common Stock are proposed
to be delivered in exchange for or with respect to Common Stock, arrangements
providing that any option shall become one or more options with respect to such
other equity securities. Further, in the event the Company dissolves and
liquidates (other than pursuant to a plan of merger or reorganization), then
notwithstanding any restrictions on exercise set forth in the Plan or any grant
agreement pursuant thereto (i) each grantee shall have the right to exercise his
option at any time up to ten days prior to the effective date of such
liquidation and dissolution;
38
<PAGE> 42
and (ii) the Board or the Compensation Committee may make arrangements with the
grantees for the payment of appropriate consideration to them for the
cancellation and surrender of any option that is so canceled or surrendered at
any time up to ten days prior to the effective date of such liquidation and
dissolution. The Board or the Compensation Committee also may establish a
different period (and different conditions) for such exercise, cancellation, or
surrender to avoid subjecting the grantee to liability under Section 16(b) of
the Exchange Act.
The shares purchased upon the exercise of an option are to be paid for by
the optionee in cash or cash equivalents acceptable to the Compensation
Committee. In addition, the Plan provides for broker-assisted cashless exercises
in the discretion of the Compensation Committee.
Except as permitted pursuant to Rule 16b-3 under the Exchange Act, and in
any event in the case of an ISO, an option is not transferable except by will or
the laws of descent and distribution. In no case may the options be exercised
later than the expiration date specified in the option agreement.
Plan Administration. The Plan initially will be administered by the Board
of Directors or a Compensation Committee of the Board of Directors. At such
time, if any, as the Company is required to register pursuant to Section 12 of
the Exchange Act, the Plan will be administered by the full Board of Directors
by a Compensation Committee of the Board of Directors consisting of at least two
directors who are "non-employee directors" within the meaning of Rule 16b-3, and
"outside directors" within the meaning of Section 162(m) of the Code.
The Compensation Committee will decide when and to whom to make grants, the
number of shares to be covered by the grants, the vesting schedule, the type of
awards and the terms and provisions relating to the exercise of the awards. The
Compensation Committee may interpret the Plan and may at any time adopt such
rules and regulations for the Plan as it deems advisable. The Board of Directors
may at any time amend or terminate the Plan and change its terms and conditions,
except that, without shareholder approval, no such amendment may (i) materially
increase the maximum number of shares as to which awards may be granted under
the Plan; (ii) materially increase the benefits accruing to Plan participants;
or (iii) materially change the requirements as to eligibility for participation
in the Plan.
Accounting Effects. Under current accounting rules, neither the grant of
options at an exercise price not less than the current fair market value of the
underlying Common Stock, nor the exercise of options under the Plan, is expected
to result in any charge to the earnings of the Company.
Certain Federal Income Tax Consequences. The following is a brief summary
of certain Federal income tax aspects of awards under the Plan based upon the
Federal income tax laws in effect on the date hereof. This summary is not
intended to be exhaustive and does not describe state or local tax consequences.
Incentive Stock Options. An optionee will not realize taxable income upon
the grant of an ISO. In addition, an optionee will not realize taxable income
upon the exercise of an ISO, provided that such exercise occurs no later than
three months after the optionee's termination of employment with the Company
(one year in the event of a termination on account of disability). However, an
optionee's alternative minimum taxable income will be increased by the amount
that the fair market value of the shares acquired upon exercise of an ISO,
generally determined as of the date of exercise, exceeds the exercise price of
the option. If an optionee sells the shares of Common Stock acquired upon
exercise of an ISO, the tax consequences of the disposition depend upon whether
the disposition is qualifying or disqualifying. The disposition of the shares is
qualifying if made more than two years after the date the ISO was granted and
more than one year after the date the ISO was exercised. If the disposition of
the shares is qualifying, any excess of the sale price of the shares over the
exercise price of the ISO would be treated as long-term capital gain taxable to
the option holder at the time of the sale. If the disposition is not qualifying,
i.e., a disqualifying disposition, the excess of the fair market value of the
shares on the date the ISO was exercised over the exercise price would be
compensation income taxable to the optionee at the time of the disposition, and
any excess of the sale price of the shares over the fair market value of the
shares on the date the ISO was exercised would be capital gain.
Unless an optionee engages in a disqualifying disposition, the Company will
not be entitled to a deduction with respect to an ISO. However, if an optionee
engages in a disqualifying disposition, the Company generally will be entitled
to a deduction equal to the amount of compensation income taxable to the
optionee.
39
<PAGE> 43
Nonqualified Stock Options. An optionee will not realize taxable income
upon the grant of an NQSO. However, when the optionee exercises the NQSO, the
difference between the exercise price of the NQSO and the fair market value of
the shares acquired upon exercise of the NQSO on the date of exercise is
compensation income taxable to the optionee. The Company generally will be
entitled to a deduction equal to the amount of compensation income taxable to
the optionee.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth certain information
regarding compensation paid during each of the indicated fiscal periods to the
person serving as the Company's Chief Executive Officer during the last year. No
executive officers received salary and bonus in an amount exceeding $100,000
during any of the fiscal periods.
<TABLE>
<CAPTION>
NAME AND FISCAL ANNUAL
PRINCIPAL POSITION PERIOD(1) SALARY
---------------------------------------------------------- --------- -------
<S> <C> <C>
Andrew Thorburn, Chief Executive Officer.................. 1996 $13,000
1995 $39,000
1994 $26,000
1993 $ 0
</TABLE>
- ---------------
(1) The Company's 1996 fiscal period was from November 1, 1995 to January 31,
1996, its 1995 fiscal period was from February 1, 1995 to October 31, 1995,
its 1994 fiscal period was from February 1, 1994 through January 31, 1995
and its 1993 fiscal period was from September 27, 1993 (inception) through
January 31, 1994.
CERTAIN TRANSACTIONS
In two transactions on July 1, 1994 and August 15, 1994, Blue Chip
Computerware, Inc. ("Blue Chip"), previously an unaffiliated third party,
acquired from the Company a total of 600,000 shares of the Company's Common
Stock, representing approximately 44% of the Company's Common Stock outstanding
immediately subsequent to these transactions, for total consideration consisting
of 100,000 shares of the common stock of Jutland Enterprises Inc., previously
acquired by Blue Chip from Jutland Enterprises, Inc., 400,000 shares of Blue
Chip common stock and $50,000 cash. Thereafter, the Company sold the 400,000
shares of Blue Chip common stock to an unaffiliated purchaser for total
consideration of $650,000.
In December 1994, Andrew Thorburn, the Chairman, President and Chief
Executive Officer of the Company, was elected to the Board of Directors of Blue
Chip and shortly thereafter was elected as Chairman of the Blue Chip Board of
Directors, a non-executive position. Mr. Thorburn served in this capacity until
his resignation on February 23, 1996. Mr. Thorburn received no compensation for
his services as a member or Chairman of the Blue Chip Board of Directors and
owns no Blue Chip securities.
In March of 1995, the Company exchanged 825,000 shares of its Series C
Redeemable Convertible Preferred Stock for 412,500 shares of its Common Stock
owned by Blue Chip. Subsequently, during 1995, Blue Chip purchased an additional
475,000 shares of the Series C Preferred Stock for which the Company received
aggregate consideration of $475,000. During 1996, the Company voluntarily
redeemed 402,000 shares of the Series C Preferred Stock held by Blue Chip at a
price of $1.00 per share. See "Description of Securities -- Preferred Stock."
Blue Chip has sold or otherwise disposed of all of its shares of the
Company's Common and Series C Preferred Stock and is no longer a shareholder of
the Company.
The Company believes that each of the foregoing transactions has been on
terms no less favorable to the Company than those that could have been obtained
from unaffiliated parties. It is the Company's intent that, in the future,
transactions with affiliated parties will be approved by a majority of the
Company's disinterested directors or otherwise as permitted by applicable law.
Any such future transactions are expected to be on terms no less favorable to
the Company than could be obtained from unaffiliated parties.
40
<PAGE> 44
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of October 31, 1996, certain information
as to the beneficial ownership of Common Stock of each of the Company's
directors, all officers and directors as a group, and each person known by the
Company to be the beneficial owner of more than 5% of the Company's Common
Stock.
<TABLE>
<CAPTION>
PERCENTAGE
AMOUNT AND NATURE OF OF COMMON STOCK
BENEFICIAL OWNERSHIP ---------------------
NAME AND ADDRESS OF IMMEDIATELY BEFORE BEFORE AFTER
BENEFICIAL STOCKHOLDER OFFERING(1) OFFERING OFFERING(2)
----------------------- --------------------- -------- --------
<S> <C> <C> <C>
Andrew Thorburn........................................... 415,101 22.23% 13.69%
9 Law Drive
Fairfield, NJ 07006
Chris R. Decker........................................... 100,211(3) 5.23% 3.25%
9 Law Drive
Fairfield, NJ 07006
John Chitvanni............................................ 30,233(4) 1.60% 0.99%
910 West Lake Street
Roselle, IL 60172
Anthony G. Foster......................................... 5,000(5) * *
9 Law Drive
Fairfield, NJ 07006
Guy McNeil................................................ 5,000(6) * *
9 Law Drive
Fairfield, NJ 07006
Mario and Ann Caputo...................................... 100,000(7) 5.35% 3.3%
3 Libby Road
Norwalk, CT 06850
All officers and directors as a group (6 persons)......... 555,545(8) 28.60% 17.88%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as otherwise indicated, each of the parties listed has sole voting
and investment power with respect to all shares of Common Stock indicated.
Beneficial ownership is calculated in accordance with Rule 13-d-3(d) under
the Exchange Act.
(2) Assumes that the listed shareholders will continue to hold the shares
currently held thereby after completion of the Offering.
(3) Consists of 50,211 shares of Common Stock and currently exercisable options
(expiring January 1, 2001) to purchase 50,000 shares of Common Stock at
$2.00 per share.
(4) Consists of 233 shares of Common Stock and currently exercisable options
(expiring November 1, 2000) to purchase 25,000 shares of Common Stock at a
per share price of $2.00 held by Mr. Chitvanni and 5,000 shares of Common
Stock held jointly by Mr. Chitvanni and his spouse. The 5,000 jointly-held
shares are being offered for sale in the Concurrent Offering, subject to the
Chitvannis' agreement to refrain from selling, transferring, assigning,
pledging or hypothecating in any way such shares until the later of 180 days
following the effective date of the Registration Statement of which this
Prospectus forms a part or 365 days following their initial purchase from
the Company and to refrain from transferring, assigning or selling any
shares of Common Stock held thereby for a period of 24 months following the
closing of the Offering without the Underwriters' consent, unless the
transferee, assignee or purchaser agrees to be bound by the same 24-month
transfer restriction. In the event that all such shares were sold, Mr.
Chitvanni would beneficially own 25,233 shares of Common Stock, representing
0.83% of the Common Stock outstanding immediately subsequent to the
Offering. See "Underwriting" and "Concurrent Offering."
(5) Does not include 6,500 shares of Common Stock owned by Mr. Foster's
mother-in-law, who shares Mr. Foster's residence. Mr. Foster disclaims
beneficial ownership of these shares. All of the shares owned by Mr. Foster
and his mother-in-law are being offered for sale in the Concurrent Offering,
subject to the holders' agreement, to refrain from selling, transferring,
assigning, pledging or hypothecating in any way such shares until the later
of 180 days following the effective date of the Registration Statement of
which this Prospectus forms a part or 365 days following their initial
purchase from the Company and, with respect to the 5,000 shares held
directly by Mr. Foster, to refrain from transferring, assigning or selling
such shares for a period of 24 months following the closing of the Offering
without the Underwriters' consent, unless the transferee, assignee or
purchaser agrees to be bound by the same 24-month transfer restriction. In
the event that all such shares were sold, Mr. Foster would beneficially own
no shares of Common Stock. See "Underwriting" and "Concurrent Offering."
(6) All such shares are being offered for sale in the Concurrent Offering,
subject to Mr. McNeil's agreement to refrain from selling, transferring,
assigning, pledging or hypothecating in any way such shares until the later
of 180 days following the effective date of the Registration Statement of
which this Prospectus forms a part or 365 days following their initial
purchase from the Company and to refrain from transferring, assigning or
selling such shares for a period of 24 months following the closing of the
Offering without the Underwriters' consent, unless the transferee, assignee
or purchaser agrees to be bound by the same 24-month transfer restriction.
In the event that all such shares were sold, Mr. McNeil would beneficially
own no shares of Common Stock. See "Underwriting" and "Concurrent Offering."
41
<PAGE> 45
(7) Consists of 50,000 shares of Common Stock individually held by each of Mario
and Ann Caputo, husband and wife. All such shares are being offered for sale
in the Concurrent Offering subject to the Caputos' agreement to refrain from
selling, transferring, assigning, pledging or hypothecating in any way any
such shares until the later of 180 days following the effective date of the
Registration Statement of which this Prospectus forms a part or 365 days
following their initial purchase from the Company. See "Concurrent
Offering."
(8) Includes all shares reflected above as beneficially owned by Messrs.
Thorburn, Decker, Chitvanni, Foster and McNeil.
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of an aggregate of
24,000,000 shares of capital stock, consisting of 20,000,000 shares of Common
Stock, no par value, and 4,000,000 shares of Preferred Stock, no par value. As
of November 15, 1996, there were outstanding 1,867,661 shares of Common Stock
and 190,000, 180,000, and 982,503 shares of Series A, Series B and Series C
Preferred Stock, respectively.
COMMON STOCK
Holders of Common Stock have one vote per share on each matter submitted to
a vote of the shareholders. Holders of the Common Stock do not have preemptive
rights to purchase additional shares of Common Stock or other subscription
rights. The Common Stock carries no conversion rights and is not subject to
redemption or to any sinking fund provisions. All shares of Common Stock are
entitled to share equally in dividends from legally available sources as
determined by the Board of Directors, subject to any preferential dividend
rights of the Preferred Stock (described below). Upon dissolution or liquidation
of the Company, whether voluntary or involuntary, holders of the Common Stock
are entitled to receive assets of the Company available for distribution to the
stockholders, subject to the preferential rights of the Preferred Stock. As of
October 31, 1996, there were 336 holders of record of the Company's Common
Stock.
PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more series. The
Board of Directors is authorized to determine the rights, preferences,
privileges and restrictions granted to, and imposed upon any series of Preferred
Stock and to fix the number of shares of any series of Preferred Stock and the
designation of any such series, subject, to the consent of the existing holders
of preferred stock, in certain instances. The issuance of Preferred Stock could
be used, under certain circumstances, as a method of preventing a takeover of
the Company and could permit the Board of Directors, without any action of the
holders of the Common Stock to issue Preferred Stock which could have a
detrimental effect on the rights of holders of the Common Stock, including loss
of voting control. Anti-takeover provisions that could be included in the
Preferred Stock when issued may depress the market price of the Company's
securities and may limit stockholders' ability to receive a premium on their
shares of Common Stock by discouraging takeover and tender offer bids.
The Company has issued three series Preferred Stock, designated Series A
Partially Redeemable Convertible Preferred Stock ("Series A Preferred Stock"),
Series B Redeemable Convertible Preferred Stock ("Series B Preferred Stock") and
Series C Convertible Preferred Stock ("Series C Preferred Stock" and,
collectively with the Series A Preferred Stock and the Series B Preferred Stock,
"Convertible Preferred Stock").
Each share of Convertible Preferred Stock is convertible, at the election
of the holder thereof, into shares of the Common Stock of the Company on a
one-for-one basis, subject to adjustment in the event of certain events
including (i) stock dividends, splits and reverse splits; (ii)
reclassifications; (iii) issuances of warrants or rights to holders of Common
Stock at a price per share less than the then-current market price of the Common
Stock (as defined); (iv) other dividends or distributions to shareholders of
assets or evidences of indebtedness; and (v) mergers, consolidations, sales of
all or substantially all of the Company's assets, statutory exchanges of its
securities and similar transactions. As a consequence of the one-for-two reverse
split of the Common Stock being effected in connection with the Offering, and
adjustments in connection
42
<PAGE> 46
therewith, each share of Series A Preferred Stock and Series B Preferred Stock
will remain convertible into one share of Common Stock and each share of Series
C Preferred Stock will be convertible into one-half share of Common Stock. The
Convertible Preferred Stock has no preference as to dividends, which are payable
only as and when declared by the Board of Directors, and need not be declared,
notwithstanding the declaration of dividends with respect to any other class or
series of the Company's capital stock. The Convertible Preferred Stock has no
preference upon liquidation of the Company, but instead participates pro rata,
on a share-for-share basis, with shares of Common Stock in respect of any funds
otherwise available for distribution to shareholders upon such liquidation.
Holders of Convertible Preferred Stock have no voting rights, except as required
by applicable law.
The Company is obligated to redeem 40,000 shares (or such lesser number of
shares as is then outstanding) of the Series A Preferred Stock at a price of
$5.00 per share in the event that it engages in an underwritten initial public
offering of its Common Stock yielding net proceeds to the Company (after the
deduction of offering costs, commissions, attorneys' fees and other costs and
expenses associated therewith) of more than $2,000,000. However, on August 12,
1996, the Company and Howard Goldberg, the holder of 180,000 shares of Series A
Preferred Stock, entered into a Modification and Settlement Agreement pursuant
to which, among other things, Mr. Goldberg agreed to convert 65,000 shares of
Series A Preferred Stock to an equal number of shares of Common Stock and to
surrender his remaining Series A shares. See "Business -- Renegotiation of
Certain Acquisition Terms."
The Company is obligated to redeem 60,000 shares (or such lesser number of
shares as is then outstanding) of the Series B Preferred Stock at a price of
$5.00 per share in the event that it receives a capital infusion of more than
$1,000,000 (net of any offering costs, commissions, attorneys' fees and other
costs and expenses associated therewith). Therefore, upon completion of the
Offering made hereby, the Company expects to redeem 60,000 such shares. See "Use
of Proceeds." In addition, if the Company engages in an initial public offering
of its Common Stock and shares of Series B Preferred Stock remain outstanding 24
months thereafter, the Company is obligated to redeem 60,000 such shares (or
such lesser number of shares as is then outstanding) at a price of $5.00 per
share. The Company, at its election, also may redeem some or all of the shares
of Preferred Stock outstanding at any time upon payment of a redemption price
equal to $5.00 plus a premium thereon equal to 6% per annum measured from
September 1994 to the effective date of such redemption.
The Series C Preferred Stock is not subject to mandatory redemption by
either the Company or at the election of the holders thereof.
WARRANTS
In connection with the completion of this Offering, for nominal
consideration the Company will grant to the R.T.G. Richards & Company, Inc.,
("R.T.G. Richards"), one of the Underwriters, Underwriters warrants (the
"Underwriter's Warrants") to purchase 110,000 shares of Common Stock at an
initial exercise price of $ per share (140% of the initial public offering
price of the Shares sold in the Offering). The Underwriter's Warrants are
exercisable for a period of four years commencing one year from the date of this
Prospectus. The shares of Common Stock issuable upon exercise of the
Underwriter's Warrants are identical to the Shares being sold in this Offering.
The Underwriter's Warrants contain anti-dilution provisions providing for
adjustment in the number of Warrants and the exercise price thereof under
certain circumstances. The Underwriter's Warrants also grant the holders thereof
certain rights of registration of the shares of Common Stock issuable upon
exercise of such Warrants. The Company is registering the Underwriter's
Warrants, as well as the underlying Common Stock, pursuant to the Registration
Statement of which this Prospectus forms a part. See "Underwriting."
TRANSFER AGENT
The transfer agent for the Company's Common and Preferred Stock is
Continental Stock Transfer and Trust Company.
43
<PAGE> 47
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding an
aggregate of 3,032,661 shares of Common Stock which includes the 1,100,000
shares offered hereby and the 65,000 shares to be issued pursuant to the
Modification and Settlement Agreement between the Company and Howard Goldberg.
See "Business -- Renegotiation of Certain Acquisition Terms" and "Underwriting."
Upon completion of the Offering, the 1,100,000 Shares issued in the Offering
will be freely transferable without restriction under the Securities Act
(excluding any shares purchased in the Offering by any person who is or thereby
becomes an "affiliate" of the Company). The 65,000 shares to be issued pursuant
to the Modification and Settlement Agreement also will be freely transferable.
All of the 1,867,661 shares outstanding immediately prior to the Offering were
issued in private placements without registration under the Securities Act and,
therefore, are "restricted securities" as that term is defined in Rule 144 under
the Securities Act.
Of the 1,867,661 shares outstanding immediately prior to the Offering, the
886,951 Private Placement Shares were issued in the Private Placements and,
pursuant to registration rights granted in connection therewith, all of the
Private Placement Shares are being registered for resale pursuant to the
Registration Statement of which this Prospectus forms a part. So long as such
shares remain subject to an effective registration statement, and following any
sale pursuant thereto, such shares will be freely transferable without
restriction under the Securities Act (subject to the contractual restrictions
that the holders may not sell, transfer, assign, pledge or hypothecate their
shares until the later of 180 days after the effective date of the Registration
Statement of which this Prospectus forms a part or 365 days from the date of
initial purchase of such shares from the Company and, in addition, that certain
such holders who are not officers or directors of the Company (holding, in the
aggregate, 622,643 shares of Common Stock, representing approximately 20.53% of
the shares to be outstanding immediately after the Offering) are subject to an
Underwriters' lock-up for a period of 12 months following the closing of the
Offering, while holders who are officers or directors are subject to a 24-month
Underwriters' lock-up). See "Underwriting" and "Concurrent Offering." The
remaining 980,710 shares of Common Stock outstanding prior to this Offering are
"restricted securities" as that term is defined under Rule 144. In addition,
120,000 shares underlying currently outstanding options to purchase Common Stock
will, upon issuance, be restricted securities and any shares of Common Stock
issued upon conversion of the 1,112,503 shares of Preferred Stock expected to be
outstanding subsequent to the completion of the Offering, the performance of the
Modification and Settlement Agreement and the initial mandatory redemption of
Preferred Stock (representing a total of 621,252 shares of Common Stock), prior
to the expiration of the applicable holding period with respect thereto,
likewise will be "restricted securities."
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has satisfied a two-year holding period may
sell within any three-month period a number of restricted shares which does not
exceed the greater of 1% of the then outstanding shares of such class of
securities or the average weekly trading volume during the four calendar weeks
prior to such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. Rule 144 also permits, under certain
circumstances, the sale of shares by a person who is not an affiliate of the
Company with respect to restricted securities that satisfy a three-year holding
period, without regard to the volume or other resale limitations.
The Company is unable to predict the effect that sales of Private Placement
Shares, the Underwriter's Warrants or the shares underlying such Underwriter's
Warrants or sales under Rule 144 may have on the then prevailing market price of
the Common Stock, but such sales may have a substantial depressing effect on
such market price. However, holders of the 886,951 Private Placement Shares have
agreed not to sell, transfer, assign, pledge or hypothecate any of their shares
of Common Stock until the later of 180 days from the effective date of the
Registration Statement of which this Prospectus forms a part or 365 days from
the date of initial purchase of such shares from the Company. In addition,
certain holders of Private Placement Shares who are not officers or directors of
the Company (holding, in the aggregate, 622,643 shares of Common Stock) are
subject to the foregoing restriction as well as an Underwriters' lock-up for a
period of 12 months following the closing of the Offering. The officers and
directors of the Company have agreed not to transfer, assign or sell any shares
of the Company's Common Stock currently held thereby for 24 months from the
closing of the Offering. The remaining 980,710 shares of Common Stock that will
be "restricted securities"
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<PAGE> 48
immediately subsequent to the Offering will become eligible for sale at various
times beginning in February 1998. See "Underwriting."
UNDERWRITING
The underwriters named below (the "Underwriters") have agreed, subject to
the terms and conditions of the Underwriting Agreement between the Company and
R.T.G. Richards & Company, Inc. ("R.T.G. Richards") as representative of the
Underwriters, to purchase from the Company the number of Shares set forth below
opposite their names:
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
-------------------------------------------------------------- ------------
<S> <C>
</TABLE>
The Underwriters are committed to purchase and pay for all of the Shares
offered hereby if any are purchased. The Common Stock is being offered by the
Underwriters subject to prior sale, when, as and if delivered to and accepted by
the Underwriters and subject to approval of certain legal matters by counsel and
to certain other conditions, such as no adverse changes in the Company and
market conditions.
R.T.G. Richards, has not previously acted as an Underwriter in a public
offering of securities. There can be no assurance that R.T.G. Richards' lack of
experience will not adversely affect the Offering and the subsequent
development, if any, of a trading market for the Company's Common Stock. See
"Risk Factors -- Limited Offering Experience of the Managing Underwriter."
The Underwriters have advised the Company that they propose to offer the
Common Stock to the public at the initial public offering price set forth on the
cover page of this Prospectus. The Underwriters may allow to certain dealers who
are members of the NASD concessions, not in excess of $ per share, of which
not in excess of $ per share may be reallowed to other dealers who are
members of the NASD. After the commencement of the Offering, the public offering
price, concession and reallowance may be changed by the Underwriters.
The Company has granted the Underwriters an over-allotment option,
exercisable during the 30-day period commencing with the date of the
Underwriting Agreement, to purchase from the Company at the initial offering
price less underwriting discounts, up to an aggregate of 165,000 additional
shares of Common Stock for the sole purpose of covering over-allotments, if any.
The Company will be obligated, pursuant to this over-allotment option, to sell
such additional shares to the Underwriters.
The Company has agreed to pay to R.T.G. Richards a non-accountable expense
allowance of 3% of the gross proceeds of the Offering, of which $65,000 has been
paid as of the date of this Prospectus. The Company has also agreed to pay all
expenses in connection with qualifying the Common Stock offered hereby for sale
under the laws of such states as the Underwriters may designate, including
expenses of counsel retained for such purpose by the Underwriters.
In connection with the Offering, the Company has agreed to sell to R.T.G.
Richards, for $0.001 per Warrant, the Underwriter's Warrants. The Underwriter's
Warrants initially are exercisable at a price of 140% of the per share initial
public offering price of the Shares offered hereby, for a period of four years
commencing one year from the date of this Prospectus. The shares of Common Stock
issuable upon exercise of the Underwriter's Warrants are identical to the Shares
being sold in this Offering. The Underwriter's Warrants contain anti-dilution
provisions providing for adjustment in the number of Warrants and the exercise
price thereof under certain circumstances. The Underwriter's Warrants also grant
the holders thereof certain rights of registration of the shares of Common Stock
issuable upon exercise of such Warrants. The Company
45
<PAGE> 49
is registering the Underwriter's Warrants, as well as the underlying Common
Stock, pursuant to the Registration Statement of which this Prospectus forms a
part.
The Company will retain R.T.G. Richards to provide financial consulting
services for a period of three years following completion of the Offering for a
fee of $90,000, payable upon completion of the Offering.
The Company will enter into a Merger and Acquisition Agreement with R.T.G.
Richards pursuant to which R.T.G. Richards will receive a finder's fee ranging
from 10% of the first $1,000,000, 5% of the next $1,000,000, 4% of the next
$1,000,000, 3% of the next $1,000,000 and 2% of any excess over $4,000,000 of
the consideration involved in any transaction involving the Company introduced
by R.T.G. Richards and consummated with three years following the closing of the
Offering.
Pursuant to the Underwriting Agreement, the Board of Directors is expected
to be expanded from three to no more than five members within 30 days following
the effective date of the Registration Statement of which this Prospectus forms
a part, at least two of which members will be unaffiliated with the Company. The
Underwriters have the right to designate one member of the Board of Directors
for a period of five years commencing with the closing of the Offering or, at
their option, to designate a non-director observer to the Board of Directors.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Underwriters have informed the Company that they do not expect sales to
any accounts over which they exercise discretionary authority to exceed 5% of
the shares of Common Stock offered by the Company.
The holders of Common Stock outstanding as of the closing date of the
Offering who are officers or directors of the Company have agreed not to
transfer, assign or sell any of such shares of Common Stock (555,545 shares in
the aggregate) for a period of 24 months from the closing of the Offering
without the Underwriters' consent, unless the transferee, assignee or purchaser
agrees to be bound by the same restriction as the original holder. See
"Principal Shareholders." In addition, 15 purchasers of Private Placement Shares
have agreed not to transfer, assign or sell, any such shares of Common Stock
(representing a total of 622,643 shares, or approximately 20.53% of the shares
of Common Stock to be outstanding immediately after the Offering) for a period
of 12 months following the closing of the Offering without the Underwriters'
consent, unless the transferee, assignee or purchaser agrees to be bound by the
same restriction as the original holder.
The Company has agreed with the Underwriters that, except as described in
this Prospectus, for a period of 90 days from the date of this Prospectus, it
will not issue any securities or grant options or warrants to purchase any
securities of the Company without the consent of the Underwriters.
Other than securities issued pursuant to, or the issuance of which is
contemplated by this Prospectus, for a period of nine months following the
effective date of the Registration Statement of which this Prospectus forms a
part the Company has agreed that it will not issue more than 150,000 shares of
Common Stock, which shares will be issued only for the purpose of satisfying
vendor debt, and that for the ensuing 15 months it will not issue securities
which, when aggregated with any shares issued in satisfaction of vendor debt,
represent more than 10% of the number of shares of Common Stock outstanding
immediately prior to such effective date, except with the prior written consent
of the Underwriters.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement and related documents, copies of which
are on file at the offices of R.T.G. Richards, the Company and the Commission.
See "Additional Information."
PRICING THE OFFERING
Prior to this Offering, there has been no public market for any of the
Company's securities. Consequently, the initial public offering price of the
Common Stock will be determined by negotiation between the Company and the
Underwriters. Factors to be considered in determining such price, in addition to
prevailing market conditions, include an assessment of the Company's prospects.
The public offering price of the Shares does not
46
<PAGE> 50
bear any relationship to the Company's asset value, earnings, net financial
condition, or other established criteria of value applicable to the Company and
should not be regarded as an indication of the actual value or future market
price of the Shares. Such prices are subject to change as a result of market
conditions and other factors, and no assurance can be given that the Shares can
be resold at its public offering price.
CONCURRENT OFFERING
Concurrently with the offering, the Company is also registering for resale,
from time to time, on behalf of the owners thereof, the Selling Securityholder
Securities consisting of 886,951 shares of Common Stock acquired by the holders
thereof in the Company's Private Placements, subject to the contractual
restrictions that all of the Selling Securityholders may not sell, transfer,
assign, pledge or hypothecate their shares until the later of 180 days after the
effective date of the Registration Statement of which this Prospectus forms a
part or 365 days from the date of initial purchase from the Company. In
addition, certain Selling Securityholders who are not officers or directors of
the Company (and who hold, in the aggregate, 622,643 shares) have agreed, in
addition to the foregoing restriction, that they will not sell, transfer or
assign their Private Placement Shares for a period of 12 months following the
closing of the Offering without the consent of the Underwriters, unless the
transferee, assignee or purchaser agrees to be bound by the same 12-month
restriction as the original holder. The Selling Securityholders who are officers
or directors of the Company (and who hold, in the aggregate, 15,000 shares) also
have agreed to the foregoing restriction. In addition, all of the directors and
officers who hold Common Stock as of the closing date of the Offering (555,545
shares in the aggregate) have agreed that they will not sell, transfer or
assign, pledge, hypothecate, or otherwise encumber any shares of the Company's
Common Stock currently held thereby for a period of 24 months following closing
of the Offering without the consent of the Underwriters, unless the transferee,
assignee or purchaser agrees to be bound by the same restrictions as the
original holder. See "Management's Discussion and Analysis or Plan of
Operation -- Liquidity and Capital Resources."
The Company will not receive any proceeds from sale of securities by the
Selling Securityholders.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for the
Company by Dwyer & Canellis, P.A. In connection with the Closing, certain other
matters will be passed upon for the Company by Venable, Baetjer, Howard &
Civiletti, LLP. Lehman & Eilen, Uniondale, New York, will pass upon certain
legal matters for the Underwriters.
EXPERTS
The financial statements of the Company at January 31, 1995 and October 31,
1995 and for the fiscal periods then ended, appearing in this Prospectus and
Registration Statement of which this Prospectus forms a part have been audited
by DelSanto and DeFreitas, Certified Public Accountants, independent auditors,
as set forth in their report thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement under
the Securities Act with respect to the securities offered by this Prospectus. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement and
the exhibits thereto, which may be examined without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at the Regional Offices of the Commission at 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois
47
<PAGE> 51
60661. Copies of such materials may be obtained from the Public Reference
Section of the Commission in Washington, D.C. upon payment of the prescribed
fees. Statements contained in this Prospectus as to the contents of any contract
or other documents referred to herein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
The Company will, upon completion of the Offering, be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
and, in accordance therewith, will file reports and other information with the
Commission. Such reports and other information may be inspected and copied at
the public reference facilities of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such materials can be obtained at prescribed
rates from the Commission at such address.
48
<PAGE> 52
ALL AMERICAN FOOD GROUP, INC., AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of DelSanto & DeFreitas, Certified Public Accountants......................... F- 2
Consolidated Balance Sheets as of October 31, 1995 and January 31, 1995.............. F- 3
Consolidated Statements of Operations for the Nine Months Ended October 31, 1995 and
the Year Ended January 31, 1995.................................................... F- 4
Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 1995 and
the Year Ended January 31, 1995.................................................... F- 5
Consolidated Statements of Stockholders' (Deficit) Equity for the Nine Months Ended
October 31, 1995 and the Year Ended January 31, 1995............................... F- 6
Notes to Consolidated Financial Statements........................................... F- 7
INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
Consolidated Balance Sheets as of July 31, 1996 and 1995............................. F-21
Consolidated Statements of Operations for the Three and Nine Months Ended July 31,
1996 and 1995...................................................................... F-22
Consolidated Statements of Cash Flows for the Nine Months Ended July 31, 1996 and
1995............................................................................... F-23
Consolidated Statements of Common Stock, Non-Redeemable Preferred Stock and Other
Stockholders' Equity for the Nine Months Ended July 31, 1996 and 1995.............. F-24
Notes to Consolidated Financial Statements........................................... F-25
</TABLE>
F-1
<PAGE> 53
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
All American Food Group, Inc. and Subsidiaries
Fairfield, New Jersey
We have audited the accompanying consolidated balance sheets of All
American Food Group, Inc. (formerly Jutland Food Group, Inc.) and subsidiaries
(Note 1) as of January 31, 1995, and October 31, 1995 and the related
consolidated statements of operations and cash flows for the year ended January
31, 1995, and nine month period ended October 31, 1995 and the consolidated
statements of stockholders' (deficit) equity for the year ended January 31,
1995, and nine month period ended October 31, 1995.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our 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 the audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of All American
Food Group, Inc. and subsidiaries as of January 31, 1995 and October 31, 1995,
the consolidated statements of operations and cash flows and changes in
stockholders' (deficit) equity for the year ended January 31, 1995, and nine
month period ended October 31, 1995 in conformity with generally accepted
accounting principles.
/s/ DelSanto & DeFreitas
DelSanto & DeFreitas
Closter, New Jersey
July 1, 1996
F-2
<PAGE> 54
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1995 1995
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash.................................................................... $ 53,703 $ 55,472
Accounts and notes receivable, net of allowances for possible losses of
$15,000 and $50,000, respectively...................................... 107,641 95,980
Inventories............................................................. 123,649 182,364
Note Receivable......................................................... 13,505 --
Prepaid expenses........................................................ 45,251 30,000
----------- -----------
Total Current Assets............................................... 343,749 363,816
Property, Plant and Equipment, at cost less accumulated depreciation and
amortization of $145,589 and $134,802, respectively....................... 517,902 711,686
Intangible Assets, net of accumulated amortization of $230,339 and $127,129
respectively.............................................................. 342,117 561,579
Acquisition Costs, net of accumulated amortization of $40,324 and $24,456
respectively.............................................................. 65,427 81,295
Security Deposits........................................................... 30,234 25,185
Note Receivable, long-term.................................................. 39,365 --
Investment in Jutland Enterprises Inc.'s common stock....................... -- --
----------- -----------
Total Assets....................................................... $ 1,338,794 $ 1,743,561
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable -- acquisition............................................ $ -- $ 200,000
Accounts payable and accrued expenses................................... 1,054,721 573,687
Deferred franchising revenue, current portion........................... 76,005 --
Capitalized lease obligations -- current maturities..................... 75,653 71,064
Loans from stockholders -- current maturities........................... 34,049 37,529
Current maturities of long-term debt.................................... 6,041 20,556
----------- -----------
Total Current Liabilities.......................................... 1,246,469 902,836
Notes payable -- acquisition................................................ -- --
Capitalized lease obligations............................................... 84,502 143,215
Loans from stockholders..................................................... 15,041 45,809
Deferred franchising revenue................................................ 39,365 --
Deferred tax liability...................................................... -- 78,000
Long-term debt.............................................................. 1,590 347
----------- -----------
Total Liabilities.................................................. 1,386,967 1,170,207
----------- -----------
Commitments and contingencies
Stockholders' (Deficit) Equity(1):
Common stock, no par value, 10,000,000 shares authorized, 945,650 and
1,355,650 shares issued and outstanding, respectively.................. 876,150 1,277,000
Convertible preferred stock, no par value, Series A, 190,000 shares
authorized, 190,000 and 120,000 shares issued and outstanding,
respectively; Series B, 180,000 shares authorized, 80,000 and 180,000
shares issued and outstanding, respectively; Series C, 1,600,000 shares
authorized, 1,369,500 and 0 shares issued and outstanding,
respectively........................................................... 1,022,580 54,000
Additional paid-in capital.............................................. 365,000 365,000
Accumulated deficit..................................................... (2,311,903) (1,122,646)
----------- -----------
(48,173) 573,354
----------- -----------
Total Liabilities and Stockholders' (Deficit) Equity............... $ 1,338,794 $ 1,743,561
=========== ===========
</TABLE>
- ---------------
(1) Gives effect to a one-for-two reverse split of the Company's Common Stock
that, as of November 18, 1996, has been approved by the Board of Directors
and shareholders, completion of which is a condition to the closing of the
Offering.
The Accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-3
<PAGE> 55
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
OCTOBER 31, JANUARY 31,
1995 1995
----------- -----------
<S> <C> <C>
Revenues:
Retail store sales............................................ $ 1,422,341 $ 1,178,638
Franchising revenue........................................... 377,201 --
Equipment and product sales................................... 550,726 804,340
---------- -----------
2,350,268 1,982,978
---------- -----------
Operating expenses:
Cost of Sales -- equipment costs and store operations,
exclusive of depreciation and amortization................... 1,739,147 1,602,538
Cost of Sales -- franchising activities, exclusive of
depreciation and amortization................................ 213,408 --
Selling, general and administrative expenses.................. 1,146,365 1,100,919
Depreciation and amortization................................. 211,463 197,347
Acquisition costs............................................. 170,352 74,256
Impairment of assets.......................................... -- 676,038
---------- -----------
3,480,735 3,651,098
---------- -----------
Operating loss..................................................... (1,130,467) (1,668,120)
Interest expense................................................... 21,078 38,651
---------- -----------
Loss before extraordinary item..................................... (1,151,545) (1,706,771)
Extraordinary item -- Gain from extinguishment of debt............. -- 644,150
---------- -----------
Net loss........................................................... $(1,151,545) $(1,062,621)
========== ===========
Shares outstanding(1):
Weighted average number of common shares
outstanding................................................. 943,150 983,084
Additional shares............................................. 430,558 430,558
---------- -----------
Adjusted shares outstanding(1)..................................... 1,373,708 1,413,642
========== ===========
Net loss per share before extraordinary item(1).................... $ (0.84) $ (1.21)
========== ===========
Net gain per share -- extraordinary item(1)........................ -- $ 0.46
========== ===========
Net loss per share after extraordinary item(1)..................... $ (0.84) $ (0.75)
========== ===========
</TABLE>
- ---------------
(1) Gives effect to a one-for-two reverse split of the Company's Common Stock
that, as of November 18, 1996, has been approved by the Board of Directors
and shareholders, completion of which is a condition to the closing of the
Offering.
The Accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-4
<PAGE> 56
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
OCTOBER 31, JANUARY 31,
1995 1995
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss...................................................... $(1,151,545) $(1,062,621)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization............................ 211,463 197,347
Provision for possible losses on accounts receivable..... (35,000) 20,000
Gain on sale of subsidiary and retail store.............. (34,369) --
Issuance of common stock for services.................... 1,750 --
Impairment of assets..................................... -- 676,038
Early extinguishment of debt............................. -- (644,150)
Decrease (increase) in:
Accounts receivable................................. (26,661) 56,920
Inventories......................................... 58,715 (40,500)
Prepaid expenses.................................... (15,251) (20,000)
Security deposits................................... (16,800) (10,420)
Increase (decrease) in:
Accounts payable and accrued expenses............... 524,937 335,905
Deferred franchising revenue........................ 62,500 --
--------- -----------
Total adjustments.............................. 731,284 571,140
--------- -----------
Net cash (used in) operating activities........ (420,261) (491,481)
--------- -----------
Cash Flows from Investing Activities:
Capital expenditures.......................................... (43,503) (137,345)
Proceeds from sale of subsidiary and retail store, net of cash
balance of subsidiary........................................ 64,953 --
Payment for Sammy's stock acquisition......................... -- (75,000)
Acquisition costs paid........................................ -- (20,000)
--------- -----------
Net cash provided by (used in) investing activities...... 21,450 (232,345)
--------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of preferred stock..................... 541,480 --
Redemption of preferred stock................................. (100,000) --
Proceeds from sale of corporate stockholder's stock........... -- 700,000
Cash overdraft acquired as part of Sammy's acquisition........ -- (6,291)
Proceeds from capitalized lease obligations................... 17,843 20,361
Payments of capitalized lease obligations..................... (52,587) (20,814)
Proceeds from loans from stockholders......................... 33,250 --
Payments of loans from stockholders........................... (38,702) (17,129)
Proceeds from issuance of long-term debt...................... 3,250 --
Payments of long-term debt.................................... (7,492) (21,090)
Payments of acquisition indebtedness.......................... -- (150,000)
--------- -----------
Net cash provided by financing activities................ 397,042 505,037
--------- -----------
Net (decrease) in cash............................................. (1,769) (218,789)
Cash and cash equivalents -- beginning of period................... 55,472 274,261
--------- -----------
Cash and cash equivalents -- end of period......................... $ 53,703 $ 55,472
========= ===========
</TABLE>
The Accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-5
<PAGE> 57
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL
----------------------- ----------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ---------- --------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 31,
1994.................... 625,000 $ 577,000 0 $ 0 $365,000 $ (60,025) $ 881,975
Year Ended January 31,
1995:
Common stock issuance..... 730,650 700,000 -- -- -- -- 700,000
Preferred stock
issuance................ -- -- 300,000 $ 54,000 -- -- 54,000
Net Loss.................. -- -- -- -- -- (1,062,621) (1,062,621)
--------- ---------- --------- ---------- -------- ----------- -----------
BALANCE AT JANUARY 31,
1995.................... 1,355,650 1,277,000 300,000 54,000 365,000 (1,122,646) 573,354
Nine Months Ended October
31, 1995:
Conversion of common stock
to preferred stock...... (412,500) (402,600) 825,000 402,600 -- -- 0
Common stock issuance for
services................ 2,500 1,750 -- -- -- 1,750
Preferred stock
issuance................ -- -- 614,500 565,980 -- 565,980
Preferred stock
redemption.............. -- -- (100,000) -- -- (100,000) (100,000)
Retained deficit of
subsidiary sold......... -- -- -- -- -- 62,288 62,288
Net Loss.................. -- -- -- -- -- (1,151,545) (1,151,545)
--------- ---------- --------- ---------- -------- ----------- -----------
BALANCE AT OCTOBER 31,
1995.................... 945,650 $ 876,150 1,639,500 $1,022,580 $365,000 $(2,311,903) $ (48,173)
========= ========== ========= ========== ======== =========== ===========
</TABLE>
The Accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-6
<PAGE> 58
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) ORGANIZATION --
All American Food Group, Inc. (the "Company"), was incorporated by Jutland
Enterprises Inc., ("Enterprises"), a Delaware corporation, on September 27, 1993
under the laws of the State of New Jersey. The Company was formed for the
purpose of acquiring and operating a retail bagel business and a bakery
equipment distribution and assembly business. At incorporation, Enterprises
acquired 468,750 shares of the Company's common stock in exchange for $300,000
and $277,000 of assets. During the fiscal year ended January 31, 1994,
Enterprises contributed $365,000 to the Company as additional paid-in capital.
Shortly after incorporation, Mr. Andrew Thorburn, Chief Executive Officer
of the Company and Chief Executive Officer of Enterprises, acquired 156,250
shares of the Company in exchange for 400,000 shares of Enterprises' common
stock. Since the transferor had no historical cost basis for his acquisition of
the Enterprises' stock, no value has been assigned to the shares transferred to
the Company.
The Company was incorporated under the name Jutland Food Group, Inc., and
changed its name to All American Food Group, Inc. on October 24, 1995.
Effective October 31, 1995 the Company changed its fiscal year end from
January 31st to October 31st.
Initial Acquisition --
On October 20, 1993, the Company completed the acquisition of substantially
all the assets of three interrelated companies, Howberg Bakery Equipment Co.,
Inc., Bagels of New Milford, Inc. and Goldberg's Famous Bagels of Orangeburg,
Inc., hereinafter referred to as the "Goldberg's acquisition," or the "Goldberg
assets," for approximately $1,612,000. Under the terms of the acquisition, the
purchase price consisted of cash consideration of $300,000, a $1,000,000 two
year note (see Note 8), the assumption of a note in the amount of $35,000, and
$277,000 of consideration provided by Enterprises. In each case the seller of
the assets was Howard Goldberg, hereinafter referred to as "Goldberg."
In accordance with Accounting Principle Board Opinion No. 16, the
acquisition has been accounted for under the purchase method. Under such
accounting policy, the cost of the acquisition is reported on the basis of the
value of the consideration given or the estimated fair value of the net assets
acquired, whichever is more readily determinable.
The consideration given of $1,612,000 had been used for the assignment of
cost to the tangible and identifiable intangible assets with the excess assigned
to goodwill. This excess of the aggregate purchase price over the estimated fair
value of the net assets of the acquired business, in the approximate amount of
$408,000, was recognized as goodwill and was being amortized over 40 years. The
values assigned to identifiable assets and goodwill were subsequently
re-evaluated and adjusted as discussed below.
Simultaneously with the acquisition of the Goldberg assets, various other
agreements and covenants, including a consulting agreement, lease agreement,
security agreement, lease assignments, non-compete agreements, franchise and
tradename rights, consents to use corporate names, and mutual indemnifications
were also entered into by the parties.
During the fiscal year ended January 31, 1995, the $1,000,000 note and
other aspects of the initial transaction were re-evaluated and re-negotiated as
discussed below and in Note 8.
F-7
<PAGE> 59
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Goldberg Contract Re-negotiations and Preferred Stock Issuance --
On September 29, 1994, the Company completed a re-evaluation of the assets
acquired, a reconciliation of all outstanding indebtedness related to the
acquisition, and a re-negotiation of its contractual relationship with Goldberg
(the "Reconciliation Agreement"). As a result, certain provisions of the
original purchase agreement, the consulting agreement and the lease agreement
were modified. Further, as discussed in Note 1 (m), the Company recognized an
impairment to the values it had originally assigned to the assets it purchased.
Under the terms of the Reconciliation Agreement, the Company exchanged
indebtedness of approximately $886,000 for an immediate cash payment of $11,500,
an additional cash payment of $50,000 paid on January 10, 1995, 120,000 shares
of newly issued Series A Convertible Preferred Stock, and an assumption of a
note in the approximate amount of $126,250 representing the remaining mortgage
owed by Goldberg on the building then occupied by the Company (the "Citizen's
debt" or the "Citizen's mortgage"). Additionally the Company received from
Goldberg 240,000 shares of Enterprises' common stock.
Each share of Series A Convertible Preferred Stock is convertible into one
share of the Company's common stock, can be redeemed by the Company for $5.00 a
share, and provides that in the event of a capital infusion of $2,000,000 or
more into the Company, 40,000 shares must be redeemed by the Company for $5.00
per share. The Series A Preferred Stock was recorded at $54,000, approximating
fair market value at the reconciliation date.
Due to the absence of a readily ascertainable market value, the Company has
assigned no value to the 240,000 shares of Enterprises' common stock.
This re-negotiation has been accounted for as an early extinguishment of
debt, resulting in an extraordinary gain from the early extinguishment of debt
in the amount of $644,150.
Additional provisions of the Reconciliation Agreement include a security
interest by Goldberg in 468,750 shares of common stock of the Company held by
Enterprises, a security interest by Goldberg in the two retail establishments,
the termination of the rent obligation under the lease, and an extension and
modification of the consulting agreement and non-compete agreement.
In October of 1995, further re-negotiations took place as a result of which
a) ownership of the Company's retail store in New Milford, NJ was transferred to
Goldberg, b) Goldberg's responsibilities under the consulting agreement were
reduced to three days a week and extended to December 31, 1996, c) the non-
compete and non-disclosure provisions were extended to December 31, 1997, d)
Goldberg assumed responsibility for the Citizen's debt, e) Goldberg assumed
responsibility for $25,000 of the Company's payables and f) and an additional
70,000 shares of Series A Preferred Stock, valued at $23,500, were issued to
Goldberg.
Subsequently, in January 1996, the Citizen's mortgage was satisfied by
Goldberg.
"Sammy's New York Bagels" Stock Acquisition --
On September 29, 1994, the company completed the acquisition, hereinafter
referred to as the "Sammy's acquisition," of 100% of the outstanding stock of
four interrelated corporations, Queen Anne Distributors, Inc., Rochelle
Distributors, Inc., G.I.D. Distributors, Inc., and Sammy's New York Bagels,
Inc., conducting business under the trade name "Sammy's New York Bagels,"
hereinafter referred to as "Sammy's."
F-8
<PAGE> 60
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
"Sammy's New York Bagels" Stock Acquisition -- (continued)
Under the terms of the acquisition, the Company purchased the stock of the
Sammy's corporations in exchange for cash of $75,000, assumption of indebtedness
of approximately $441,000 and issuance of 180,000 shares of newly issued Series
B Convertible Preferred Stock. Each share of the Series B Preferred Stock is
convertible into one share of the Company's common stock, can be redeemed by the
Company for $5.00 a share, and must be partially redeemed by the Company under
certain circumstances as described below.
The redemption provisions of the Series B Preferred Stock provide that
60,000 shares are redeemable at $5.00 per share within 30 days of a single
equity infusion of more than $1,000,000, and an additional 60,000 are redeemable
at $5.00 per share 24 months after an initial public offering of the Company's
common stock.
In accordance with Accounting Principle Board Opinion No. 16, the Sammy's
acquisition has been accounted for under the purchase method. The cost of the
acquisition is recorded at $516,000 based on the amount of the cash
consideration paid and the indebtedness assumed. No value has been assigned to
the Series B Preferred Stock issued as part of the consideration in the
acquisition. The accompanying consolidated financial statements include the
elimination of the investment in parent and equity in subsidiaries, and adjust
for the purchase of the assets acquired. The allocation of the assigned values
to the assets has been determined by management. The acquisition arrangement
provides for employment contracts and non-compete agreements.
(b) BUSINESS --
During the nine months ended October 31, 1995, the Company changed its
business focus and became principally engaged in the development of a retail
chain of franchised bagel stores, including the operation of Company-owned
stores for training and marketing and promotional activities, and the
distribution of bagel bakery equipment and related products to the franchise
system. The Company markets both single unit and market development franchise
agreements. The Company, in the normal course of business, also markets stores
it acquires to individuals who operate as franchisees. The Company franchises
its concepts under the names "Goldberg's Original Old World Bagels" and "Sammy's
New York Bagels." During the nine months ended October 31, 1995, the Company
ceased to be actively engaged in the sales of bagel bakery equipment to
independent retail operators.
(c) PRINCIPLES OF CONSOLIDATION --
The accompanying consolidated financial statements include the accounts of
All American Food Group, Inc. and its subsidiaries as disclosed above. The
acquisition of all subsidiaries, represented by the "Sammy's" transaction,
occurred on September 29, 1994. Accordingly, the consolidated balance sheet
includes the accounts of the subsidiaries as of October 31, 1995 and January 31,
1995. The accompanying consolidated statements of operations and cash flows only
include activities of the subsidiaries for the nine months ended October 31,
1995 and the period from September 29, 1994 (date of acquisition), through
January 31, 1995. All significant inter-company balances and transactions have
been eliminated.
(d) CASH AND CASH EQUIVALENTS --
At October 31, 1995 and January 31, 1995 cash represented monies on deposit
in financial institutions.
F-9
<PAGE> 61
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(e) CONCENTRATION OF CREDIT RISK --
The Company maintains cash and cash equivalents with various financial
institutions. Company policy is designed to limit exposure with any one
institution. Credit risk with respect to trade accounts receivable is minimal,
due to the terms under which the Company transacts its business.
(f) INVENTORIES --
Inventories are stated at the lower of cost (first-in, first-out ("FIFO"))
or market.
(g) PROPERTY, PLANT AND EQUIPMENT --
Equipment, fixtures and leasehold improvements are recorded at cost.
Equipment under capital leases is recorded at the net present value of the
associated lease payments. Major replacements or improvements are capitalized.
Maintenance and repairs are charged to earnings as incurred. For financial
statement purposes, depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets, which range
from three to ten years.
(h) INTANGIBLE ASSETS AND AMORTIZATION --
Intangible assets consist primarily of specifically identifiable items such
as a favorable lease agreement, a retail license, non-compete agreements,
customer lists, drawings and blueprints, a proprietary formula and kosher
certification. The values assigned to intangible assets are based on an
independent appraisal and management's estimates, and are being amortized on a
straight-line basis over the estimated useful lives of such assets, which range
from three and one-half to nine and one-half years.
(i) ACQUISITION COSTS --
Acquisition costs represent fees incurred in the Goldberg and Sammy's
acquisitions and are being amortized over their useful lives of five years.
(j) VALUATION OF NON-CURRENT INVESTMENTS --
The non-current portfolio of securities represented by the investment in
Enterprises' common stock is carried at zero value. Currently there is no market
for the shares. Any gain realized from the disposition of these securities will
be recognized at the time of disposition.
(k) FRANCHISE REVENUE RECOGNITION --
As discussed above, the Company began franchising activities during the
nine months ended October 31, 1995. Franchise revenue includes the sale of
single unit franchises, the sale of Company-owned stores to franchisees, the
sale of market development franchises and ongoing royalty and advertising fees.
Single unit franchise agreements ("Single Unit Agreements") provide for
payment of a nonrefundable initial franchise fee (an "Initial Franchise Fee"), a
weekly royalty on gross sales, and a weekly cooperative advertising fund
contribution. The Company's material obligations under the terms of all Single
Unit Agreements are assisting in site selection and franchisee training. Initial
Franchise Fees under Single Unit Agreements are recognized as revenues when the
Company has no further material obligations in respect of the establishment of
such franchise, which occurs upon the opening of the store. As of October 31,
1995, the
F-10
<PAGE> 62
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(k) FRANCHISE REVENUE RECOGNITION -- (CONTINUED)
Company had deferred recognition of Initial Franchise Fees relating to four
stores, which management anticipates will open within the next year. See note 9.
Market Development Agreements provide for the payment, by the Market
Developer, of a nonrefundable initial fee (a "Market Development Fee") based on
the size, population and overall market potential of the territory subject to
the Market Development Agreement (the "Market Area"). The Market Developer
assumes substantially all of the responsibilities that otherwise would be
assumed by the Company, as franchiser within the Market Area. In exchange, the
Market Developer receives (i) the exclusive right to build stores for the Market
Developer's own account or to seek third party franchisees within the Market
Area and (ii) the right to share with the Company, on a 50/50 basis, initial and
ongoing single store fees within the Market Area. Under Market Development
Agreements, the Company's obligations in respect of the development of single
unit franchises within the Market Area are limited to (i) approval of
franchisees presented by the Market Developer and (ii) approval of store sites.
The Company has no further material obligations in respect of a Market
Development Agreement at the time of execution of the Agreement. Market
Development Fees paid in cash or by promissory notes fully collateralized by
liquid assets or as to which the Company has obtained an independent third-party
valuation, are recognized as revenues by the Company upon execution of the
Market Development Agreement and payment of the fee. In the absence of such
collateral or valuation, the Company recognizes Market Development Fees on a
cash basis as payments on such notes are received. The Company records
non-interest bearing notes with a term in excess of one year at a discount for
imputed interest thereon. As of October 31, 1995, the Company had deferred the
recognition of $52,870 of revenues relating to a note from a Market Developer.
See notes 3 and 8.
The Company's portion of the Initial Franchise Fee on single unit
franchises sold within a Market Developer's Market Area is recognized as
revenues when the Company has no further material obligations in respect of the
establishment of such franchise, which occurs upon opening of the store. As of
October 31, 1995, the Company had deferred recognition of Initial Franchise Fees
relating to one such store.
The Company recognizes revenues from the sale of Company-owned stores to
franchisees upon consummation of the sale transaction.
The Company recognizes franchise royalty revenue when it is earned.
Franchise revenue for the nine months ended October 31, 1995 of $377,201
consists of initial non-recurring franchise and market development fees of
$7,500 and $117,824, respectively, initial non-recurring revenues from the sale
of Company-owned stores of $247,777 and ongoing royalties of $4,100.
(l) NET LOSS PER SHARE --
Net loss per common share was determined by dividing net loss by the
weighted average number of common shares outstanding, as adjusted to reflect all
shares and options issued within the twelve months prior to May 3, 1996, (the
date the Company filed a registration statement for an initial public offering),
that were issued for consideration per share or at an exercise per share less
than the anticipated public offering price of $3.50 per share. These additional
shares have been treated as if they were outstanding for all periods presented.
The treasury stock method has been used to determine the net increase in the
number of shares outstanding. As such, the computation of fully diluted net loss
per share was anti-dilutive in each of the periods presented; therefore, the
amounts reported for primary and fully-diluted loss are the same.
F-11
<PAGE> 63
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(m) LONG-LIVED ASSETS -- IMPAIRMENT OF ASSETS --
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company
records impairment losses on long-lived assets used in operations, including
goodwill and intangible assets, when events and circumstances indicate that the
assets might be impaired and the fair value of these assets, determined by
reference to the discounted cash flows estimated to be generated by those
assets, are less than the carrying amounts of those assets. During the fiscal
year ending January 31, 1995, the application of SFAS No. 121 resulted in the
Company recognizing an intangible asset and goodwill impairment charge of
$676,038, representing the difference between the carrying amount of these
assets and their then-current fair value so determined. As disclosed in Note 1,
this adjustment was the result of the re-evaluation of the assets it had
purchased and a reconciliation of all outstanding indebtedness and contractual
obligations with Goldberg. This re-evaluation resulted in the Company reducing
the estimated cash flows attributed to the Goldberg assets. In determining the
magnitude of adjustment, the Company developed its best estimate of fair value
based on future discounted operating cash flows, and determined that these cash
flows would not be sufficient to recover the carrying value of the intangible
assets and goodwill. Consequently, the Company reduced the recorded value of
these assets to the estimated future discounted cash flows associated therewith,
and recognized an impairment loss equal to the difference between that amount
and the prior carrying value of these assets. As a result, goodwill has been
written off entirely, and the carrying value of the identifiable intangible
assets has been reduced by approximately $290,000, during the fiscal year ended
January 31, 1995.
(n) STOCK OPTIONS --
The Company has granted stock options to a key vendor with an exercise
price not less than fair market value per share of common stock on the date the
option was granted. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and,
accordingly, recognizes no compensation or other expense for the stock option
grants.
2. INVENTORY:
A summary of inventory is as follows:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1995 1995
----------- -----------
<S> <C> <C>
Equipment and parts.................................... $ 69,544 $ 166,364
Food and paper goods................................... 54,105 16,000
----------- -----------
Total inventories................................. $ 123,649 $ 182,364
======== ========
</TABLE>
3. NOTE RECEIVABLE:
Note receivable at October 31, 1995, represents the present value of the
unpaid portion of the Market Development Fee due in connection with the sale of
a Market Area. The note is non-interest bearing and is paid by the application,
by the Company, of fifty percent (50%) of all compensation otherwise due to the
F-12
<PAGE> 64
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1995
3. NOTE RECEIVABLE -- (CONTINUED)
Market Developer against the balance. Management estimates that $39,365 of the
balance will be collected after one year, as follows:
<TABLE>
<S> <C>
Note receivable (less unamortized discount based on an imputed
interest rate of 9%)............................................. $52,870
Less current portion............................................... 13,505
-------
Note receivable, long-term......................................... $39,365
=======
</TABLE>
4. FIXED ASSETS:
Fixed assets and accumulated depreciation consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31, ESTIMATED
1995 1995 USEFUL LIVES
----------- ----------- --------------
<S> <C> <C> <C>
Machinery and equipment -- retail stores................ $ 333,237 $ 555,715 7 years
Office furniture and warehouse equipment................ 169,951 111,906 7 years
Trucks and delivery vehicle............................. 26,370 26,370 3 to 5 years
Leasehold improvements -- retail stores................. 133,933 152,497 Term of lease
----------- -----------
663,491 846,488
Accumulated depreciation and amortization............... (145,589) (134,802)
----------- -----------
Fixed assets net of accumulated depreciation............ $ 517,902 $ 711,686
========= =========
</TABLE>
As disclosed in Note 10, certain debt is secured by fixed assets.
5. INTANGIBLE ASSETS:
Identifiable intangible assets, recorded as a result of the Goldberg's and
Sammy's acquisitions, and accumulated amortization consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31, ESTIMATED
1995 1995 USEFUL LIVES
----------- ----------- -------------
<S> <C> <C> <C>
Kosher certification....................... $ 145,771 $ 157,771 5 years
Favorable lease agreement.................. 6,250 22,500 3 1/2 years
Non-compete agreements..................... 192,507 214,507 4 years
Customer lists............................. 74,432 93,434 4 years
Proprietary formula........................ 107,338 121,338 5 years
Retail store license....................... -- 27,000 9 1/2 years
Drawings and blueprints.................... 46,158 52,158 5 years
----------- -----------
Total intangible assets.................... 572,456 688,708
Accumulated amortization................... (230,339) (127,129)
----------- -----------
Total intangible assets, net of accumulated
amortization............................. $ 342,117 $ 561,579
========= =========
</TABLE>
F-13
<PAGE> 65
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1995
6. ACQUISITION COSTS:
Acquisition costs represent fees incurred in consummating the Goldberg's
and Sammy's acquisitions. These costs are being amortized over an estimated
useful life of five years. Acquisition costs and accumulated amortization are as
follows:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1995 1995
----------- -----------
<S> <C> <C>
Total acquisition costs................................ $ 105,751 $ 105,751
Accumulated amortization............................... (40,324) (24,456)
----------- -----------
Net acquisition costs.................................. $ 65,427 $ 81,295
======== ========
</TABLE>
7. INVESTMENT IN JUTLAND ENTERPRISES INC. COMMON STOCK:
The Company acquired stock in Enterprises from Andrew Thorburn as part of
its initial capitalization, as discussed in Note 1. Consistent with the
transferor's cost basis, this stock has been assigned no value by the Company.
The Company received additional shares of Enterprises in separate
transactions involving Blue Chip Computerware, Inc., discussed in Note 13, and
in the re-negotiations with Goldberg discussed in Note 1. Due to the absence of
a readily ascertainable market value, no value has been assigned to these
shares.
8. NOTE PAYABLE -- GOLDBERG ASSET ACQUISITION:
The Company issued a $1,000,000 two year note as part of the consideration
given in the purchase of the Goldberg assets as disclosed in Note 1.
As part of the 1994 Goldberg re-negotiation also discussed at Note 1, the
Company was obligated to Citizen's First National Bank of New Jersey for the
remaining Citizen's mortgage balance of approximately $126,250. The Company
defaulted on its obligation to pay such mortgage, and Citizen's brought an
action against various parties, including the Company, to foreclose on the
mortgage. The outstanding balance on the Citizen's mortgage, including unpaid
interest and late charges, of $150,000 and the balance due to Goldberg of
$50,000, are reflected as a current liability in the accompanying consolidated
financial statements at January 31, 1995. In October 1995 Goldberg re-assumed
responsibility for the Citizen's mortgage. Subsequent to October 31, 1995 the
mortgage was satisfied.
9. DEFERRED FRANCHISING REVENUE:
Deferred franchising revenue at October 31, 1995, represents Initial
Franchise Fees received in connection with single store franchises where the
stores have not yet opened and the present value of the portion of the Market
Development Fee paid by means of a non-interest bearing note as to which the
Company has not as yet recognized revenue, and are as follows:
<TABLE>
<S> <C>
Single store Initial Franchise Fees received, stores not yet
open............................................................. $62,500
Market Development Fees............................................ 52,870
-------
115,370
Less current portion............................................... 76,005
-------
Deferred franchising revenue, long-term............................ $39,365
=======
</TABLE>
F-14
<PAGE> 66
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1995
10. EQUIPMENT LEASE OBLIGATIONS:
The Company and its subsidiaries are obligated under various equipment
lease arrangements which have been capitalized in the accompanying financial
statements. Property, plant, and equipment presented on the consolidated balance
sheet includes approximately $259,000 of assets capitalized under these lease
arrangements. Accumulated depreciation recorded on these assets approximated
$54,000 at October 31, 1995. These lease obligations are due in monthly
installments including interest expense at annual interest rates ranging from
8.3% to 24.5%. The lease obligations are payable through dates ranging from
February 1996 through November 1999.
The future minimum payments required under the lease arrangements, with
their present value at October 31, 1995, are as follows:
<TABLE>
<CAPTION>
PRESENT INTEREST MINIMUM
YEAR ENDED OCTOBER 31, VALUE EXPENSE PAYMENTS
----------------------------------------------- -------- ------- --------
<S> <C> <C> <C>
1996........................................... $ 75,653 $23,976 $ 99,629
1997........................................... 58,828 9,784 68,612
1998........................................... 25,120 2,686 27,806
1999........................................... 554 6 560
-------- ------- --------
$160,155 $36,452 $196,607
======== ======= ========
</TABLE>
11. LOANS FROM STOCKHOLDERS:
Loans from stockholders primarily consist of obligations assumed in the
Sammy's acquisition. These loans are due in monthly installments including
interest expense at annual rates ranging from 5.0% to 16.76%. The loans are
payable through dates ranging from February 1996 through February 1999.
The future minimum payments required under the loans, with their present
value at October 31, 1995, are as follows:
<TABLE>
<CAPTION>
PRESENT INTEREST MINIMUM
YEAR ENDED OCTOBER 31, VALUE EXPENSE PAYMENTS
-------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
1996.............................................. $34,049 $2,245 $36,294
1997.............................................. 9,587 636 10,223
1998.............................................. 4,057 180 4,237
1999.............................................. 1,397 15 1,412
------- ------- -------
$49,090 $3,076 $52,166
======= ====== =======
</TABLE>
F-15
<PAGE> 67
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1995
12. LONG-TERM DEBT:
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1995 1995
----------- -----------
<S> <C> <C>
Minimum payment on note payable to Tilden Financial
Corporation in monthly installments of $1,521
including interest, through October 1995, secured by
equipment............................................ -- $12,222
Minimum payment on note payable to Bank of New York in
monthly installments of $347 plus interest at the
bank's prime rate plus 1.5% per annum, through
February 1997, secured by equipment.................. $ 6,041 8,681
Notes payable to individual in monthly installments of
$153 including interest at the annual rate of 12.5%,
payable through September 1996....................... 1,590 --
----------- -----------
7,631 20,903
Current portion of long-term debt...................... 6,041 20,556
----------- -----------
Long-term debt......................................... $ 1,590 $ 347
======== ========
</TABLE>
13. BLUE CHIP COMPUTERWARE INC. STOCK SUBSCRIPTION:
On July 1, 1994 and August 15, 1994, the Company entered into two separate
stock purchase agreements with Blue Chip Computerware Inc. ("Blue Chip"), a
publicly traded company whose stock trades under the symbol BCHP. Under the
terms of the agreements, the Company issued a total of 730,000 newly issued
shares of common stock, of which 600,000 shares were issued to Blue Chip and
130,000 shares were issued to a financial services firm for arranging the
transaction. Consequently, Blue Chip became the owner of 44% of the then-issued
and outstanding common stock of the Company.
In exchange for the 730,000 shares, the Company received, in aggregate,
$50,000, 100,000 shares of Enterprises common stock owned by the Blue Chip, and
400,000 shares of Blue Chip common stock. The 400,000 shares of Blue Chip common
stock were subsequently sold in two separate transactions to a third party. The
aggregate proceeds from the sale of the 400,000 shares was $650,000.
In the accompanying consolidated financial statements, the value assigned
to the common stock issued to Blue Chip is $700,000, comprised of the $50,000
cash paid to the company by Blue Chip, and $650,000 paid for the 400,000 shares
of Blue Chip common stock sold. No value has been assigned to the 100,000 shares
of Enterprises, due to the absence of a readily ascertainable market value.
In February 1995, the Company exchanged 825,000 shares of the Company's
newly issued Series C Convertible Preferred Stock for 412,500 shares of the
common stock acquired by Blue Chip, reducing Blue Chip's holdings of common
stock to 19%. See Note 15.
14. INCOME TAXES:
The Company has adopted SFAS No. 109 and is a C Corporation subject to
federal and state income taxes. The Company has changed its fiscal year end to
October 31 for tax purposes. At October 31, 1995, there were consolidated net
operating loss carry-forwards of approximately $750,000 expiring in 2010. Due to
the current period operating loss, no amount has been provided for corporate
income taxes.
F-16
<PAGE> 68
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1995
14. INCOME TAXES -- (CONTINUED)
In accordance with SFAS No. 109, the difference between the tax bases and
the assigned value of the assets for financial reporting purposes of
approximately $650,000 resulting from the Goldberg and Sammy's acquisitions will
not result in taxable or deductible amounts in future years and no deferred
asset or liability has been recognized because of the magnitude of the net
operating loss carryforward. In the event the Company generates taxable income
in excess of the net operating loss carryforward, a deferred tax liability will
be recognized.
15. RELATED PARTY TRANSACTIONS:
As of January 31, 1995, Blue Chip held 44% of the Company's common stock.
In March 1995, Blue Chip and the Company entered into an agreement whereby Blue
Chip exchanged 412,500 shares of the Company's common stock for 825,000 shares
of the Company's Series C Convertible Preferred Stock, thereby reducing its
holdings of common stock to 19%. During the nine months ended October 31, 1995,
Blue Chip purchased an additional 425,000 shares of the Company's Series C
Preferred Stock at a price of $1.00 per share. Each share of the Series C
Preferred Stock may be redeemed by the Company for $5.00 a share, and can be
converted into one share of the Company's common stock. The Company has no
obligation to redeem any of the Series C Preferred shares.
Additionally, during this period, the Company's President purchased 70,000
shares of Series C Preferred Stock at the price of $1.00 per share.
16. EXTRAORDINARY ITEM -- GAIN FROM EXTINGUISHMENT OF DEBT:
On September 29, 1994, and as further explained in Note 1, the Company
completed a re-negotiation and reconciliation of all outstanding indebtedness
and contractual obligations with Goldberg. This reconciliation resulted in the
extinguishment of the unpaid remaining balance due of $874,400 on the original
$1,000,000 note issued in connection with the Goldberg acquisition in exchange
for the assumption of the Citizen's mortgage in the amount of $126,250, a
$50,000 payment to Goldberg, and the issuance of 120,000 shares of the Company's
Series A Preferred Stock valued at $54,000. For financial reporting purposes, an
extraordinary item consisting of a $644,150 gain from the extinguishment of debt
has been recognized. Due to the operating losses in excess of the gain, an
accrual for income taxes attributable to the gain has not been provided.
17. STOCK OPTIONS:
The Company has granted options to purchase 40,000 shares of the Company's
common stock to a supplier. The options were issued in two transactions; 15,000
options with an exercise price of $1.00 per share were issued on February 1,
1995 and 25,000 options with an exercise price of $2.00 per share were issued on
August 1, 1995. The options expire five years after their issue date and are
exercisable at any time during the period they are outstanding. The following
summarizes the activity during the periods presented:
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
------ --------------
<S> <C> <C>
Options outstanding at January 31, 1995.............. None
Granted......................................... 40,000 $1.00 to $2.00
------
Options outstanding at October 31, 1995.............. 40,000 $1.00 to $2.00
======
</TABLE>
F-17
<PAGE> 69
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1995
18. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
OCTOBER 31, JANUARY 31,
1995 1995
----------- -----------
<S> <C> <C>
Interest paid......................................... $ 21,078 $ 21,640
Income taxes paid..................................... $ 0 $ 0
Non-cash investing and financing activities:
Exchange of accounts receivable for note
payable -- acquisition.............................. $ 50,000 $ --
Issuance of preferred stock for debt.................. 23,500 54,000
Sale of Market Area for note receivable............... 52,870 --
Acquisition of Sammy's for assumption of debt......... -- 441,000
Issuance of common stock for assets................... -- --
Goldberg assets acquired for assumption and issuance
of debt............................................. -- --
----------- -----------
$ 126,370 $ 495,000
========= ========
</TABLE>
19. COMMITMENTS AND CONTINGENCIES:
(a) SAMMY'S FRANCHISING FEES --
During the first sixty months after the Sammy's acquisition, the former
shareholders of the sellers are entitled to receive monthly payments equal to
10% of the single unit franchising fees paid to the Company and, during the
first twelve months after the acquisition and 20% of the fees collected on
international licensing or franchising. At October 31, 1995 $8,100 was due and
payable under this provision.
(b) LEASES --
The Company rents real and personal property under various non-cancelable
leases expiring at various dates through 2003. Certain of the leases include
renewal options and provisions for additional rental payments based on various
formulas such as cost of living adjustments, real estate tax and operating
expense escalations and escalations based on gross revenues. Total rent expense
charged to operations for the nine months ended October 31, 1995 approximated
$166,000. Included in this amount is approximately $7,000 of contingent rental
expense. Total rent expense charged to operations for the year ended January 31,
1995 approximates $148,000, all of which represented minimum rental obligations.
Minimum annual rental commitments under leases in effect at October 31,
1995 are summarized as follows:
<TABLE>
<CAPTION>
EQUIPMENT
YEAR ENDED OCTOBER 31, REAL ESTATE & OTHER
------------------------------------------------------- ----------- ---------
<S> <C> <C>
1996................................................... $ 134,000 $17,000
1997................................................... 129,000 1,000
1998................................................... 114,000 --
1999................................................... 113,000 --
2000................................................... 80,000 --
Later years............................................ 203,000 --
----------- ---------
Total minimum lease payments........................... $ 773,000 $18,000
======== ========
</TABLE>
F-18
<PAGE> 70
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1995
19. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
(c) CONSULTING AGREEMENT --
In connection with the Goldberg acquisition the Company entered into a
consulting agreement which was modified in September of 1994, and further
re-negotiated in October 1995. The modified consulting agreement provides for
monthly consulting fees of $4,333 payable through December 1996, aggregating
$61,000 at October 31, 1995. Goldberg is prohibited from conducting any business
activity in competition with the operations of the Company through December
1996.
(d) EMPLOYMENT AGREEMENTS --
The Company entered into employment contracts with the three principal
former shareholders of Sammy's as part of the acquisition. The employment
contracts provide for annual salaries through December 31, 1996 and include
non-compete covenants through December 31, 1998. The Company's aggregate
obligation for future payments under these agreements was $237,000 at October
31, 1995.
Total compensation expenses under these contracts for the nine months ended
October 31, 1995 and the year ended January 31, 1995 were $170,352 and $74,256,
respectively and have been reflected as acquisition costs on the accompanying
Statement of Operations.
(e) OBLIGATION TO REDEEM PREFERRED STOCK --
The agreements governing the Sammy's and Goldberg's acquisitions contain
provisions under which the Company must redeem shares of convertible preferred
stock. Under the Sammy's agreement 60,000 shares of the Series B Preferred Stock
are redeemable at $5.00 per share within 30 days of a single equity infusion of
more than $1,000,000, and an additional 20,000 shares are redeemable at $5.00
per share within 24 months of an initial public offering. The Goldberg agreement
stipulates that the Company must redeem 40,000 shares of the Series A Preferred
stock at $5.00 per share after an initial public offering of at least
$2,000,000.
20. SUBSEQUENT EVENTS:
In addition to certain subsequent events disclosed above, the following
additional material events have occurred subsequent to the date of these
financial statements.
(a) PRIVATE PLACEMENTS --
Subsequent to October 31, 1995, the Company completed private placements
(the "Private Placements") of its common stock pursuant to which it received an
aggregate of $2,413,986, net of expenses of $48,514. Included in the proceeds
was property consisting of two retail bagel stores in the final stages of
construction, valued at $410,000. The proceeds from the Private Placements to
date have been used to (i) fund the Company's operations; (ii) the voluntary
redemption of shares of the Company's Preferred Stock; (iii) reduce trade
payables; and (iv) acquire capital assets. The Company intends to apply the
remainder of these proceeds for working capital purposes.
(b) PREFERRED STOCK TRANSACTIONS --
The Company sold 100,000 shares of Series B Preferred Stock to the former
owners of Sammy's for consideration of $1.00 per share. In connection with this
transaction the Company's obligation to redeem Series B Preferred Stock within
24 months an initial public offering increased from 20,000 shares to 60,000
shares.
F-19
<PAGE> 71
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1995
20. SUBSEQUENT EVENTS -- (CONTINUED)
(c) VOLUNTARY REDEMPTION OF PREFERRED STOCK --
The Company voluntarily redeemed 416,997 shares of Series C Preferred
Stock. Of this total, 401,997 shares were redeemed from an affiliate, Blue Chip,
for consideration of $1.00 per share, equivalent to the price Blue Chip paid to
acquire the shares. This was done in connection with the financial
reorganization of Blue Chip.
(d) STOCK OPTIONS --
The Company granted options to purchase 80,000 shares of the Company's
Common Stock; 5,000 options were granted to a customer, 25,000 options were
granted to a director and 50,000 options were granted to the Company's Chief
Financial Officer. The options are exercisable $2.00 per share and expire in
2001.
(e) REVERSE STOCK SPLIT --
As of November 18, 1996, the Board of Directors and shareholders have
approved a one-for-two reverse split of the Company's Common Stock, completion
of which is a condition to the closing of the Offering. As a consequence of the
reverse stock split and certain related adjustments, each share of Series A
Preferred Stock and Series B Preferred Stock will remain convertible on a
one-for-one basis and each share of Series C Preferred Stock will be convertible
into one-half share of Common Stock. These financial statements, including the
notes thereto, give effect to this reverse stock split.
F-20
<PAGE> 72
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash.................................................................... $ 185,585 $ 40,675
Accounts and notes receivable, net of allowances for possible losses of
$15,000 in 1996 and 1995............................................... 71,885 25,028
Notes Receivable........................................................ 89,722 11,435
Inventories............................................................. 138,228 144,174
Prepaid expenses........................................................ 234,387 36,646
----------- -----------
Total Current Assets............................................... 719,807 257,958
Property, Plant and Equipment, at cost less accumulated depreciation and
amortization of $227,745 and $190,935 respectively........................ 927,434 698,910
Intangible Assets, net of accumulated amortization of $322,436 and $203,380
respectively.............................................................. 250,020 407,326
Acquisition Costs, net of accumulated amortization of $56,187 and $35,031
respectively.............................................................. 49,564 70,720
Security Deposits........................................................... 31,148 21,837
Notes Receivable, long-term................................................. 177,282 41,076
Investment in Jutland Enterprises Inc.'s common stock....................... -- --
----------- -----------
Total Assets....................................................... $ 2,155,255 $ 1,497,827
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Notes payable -- acquisition............................................ $ -- $ 150,000
Accounts payable and accrued expenses................................... 791,437 866,000
Deferred franchising revenue, current portion........................... 114,722 48,935
Capitalized lease obligations -- current maturities..................... 71,814 94,062
Loans from stockholders -- current maturities........................... 12,386 57,402
Current maturities of long-term debt.................................... 3,255 13,995
----------- -----------
Total Current Liabilities.......................................... 993,614 1,230,394
Capitalized lease obligations............................................... 33,304 112,625
Loans from stockholders..................................................... 6,810 28,274
Deferred franchising revenue................................................ 177,282 41,076
Long-term debt.............................................................. -- 3,050
----------- -----------
Total Liabilities.................................................. 1,211,010 1,415,419
----------- -----------
Redeemable preferred stock, no par value Series A, 40,000 shares issued and
outstanding, Series B, 120,000 shares issued and outstanding.............. 714,426 --
----------- -----------
Commitments and contingencies
Common stock, no par value, 10,000,000 shares authorized, 1,867,661 and
943,150 shares issued and outstanding respectively(1)..................... 3,360,136 874,400
Non-redeemable convertible preferred stock, no par value, Series A, 190,000
shares authorized, 150,000 and 120,000 shares issued and outstanding
respectively; Series B, 180,000 shares authorized, 60,000 shares and
80,000 shares issued and outstanding respectively; Series C, 1,600,000
shares authorized, 982,503 and 1,120,000 shares issued and outstanding
respectively.............................................................. 386,157 751,580
Other Stockholders' Equity:
Additional paid-in capital.............................................. -- 365,000
Accumulated deficit..................................................... (3,516,474) (1,908,572)
----------- -----------
229,819 82,408
----------- -----------
Total Liabilities and Stockholders' Equity.............................. $ 2,155,255 $ 1,497,827
============ ============
</TABLE>
- ---------------
(1) Gives effect to a one-for-two reverse split of the Company's Common Stock
that, as of November 18, 1996, has been approved by the Board of Directors
and shareholders, completion of which is a condition to the closing of the
Offering.
The Accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-21
<PAGE> 73
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED JULY
JULY 31, 31,
------------------------- -----------------------
1996 1995 1996 1995
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Retail store sales....................... $ 1,028,726 $ 1,603,053 $ 382,409 $ 557,807
Franchising revenue...................... 237,223 93,170 41,584 93,170
Equipment and product sales.............. 446,592 330,613 149,593 41,132
----------- ----------- ---------- ----------
1,712,541 2,026,836 573,586 692,109
----------- ----------- ---------- ----------
Operating expenses:
Cost of Sales -- equipment costs and
store operations, exclusive of
depreciation and amortization.......... 1,094,082 1,624,230 358,814 476,323
Selling, general and administrative
expenses............................... 1,435,132 1,151,976 541,702 423,753
Depreciation and amortization............ 190,113 226,179 63,521 71,483
Acquisition costs........................ 170,352 170,352 56,784 56,784
----------- ----------- ---------- ----------
2,889,679 3,172,737 1,020,821 1,028,343
----------- ----------- ---------- ----------
Operating loss................................ (1,177,138) (1,145,901) (447,235) (336,234)
Interest expense.............................. 27,433 55,381 4,382 8,392
----------- ----------- ---------- ----------
Net loss...................................... $(1,204,571) $(1,201,282) $ (451,617) $ (344,626)
========== ========== ========= =========
Adjusted net loss for net loss per common
share calculation:
Net loss................................. $(1,204,571) $(1,201,282) $ (451,617) $ (344,626)
Increase in carrying amount of redeemable
preferred stock........................ (714,426) -- (6,886) --
----------- ----------- ---------- ----------
Net loss attributable to common stock.... $(1,918,997) $(1,201,282) $ (458,503) $ (344,626)
========== ========== ========= =========
Shares outstanding(1):
Weighted average number of common shares
outstanding............................ 943,150 1,082,015 943,150 943,150
Additional shares........................ 430,558 430,558 430,558 430,558
----------- ----------- ---------- ----------
Adjusted shares outstanding(1)................ 1,373,708 1,512,573 1,373,708 1,373,708
========== ========== ========= =========
Net loss per common share(1).................. $ (1.40) $ (0.79) $ (0.33) $ (0.25)
========== ========== ========= =========
</TABLE>
- ---------------
(1) Gives effect to a one-for-two reverse split of the Company's Common Stock
that, as of November 18, 1996, has been approved by the Board of Directors
and shareholders, completion of which is a condition to the closing of the
Offering.
The Accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-22
<PAGE> 74
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss...................................................... $(1,204,571) $(1,201,282)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization............................ 190,113 226,179
Provision for possible losses on accounts receivable..... -- 20,000
Decrease (increase) in:
Accounts receivable................................. 29,558 144,317
Notes receivable.................................... 6,200 --
Inventories......................................... (14,579) 48,270
Receivable from sale of common stock................ -- 150,000
Prepaid expenses.................................... (189,138) (26,646)
Security deposits................................... (914) (6,322)
Increase (decrease) in:
Accounts payable and accrued expenses............... (263,284) 380,833
Deferred franchising revenue........................ (37,500) 37,500
----------- -----------
Total adjustments.............................. (279,544) 974,131
----------- -----------
Net cash (used in) operating activities........ (1,484,115) (227,151)
----------- -----------
Cash Flows from Investing Activities:
Capital expenditures.......................................... (81,685) (101,177)
----------- -----------
Net cash (used in) investing activities.................. (81,685) (101,177)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock........................ 2,003,986 --
Proceeds from issuance of preferred stock..................... 200,000 294,980
Redemption of preferred stock................................. (416,997) (100,000)
Proceeds from capitalized lease obligations................... -- 17,844
Payments of capitalized lease obligations..................... (55,037) (62,319)
Proceeds from loans from stockholders......................... -- 20,000
Payments of loans from stockholders........................... (29,894) (31,862)
Payments of long-term debt.................................... (4,376) (9,901)
----------- -----------
Net cash provided by financing activities................ 1,697,682 128,742
----------- -----------
Net increase (decrease) in cash.................................... 131,882 (199,586)
Cash and cash equivalents -- beginning of period................... 53,703 240,261
----------- -----------
Cash and cash equivalents -- end of period......................... $ 185,585 $ 40,675
========== ==========
Supplemental information: Interest expense paid.................... $ 27,188 $ 43,642
Corporate income taxes paid............ $ 0 $ 0
Supplemental schedule of non-cash investing and financing
activities:
Non-cash transactions consisted of the exchange of common
stock for capital assets valued at $410,000 in 1996 and the
sale of a Market Area for a non-interest bearing notes with a
present value of $217,125 in 1996 and $52,511 in 1995.
</TABLE>
The Accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-23
<PAGE> 75
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON STOCK, NON-REDEEMABLE PREFERRED
STOCK AND OTHER STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED JULY 31, 1996
----------------------------------------------------------------------------------------------
COMMON STOCK PREFERRED STOCK ADDITIONAL
----------------------- ----------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ---------- --------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1995.... 945,650 $ 876,150 1,639,500 $1,022,580 $365,000 $(2,311,903) $ (48,173)
Six Months Ended April 30,
1996:
Conversion of preferred stock
to common stock.............. 35,000 70,000 (70,000) (70,000) -- -- 0
Common stock issuance.......... 887,011 2,413,986 -- -- -- -- 2,413,986
Preferred stock issuance....... -- -- 200,000 200,000 -- -- 200,000
Preferred stock redemption..... -- -- (416,997) (416,997) -- -- (416,997)
Increase in carrying amount of
redeemable preferred stock... -- -- (160,000) (349,426) (365,000) -- (714,426)
Net Loss....................... -- -- -- -- -- (1,204,571) (1,204,571)
--------- ---------- --------- ---------- ---------- ----------- -----------
Balance at July 31, 1996....... 1,867,661 $3,360,136 1,192,503 $ 386,157 $ 0 $(3,516,474) $ 229,819
======== ========= ======== ========= ========= ========== ==========
<CAPTION>
FOR THE NINE MONTHS ENDED JULY 31, 1995
----------------------------------------------------------------------------------------------
COMMON STOCK PREFERRED STOCK ADDITIONAL
----------------------- ----------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ---------- --------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1994.... 1,355,650 $1,277,000 300,000 $ 54,000 $365,000 $ (607,290) $ 1,088,710
Six Months Ended April 30,
1995:
Conversion of common stock to
preferred stock.............. (412,500) (402,600) 825,000 402,600 -- -- 0
Preferred stock issuance....... -- -- 295,000 294,980 -- -- 294,980
Preferred stock redemption..... -- -- (100,000) -- -- (100,000) (100,000)
Net Loss....................... -- -- -- -- -- (1,201,282) (1,201,282)
--------- ---------- --------- ---------- ---------- ----------- -----------
Balance at July 31, 1995....... 943,150 $ 874,400 1,320,000 $ 751,580 $365,000 $(1,908,572) $ 82,408
======== ========= ======== ========= ========= ========== ==========
</TABLE>
The Accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
F-24
<PAGE> 76
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) BASIS OF PRESENTATION --
The consolidated financial statements included herein have been prepared by
All American Food Group, Inc. and subsidiaries (the "Company"). In the opinion
of management, the information furnished reflects all adjustments necessary for
a fair presentation of the results for the reported interim periods. Results of
operations for interim periods are not necessarily indicative of results for the
full year.
(b) ORGANIZATION --
The Company was incorporated under the name Jutland Food Group, Inc. on
September 27, 1993 under the laws of the State of New Jersey. On October 20,
1993, the Company acquired substantially all of the assets of Howberg Bakery
Equipment Co., Inc., Bagels of New Milford, Inc. and Goldberg's Famous Bagels of
Orangeburg, Inc., hereinafter referred to as the "Goldberg acquisition." The
assets acquired consisted of a bagel equipment business and two retail bagel
stores. On September 29, 1994, the Company acquired all of the outstanding stock
of four interrelated corporations all conducting business under the tradename
"Sammy's New York Bagels," hereinafter referred to as the "Sammy's acquisition."
The acquisition consisted of three certified kosher retail bagel stores and a
bagel production facility, all operating under rabbinical supervision. Both of
these acquisitions have been accounted for under the purchase method of
accounting in accordance with Accounting Principle Board Opinion No. 16.
Effective October 31, 1995 the company changed its fiscal year to October 31st.
The Company changed its name to All American Food Group, Inc. on October 24,
1995.
(c) BUSINESS --
The Company is principally engaged in the development of a retail chain of
franchised bagel stores, including the operation of a certain number of
Company-owned stores for training and marketing and promotional activities, and
the distribution of bagel bakery equipment and related products to the franchise
system. The Company markets both single unit and market development franchise
agreements. The Company, in the normal course of business, also markets stores
it acquires to individuals who operate as franchisees. The Company franchises
its concepts under the names "Goldberg's Original Old World Bagels" and "Sammy's
New York Bagels."
The Company no longer actively engages in the sales of bagel bakery
equipment to independent retail operators.
(d) PRINCIPLES OF CONSOLIDATION --
The consolidated financial statements include the accounts of All American
Food Group, Inc. and its subsidiaries. All significant inter-company balances
and transactions have been eliminated in consolidation.
(e) CASH AND CASH EQUIVALENTS --
At July 31, 1996 cash represented monies on deposit in financial
institutions.
(f) CONCENTRATION OF CREDIT RISK --
The Company maintains cash and cash equivalents with various financial
institutions. Company policy is designed to limit exposure with any one
institution. Credit risk with respect to trade accounts and notes receivable is
minimal, due to the terms under which the Company transacts its business.
F-25
<PAGE> 77
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JULY 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(g) INVENTORIES --
Inventories are stated at the lower of cost (first-in, first-out ("FIFO"))
or market.
(h) PROPERTY, PLANT AND EQUIPMENT --
Equipment, fixtures and leasehold improvements are recorded at cost.
Equipment under capital leases is recorded at the net present value of the
associated lease payments. Major replacements or improvements are capitalized.
Maintenance and repairs are charged to earnings as incurred. For financial
statement purposes, depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets which range
from three to ten years.
(i) INTANGIBLE ASSETS --
The values assigned to intangible assets are based on an independent
appraisal and management's estimates, and are being amortized on a straight-line
basis over their estimated useful lives, which range from three and one-half to
five years.
(j) ACQUISITION COSTS --
Acquisition costs represent fees incurred in the Goldberg and Sammy's
acquisitions are being amortized over their useful lives of five years.
(k) VALUATION OF NON-CURRENT INVESTMENTS --
The non-current portfolio of securities represented by the investment in
the common stock of Jutland Enterprises Inc. ("Enterprises") is carried at zero
value. Currently there is no market for the shares. Any gain realized from the
disposition of these securities will be recognized at the time of disposition.
(l) FRANCHISE REVENUE RECOGNITION --
Franchise revenue includes the sale of single unit franchises, the sale of
Company-owned stores to franchisees, the sale of market development franchises
and ongoing royalty and advertising fees.
Single unit franchise agreements ("Single Unit Agreements") provide for
payment of a nonrefundable initial franchise fee (an "Initial Franchise Fee"), a
weekly royalty on gross sales, and a weekly cooperative advertising fund
contribution. The Company's material obligations under the terms of all Single
Unit Agreements are assisting in site selection and franchisee training. Initial
Franchise Fees under Single Unit Agreements are recognized as revenues when the
Company has no further material obligations in respect of the establishment of
such franchise, which occurs upon the opening of the store. As of July 31, 1996,
the Company had deferred recognition of Initial Franchise Fees relating to two
stores which management anticipates will open within the next year. See note 8.
Market Development Agreements provide for the payment, by the Market
Developer, of a nonrefundable initial fee (a "Market Development Fee") based on
the size, population and overall market potential of the territory subject to
the Market Development Agreement (the "Market Area"). The Market Developer
assumes substantially all of the responsibilities that otherwise would be
assumed by the Company, as franchiser within the Market Area. In exchange, the
Market Developer receives (i) the exclusive right to build stores for the Market
Developer's own account or to seek third party franchisees within the Market
Area
F-26
<PAGE> 78
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JULY 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(l) FRANCHISE REVENUE RECOGNITION -- (CONTINUED)
and (ii) the right to share with the Company, on a 50/50 basis, initial and
ongoing single store fees within the Market Area. Under Market Development
Agreements, the Company's obligations in respect of the development of single
unit franchises within the Market Area are limited to (i) approval of
franchisees presented by the Market Developer and (ii) approval of store sites.
The Company has no further material obligations in respect of a Market
Development Agreement at the time of execution of the Agreement. Market
Development Fees paid in cash or by promissory notes fully collateralized by
liquid assets or as to which the Company has obtained an independent third-party
valuation, are recognized as revenues by the Company upon execution of the
Market Development Agreement and payment of the fee. In the absence of such
collateral or valuation, the Company recognizes Market Development Fees on a
cash basis as payments on such notes are received. The Company records
non-interest bearing notes with a term in excess of one year at a discount for
imputed interest thereon. As of July 31, 1996 and 1995, the Company had deferred
the recognition of $267,004 and $52,511 of revenues relating to notes from
Market Developers. See notes 3 and 9.
The Company's portion of the Initial Franchise Fee on single unit
franchises sold within a Market Developer's Market Area is recognized as
revenues when the Company has no further material obligations in respect of the
establishment of such franchise, which occurs upon opening of the store. As of
April 30, 1996, the Company had no deferred revenue relating to stores in Market
Developers' Market Areas.
The Company recognizes revenues from the sale of Company-owned stores to
franchisees upon consummation of the sale transaction.
The Company recognizes franchise royalty revenue when it is earned.
Franchise revenue for the nine months ended July 31, 1996 of $237,223
consists of initial non-recurring franchise and market development fees of
$45,500 and $156,200, respectively, and ongoing royalties of $35,523. Franchise
revenue for the nine months ended July 31, 1995 of $93,170 consists of initial
non-recurring market development fees.
(m) NET LOSS PER SHARE --
Net loss per common share was determined by dividing net loss, as adjusted,
by the weighted average number of common shares outstanding, as adjusted. The
net loss for the nine months ended July 31, 1996 was adjusted by an increase of
$714,426 representing the increase in the carrying amount of redeemable
preferred stock. (See Note 11). The weighted average number of common shares
outstanding was adjusted by an increase of 430,558 shares for all periods
presented. These additional shares represent the number of shares and options
issued within the twelve months prior to May 3, 1996, when the Company filed a
registration statement for an initial public offering (IPO), that were issued
for consideration per share or at an exercise per share less than the
anticipated IPO price of $3.50 per share. The treasury stock method has been
used to determine the net increase in the number of shares outstanding. As such
the computation of fully diluted net loss per share was anti-dilutive in each of
the periods presented; therefore, the amounts reported for primary and fully
diluted loss are the same.
(n) LONG-LIVED ASSETS --
The Company retroactively adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
effective February 1, 1994. The Company records
F-27
<PAGE> 79
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JULY 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(n) LONG-LIVED ASSETS -- (CONTINUED)
impairment losses on long-lived assets used in operations, including goodwill
and intangible assets, when events and circumstances indicate that the assets
might be impaired and the discounted cash flows estimated to be generated by
those assets are less than the carrying amounts of those assets. The adoption of
SFAS No. 121 had no material impact on the Company's financial condition or
results of operations for the nine months ended July 31, 1996 and 1995.
(o) STOCK OPTIONS --
The Company has granted stock options to an employee, a director, a key
vendor and a customer with an exercise price not less than fair market value per
share of common stock on the date the option was granted. The Company accounts
for stock option grants in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and, accordingly, recognizes no compensation or other
expense for the stock option grants.
2. INVENTORIES:
Inventories at July 31, consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Food and paper products................................. $ 73,904 $ 35,258
Equipment and parts..................................... 64,324 108,916
-------- --------
Total inventories....................................... $138,228 $144,174
======== ========
</TABLE>
3. NOTES RECEIVABLE:
Notes receivable at July 31, represent the present value of the unpaid
portion of the Market Development Fees due in connection with the sales of
Market Areas (including a sale to a shareholder of the Company).
The notes, which are non-interest bearing and have been discounted based on
an imputed interest rate of 9%, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Note receivable, paid by the application of 50% of
compensation due to Market Developer................... $ 49,879 $52,511
Note receivable, due in quarterly installments of
$20,000................................................ 217,125 --
-------- -------
267,004 52,511
Less current portion..................................... 89,722 11,435
-------- -------
Note receivable, long-term............................... $177,282 $41,076
======== =======
</TABLE>
F-28
<PAGE> 80
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JULY 31, 1996
4. FIXED ASSETS:
Fixed assets and accumulated depreciation at July 31, consists of the
following:
<TABLE>
<CAPTION>
ESTIMATED
1996 1995 USEFUL LIVES
---------- --------- -------------
<S> <C> <C> <C>
Machinery and equipment -- retail
stores............................... $ 495,455 523,150 7 years
Office furniture and warehouse
equipment............................ 176,500 163,343 7 years
Trucks and delivery vehicle............ 26,370 26,370 3 to 5 years
Leasehold improvements -- retail
stores............................... 233,932 176,982 Term of lease
Construction in progress............... 222,922 --
---------- ---------
1,155,179 889,845
Accumulated depreciation............... (227,745) (190,935)
---------- ---------
Fixed assets net of accumulated
depreciation......................... $ 927,434 $ 698,910
========= =========
</TABLE>
At July 31, 1996 certain debt is secured by approximately $259,000 of fixed
assets.
5. INTANGIBLE ASSETS:
Intangible assets and accumulated amortization at July 31, are as
following:
<TABLE>
<CAPTION>
ESTIMATED
1996 1995 USEFUL LIVES
--------- --------- ------------
<S> <C> <C> <C>
Kosher certification....................... $ 145,771 $ 145,771 5 years
Non-compete agreements..................... 192,507 192,507 4 years
Favorable lease agreement.................. 6,250 17,500 3 1/2 years
Customer lists............................. 74,432 74,432 4 years
Proprietary formula........................ 107,338 107,338 5 years
Retail store license....................... -- 27,000 9 1/2 years
Drawings and blueprints.................... 46,158 46,158 5 years
--------- ---------
Total intangible assets.................... 572,456 610,706
Accumulated amortization................... (322,436) (203,380)
--------- ---------
Total intangible assets, net............... $ 250,020 $ 407,326
========= =========
</TABLE>
6. ACQUISITION COSTS:
Acquisition costs represent fees incurred in consummating the Goldberg's
and Sammy's acquisitions. These costs are being amortized over an estimated
useful life of five years. Acquisition costs and accumulated amortization at
July 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Acquisition costs....................................... $105,751 $105,751
Accumulated amortization................................ (56,187) (35,031)
-------- --------
Net acquisition costs................................... $ 49,564 $ 70,720
======== ========
</TABLE>
F-29
<PAGE> 81
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JULY 31, 1996
7. INVESTMENT IN JUTLAND ENTERPRISES INC. COMMON STOCK:
As part of its initial capitalization, the Company acquired 400,000 shares
of Enterprises common stock from Andrew Thorburn, the Chief Executive Officer of
Enterprises and subsequently the Chief Executive Officer of the Company.
Consistent with the transferor's cost basis, this stock has been assigned no
value by the Company.
The Company received 340,000 additional shares of Enterprises in separate
transaction involving Blue Chip Computerware, Inc., and in the re-negotiations
with Howard Goldberg. Due to the absence of a readily ascertainable market value
no value has been assigned to these shares.
8. DEFERRED FRANCHISING REVENUE:
Deferred franchising revenue at July 31, 1996, represents Initial Franchise
Fees received in connection with single store franchises where the stores have
not yet opened and the present value of the portion of the Market Development
Fee paid by means of non-interest bearing notes as to which the Company has not
as yet recognized revenue, and are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Single store Initial Franchise Fees received, stores not
yet open............................................... $ 25,000 $37,500
Market Development Fees.................................. 267,004 52,511
-------- -------
292,004 90,011
Less current portion..................................... 114,722 48,935
-------- -------
Deferred franchising revenue, long-term.................. $177,282 $41,076
======== =======
</TABLE>
9. EQUIPMENT LEASE OBLIGATIONS:
The Company and its subsidiaries are obligated under various equipment
lease arrangements which have been capitalized in the accompanying financial
statements. Property, plant, and equipment presented on the consolidated balance
sheet includes approximately $259,000 of assets capitalized under these leasing
arrangements. Accumulated depreciation recorded on these assets approximated
$79,000 at July 31, 1996. These lease obligations are due in monthly
installments including interest expense at annual interest rates ranging from
8.3% to 24.5%. The lease obligations are payable through dates ranging from
August 1996 through November 1999.
The future minimum payments required under the lease arrangements with
their present value at July 31, 1996 are as follows:
<TABLE>
<CAPTION>
PRESENT INTEREST MINIMUM
YEAR ENDED JULY 31, VALUE EXPENSE PAYMENTS
----------------------------------------------- -------- ------- --------
<S> <C> <C> <C>
1997.................................... $ 71,814 $13,164 $ 84,978
1998.................................... 29,905 3,246 33,151
1999.................................... 3,399 786 4,185
-------- ------- --------
$105,118 $17,196 $122,314
======== ======= ========
</TABLE>
F-30
<PAGE> 82
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JULY 31, 1996
10. LOANS FROM STOCKHOLDERS:
Loans from stockholders primarily consist of obligations assumed in the
Sammy's acquisition. These loans are due in monthly installments including
interest expense at annual rates ranging from 5.0% to 16.76%. The loans are
payable through dates ranging from June 1996 through February 1999.
The future minimum payments required under the loans, with their present
value at July 31, 1996, are as follows:
<TABLE>
<CAPTION>
PRESENT INTEREST MINIMUM
YEAR ENDED JULY 31, VALUE EXPENSE PAYMENTS
-------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
1997....................................... $12,386 $1,808 $14,194
1999....................................... 4,379 232 4,611
1998....................................... 2,431 40 2,471
------- ------- -------
$19,196 $2,080 $21,276
======= ====== =======
</TABLE>
11. LONG-TERM DEBT:
Long-term debt at July 31, is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Note payable to Tilden Financial Corporation payable in
monthly installments of $1,521 including interest,
through October 1995, secured by equipment............... $ -- $ 7,969
Note payable to bank payable in monthly installments of
$405 plus interest at 1.5% above the prime rate, through
February 1997, secured by equipment...................... 2,365 7,083
Note payable to individual in monthly installments of $153
including interest at the annual rate of 12.5%, payable
through September 1996................................... 890 1,993
------ -------
3,255 17,045
Less current portion....................................... 3,255 13,995
------ -------
Long-term debt............................................. $ -- $ 3,050
====== =======
</TABLE>
12. INCOME TAXES:
The Company has adopted SFAS No. 109 and is a C Corporation subject to
federal and state income taxes. The Company has changed its fiscal year end to
October 31 for tax purposes. At July 31, 1996, there were consolidated net
operating loss carryforwards of approximately $1,800,000 expiring in 2011. Due
to the current period operating loss, no amount has been provided for corporate
income taxes.
In accordance with SFAS No. 109, the difference between the tax bases and
the assigned value of the assets for financial reporting purposes of
approximately $850,000 resulting from the Goldberg and Sammy's acquisitions and
the purchase of two retail bagel stores for Common Stock will not result in
taxable or deductible amounts in future years, and no deferred asset or
liability has been recognized because of the magnitude of the net operating loss
carryforward. In the event the Company generates taxable income in excess of the
net operating loss carryforward, a deferred tax liability will be recognized.
F-31
<PAGE> 83
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JULY 31, 1996
13. REDEEMABLE AND NON-REDEEMABLE PREFERRED CONVERTIBLE PREFERRED STOCK:
The Company issued 190,000 shares of Series A and 180,000 shares of Series
B Convertible Preferred Stock in connection with the Goldberg's and Sammy's
acquisitions, respectively. The Certificate of Designation stipulates that
certain of these shares are redeemable if certain events occur as follows:
Series A Shares:
In the event that the Company completes an underwritten initial public
offering of its common stock yielding net proceeds to the Company (after
deduction of offering costs, commissions, attorneys fees, or other costs and
expenses in connection with such offering) of more than $2,000,000, then within
30 days following the closing of such offering, the Company will offer to redeem
the lesser of 40,000 shares or the number of shares of Series A Preferred Stock
then outstanding, at a redemption price of $5.00 per share. The holder of Series
A Preferred Stock can accept the offer or can convert the shares held into an
equal number of shares of common stock of the Company.
Series B Shares:
In the event that the Company completes, in a single transaction, a capital
infusion of more than $1,000,000 (net of any offering costs, commissions,
attorneys fees, or other costs and expenses in connection with such equity
infusion), then within 30 days following the closing of such offering, the
Company shall offer to redeem the lesser of 60,000 shares or the number of
shares of Series B Preferred Stock then outstanding, at a redemption price of
$5.00 per share. The holder of Series B Preferred Stock can accept the offer or
can convert the shares held into an equal number of shares of the common stock
of the Company.
In the event that the Company completes an underwritten initial public
offering of its common stock and any shares of Series B Preferred Stock remain
outstanding 24 months following the effective date of the registration statement
filed with the Securities and Exchange Commission in respect of such initial
public offering, then within 3 days following the expiration of such 24 month
period, the Company shall offer to redeem the lesser of 60,000 shares, or the
number of shares of Series B Preferred Stock then outstanding, at a redemption
price of $5.00 per share. The holder of Series B Preferred Stock can accept the
offer or can convert the shares held into an equal number of shares of the
common stock of the Company.
At July 31, 1996 the present value of the amount necessary to redeem the
maximum number of shares of Series A and Series B Convertible Preferred Stock
has been reflected in the accompanying consolidated financial statements as
Redeemable Preferred Stock, Series A and Series B. In the calculation of these
amounts, it has been assumed the Company will complete its initial public
offering on September 30, 1996.
The following presents the previous carrying amounts of the Series A and
Series B Preferred Stock, the carrying amount at July 31, 1996, the accretion
(increase in the carrying amount) for the six months ended July 31, 1996 and the
redemption amounts for the preferred shares. At July 31, 1996, the accretion
created a charge to paid in capital of $365,000 and a charge to non-redeemable
preferred stock of $349,426.
<TABLE>
<CAPTION>
ACCRETION FOR THE
CARRYING AMOUNT CARRYING AMOUNT NINE MONTHS ENDED REDEMPTION
AT OCTOBER 31, 1995 AT JULY 31, 1996 JULY 31, 1996 AMOUNT
------------------- ----------------- ----------------- ----------
<S> <C> <C> <C> <C>
Series A.................. $ -0- $ 194,042 $ 194,042 $200,000
Series B.................. -0- $ 520,384 $ 520,384 $600,000
----- ----------- -------------- ---------
$ -0- $ 714,426 $ 714,426 $800,000
===== =========== ============== =========
</TABLE>
F-32
<PAGE> 84
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JULY 31, 1996
13. REDEEMABLE AND NON-REDEEMABLE PREFERRED CONVERTIBLE PREFERRED
STOCK -- (CONTINUED)
Series B Shares -- (continued)
The maturity schedule of the redemptions is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, AMOUNT
------------------------------------------------------------------ --------
<S> <C>
1997........................................................ $500,000
1999........................................................ 300,000
--------
800,000
Less deferred interest...................................... 85,574
--------
Carrying amount at July 31, 1996............................ $714,426
========
</TABLE>
Series C Preferred Stock:
The Company has also issued a total of 982,503 shares of Series C
Non-redeemable Convertible Preferred stock in a series of transactions. The
Certificate of Designation for this series provides that the Company may, at its
sole option, redeem all or part of the stock for $5.00 a share, subject to the
holder's election to convert the shares into an equal number of common shares of
the Company. The shares have no conditions under which the Company must redeem
all or portion of theses shares.
As discussed in Note 12, Related Party Transactions, the Company agreed to
a voluntary redemption of 416,997 shares of this stock during the six months
ended April 30, 1996. The Company does not intend to voluntarily redeem any
additional shares of non-redeemable preferred stock.
14. RELATED PARTY TRANSACTIONS:
As described above, during the nine months ended July 31, 1996 the Company
voluntarily redeemed 416,997 shares of Series C Preferred Stock. Of this total
401,997 shares were redeemed from an affiliate, Blue Chip Computerware, Inc.,
for consideration of $1.00 per share, equivalent to the price Blue Chip paid to
acquire the shares. This was done in connection with the financial
reorganization of Blue Chip.
15. STOCK OPTIONS:
The Company has granted options to purchase 120,000 shares of the Company's
common stock, consisting of 40,000 options granted to a key vendor, 25,000
options granted to a director, 5,000 options granted to a customer and 50,000
options granted to the Company's Chief Financial Officer. The options are
exercisable at prices ranging from $1.00 to $2.00 per share and expire five
years after they were issued on dates ranging from January 31, 2000 through
January 31, 2001.
F-33
<PAGE> 85
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JULY 31, 1996
15. STOCK OPTION -- (CONTINUED)
The options are exercisable at any time during the period they are
outstanding. The following summarized the activity during the periods presented.
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
------- ----------------
<S> <C> <C>
Options outstanding at February 1, 1995............ None
Granted....................................... 15,000 $1.00
-------
Options outstanding at July 31, 1995............... 15,000 $1.00
Granted....................................... 25,000 $2.00
-------
Options outstanding at October 31, 1995............ 40,000 $1.00 to $2.00
Granted....................................... 80,000 $2.00
-------
Options outstanding at July 31, 1996............... 120,000 $1.00 to $2.00
=======
</TABLE>
16. COMMITMENTS AND CONTINGENCIES:
(a) SAMMY'S FRANCHISING FEES --
During the first sixty months after the Sammy's acquisition, the former
shareholders of the sellers are entitled to receive monthly payments equal to
10% of the single unit franchising fees paid to the Company, and during the
first twelve months after the acquisition and 20% of the fees collected on
international licensing or franchising. At July 31, 1996 there was no
outstanding liability under this provision.
(b) LEASES --
The Company rents real and personal property under various non-cancelable
leases expiring at various dates through 2003. Certain of the leases include
renewal options and provisions for additional rental payments based on various
formulas such as cost of living adjustments, real estate tax and operating
expense escalations and escalations based on gross revenues. Total rent expense
charged to operations approximated $168,000 and $164,000 for the nine months
ended July 31, 1996 and 1995, respectively. These amounts included contingent
rental expense of approximately $8,000 and $7,000, respectively.
Minimum annual rental commitments under leases in effect at July 31, 1996
are summarized as follows:
<TABLE>
<CAPTION>
EQUIPMENT
YEAR ENDED JULY 31, REAL ESTATE & OTHER
------------------------------------------------------ ----------- ---------
<S> <C> <C>
1997........................................... $ 216,000 $ 6,000
1998........................................... 199,000 --
1999........................................... 195,000 --
2000........................................... 177,000 --
2001........................................... 154,000 --
Later years.................................... 623,000 --
----------- ---------
Total minimum lease payments................... $ 1,564,000 $ 6,000
========= ========
</TABLE>
F-34
<PAGE> 86
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
JULY 31, 1996
16. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
(C) EMPLOYMENT AGREEMENTS --
The Company entered into employment contracts with the three principal
former shareholders of Sammy's as part of the acquisition. The employment
contracts provide for annual salaries through December 31, 1996 and include
non-compete covenants through December 31, 1998. The Company's aggregate
obligation for future payments under these agreements was $84,000 at July 31,
1996.
The total compensation expense under these agreements for the nine months
ended July 31, 1996 and for the nine months ended July 31, 1995 was $170,352 and
such amounts have been reflected as acquisition costs on the accompanying
Statement of Operations.
17. PRIVATE PLACEMENTS:
During the nine months ended July 31, 1996, the Company completed private
placements (the "Private Placements") of its common stock pursuant to which it
received an aggregate of $2,413,986, net of expenses of $48,514. Included in the
proceeds was property consisting of two retail bagel stores in the final stages
of construction, valued at $410,000. The proceeds from the Private Placements to
date have been used to (i) fund the Company's operations; (ii) the voluntary
redemption of shares of the Company's Preferred Stock; (iii) reduce trade
payables; and (iv) acquire capital assets. The Company intends to apply the
remainder of these proceeds for working capital purposes.
18. REGISTRATION STATEMENT:
On May 3, 1996, the Company filed a registration statement in connection
with an initial public offering of its common stock with the Securities and
Exchange Commission. The contemplated offering consists of 1,100,000 shares to
be sold at an initial price of $3.50 a share, through a firm commitment
underwriting by R.T.G. Richards & Company, Inc., as Representative for the
several Underwriters.
19. SUBSEQUENT EVENTS:
Settlement Agreement --
On August 12, 1996, the Company entered into a Modification and Settlement
Agreement which stated that Mr. Goldberg would convert 65,000 shares of his
Series A Preferred Stock to an equal number of shares of Common Stock and
pursuant to which, among other things, the Company would redeem his remaining
115,000 Series A shares for $25,000.
Reverse Stock Split --
As of November 18, 1996, the Board of Directors and shareholders have
approved a one-for-two reverse split of the Company's Common Stock, completion
of which is a condition to the closing of the Offering. As a consequence of the
reverse stock split and certain related adjustments, each share of Series A
Preferred Stock and Series B Preferred Stock will remain convertible on a
one-for-one basis and each share of Series C Preferred Stock will be convertible
into one-half share of Common Stock. These financial statements, including the
notes thereto, give effect to this reverse stock split.
F-35
<PAGE> 87
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, BY ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER,
SOLICITATION OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THE PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Dilution.............................. 13
Use of Proceeds....................... 14
Capitalization........................ 15
Dividend Policy....................... 15
Selected Financial Data............... 16
Management's Discussion and Analysis
or Plan of Operation................ 17
Business.............................. 23
Management............................ 36
Certain Transactions.................. 40
Principal Shareholders................ 41
Description of Securities............. 42
Shares Eligible for Future Sale....... 44
Underwriting.......................... 45
Concurrent Offering................... 46
Legal Matters......................... 47
Experts............................... 47
Additional Information................ 47
Index to Financial Statements......... F-1
</TABLE>
------------------------
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,100,000 SHARES
ALL AMERICAN FOOD GROUP, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
R.T.G. RICHARDS & COMPANY, INC.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 88
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.
SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1996
ALTERNATIVE PROSPECTUS
886,951 SHARES
ALL AMERICAN FOOD GROUP, INC.
COMMON STOCK
------------------------
This Prospectus relates to 886,951 shares of the Common Stock, no par
value, of All American Food Group, Inc., a New Jersey corporation (the
"Company"), issued to the holders thereof in private placements by the Company.
The shares of Common Stock referred to above are sometimes referred to herein as
the "Selling Securityholder Securities" and the holders thereof as the "Selling
Securityholders."
The securities offered by the Selling Securityholders pursuant to this
Prospectus may be sold from time to time by the Selling Securityholders or by
their transferees. The distribution of the securities offered hereby by the
Selling Securityholders may be effected in one or more transactions that may
take place on the over-the-counter market, including ordinary brokers'
transactions, privately negotiated transactions or through sales to one or more
dealers for resale of such securities as principals, at market prices prevailing
at the time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by the Selling Securityholders.
The Selling Securityholders, and intermediaries through whom such
securities are sold, may be deemed underwriters within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation. The Company has agreed to indemnify the
Selling Securityholders against certain liabilities, including liabilities under
the Securities Act.
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering by the Company
(the "Offering") of (1,265,000) shares of Common Stock, (including 165,000 such
shares to cover over-allotments, if any) was declared effective by the
Securities and Exchange Commission (the "Commission"). The Company will receive
approximately $3,027,000 in net proceeds from the Offering (assuming no exercise
of the Underwriters' over-allotment option) after payment of underwriting
discounts and commissions and estimated expenses of the Offering. The Company
will not receive any proceeds from the sale of Selling Securityholder Securities
by the Selling Securityholders.
------------------------
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK AND SUBSTANTIAL DILUTION. INVESTMENT IN THESE SECURITIES SHOULD
BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. POTENTIAL PURCHASERS SHOULD CAREFULLY CONSIDER THE
MATTERS SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1996
<PAGE> 89
SELLING SECURITYHOLDERS
An aggregate of up to 886,951 shares of Common Stock may be offered for
resale by the Selling Securityholders.
The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering Common Stock for
resale to the public. Each of the Selling Securityholders is offering for sale
all of the Common Stock beneficially owned thereby, except that John W.
Chitvanni (a director of the Company) will retain ownership of 233 shares of
Common Stock and currently exercisable options (expiring November 1, 2000) to
purchase 25,000 shares of Common Stock, representing, in the aggregate,
approximately 0.83% of the aggregate number of shares of Common Stock
outstanding immediately subsequent to the Offering. The Company will not receive
any of the proceeds from the sale of Common Stock by the Selling
Securityholders.
Except as indicated, there are no material relationships between any of the
Selling Securityholders and the Company or any of its predecessors or
affiliates, nor have any such material relationships existed within the past
three years.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK OWNED
AND MAXIMUM NUMBER
SELLING SECURITYHOLDERS TO BE SOLD
- ------------------------------------------------------------------------- ------------------
<S> <C>
Alexander Wollman........................................................ 500*
Allan I. Grossman........................................................ 500*
Andrew and Denise Halpern................................................ 1,500*
Andrew Chitvanni(1)...................................................... 1,500*
Andrew Lefkowitz......................................................... 2,500*
Angela Rundell........................................................... 5,000*
Anita R. Fuller.......................................................... 25,000**
Ann and Gary Stanford(1)................................................. 1,000*
Ann Caputo............................................................... 50,000**
Anthony and Ellen Goneconti.............................................. 1,200*
Anthony G. Foster(2)..................................................... 5,000***
Associates in Internal Medicine, Richard E. Handelsman MD, trustee....... 2,500*
Austin Depalma........................................................... 1,000*
Barbara Levitt Astrowsky................................................. 500*
Bernard Karmel & Judith M. Gardner (JTWROS).............................. 500*
Bernhardt Karp........................................................... 1,250*
Bruce Potter............................................................. 125*
Cal A. Massaro........................................................... 2,500*
Carl Anthony Massaro Sr.................................................. 2,500*
Carla Massaro and Jodi Schaschl.......................................... 2,500*
Catherine Bross.......................................................... 4,000*
Charles Glassman, MD..................................................... 1,000*
Charles Mayer............................................................ 2,000*
Christopher W. Eni....................................................... 5,750*
Cindy Eni Yingling....................................................... 5,750*
Craig Nice............................................................... 9,375*
Dan Cortigiano........................................................... 3,500*
David and Lorraine Kiornblatt............................................ 2,400*
David and Marlene E. Dal Santo........................................... 7,500*
Dee Fornaro.............................................................. 900*
Dietz & Watson Inc. Union Employee Pension Plan.......................... 3,000**
Dietz & Watson Inc. Pension Plan......................................... 5,750**
Dr. Richard Saffran...................................................... 2,500*
Drew Kislin.............................................................. 1,250*
Edward and Therese Malone................................................ 2,400*
Eleonore L. Giacchino and George E. Giacchino............................ 4,500*
Eleven Congers Inc.(3)................................................... 45,550**
Elliot Leffel............................................................ 1,500*
Eugene Chitvanni(1)...................................................... 30,500**
Frank McCenimen.......................................................... 125*
</TABLE>
A-2
<PAGE> 90
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK OWNED
AND MAXIMUM NUMBER
SELLING SECURITYHOLDERS TO BE SOLD
- ------------------------------------------------------------------------- ------------------
<S> <C>
Frank Tarantino.......................................................... 1,500*
George Muraski........................................................... 500*
George Watson............................................................ 1,250*
Gerald A. Bardeson....................................................... 5,000*
Gerald Gedney............................................................ 2,500*
Glenn and Merilag Mendoza................................................ 1,000*
Gregory S. Vojonvic...................................................... 2,500*
Guy McNeil(2)............................................................ 5,000***
Harold Greenberg......................................................... 12,500*
Helen A. Pappas.......................................................... 5,000*
Helga Wollman............................................................ 500*
Henry Bareket............................................................ 1,000*
Herbert L. and Francine Wilson........................................... 2,500*
Markan Associates........................................................ 9,000*
Howard Paul Cagen........................................................ 1,250*
Irvin R. Goldstein....................................................... 1,250*
James A. Ashbaugh........................................................ 1,000*
James B. Yates........................................................... 75,000**
James L. Benjamin........................................................ 2,500*
Jay S. Youngerman........................................................ 2,500*
Jeanne E. Harvey......................................................... 625*
Joan H. Facelle M.D. Money Purchase Plan DTD 10-7-89..................... 4,000**
Joan H. Facelle FBO Joan H. Facelle IRA.................................. 7,500**
Joan Kalish.............................................................. 2,500*
John Fitzpatrick, MD..................................................... 500*
John Mocio............................................................... 500*
John Mocio, Jr........................................................... 250*
John W. and Valerie A. Chitvanni(2)...................................... 5,000**
Joseph A. and Sonia E. Conti(3).......................................... 5,000*
Joseph Zampella.......................................................... 50,000**
Kenneth L. Terminini and Diane P. Cowell................................. 500*
Kenneth S. Kopchik....................................................... 1,250*
Klarberg Raiola and Associates........................................... 2,500*
Larry Laimo.............................................................. 14,020*
Lee Purser............................................................... 2,500*
Lisker Group(4).......................................................... 35,625**
Louis J. Eni............................................................. 5,750*
Louis Starace............................................................ 1,500*
Lynette S. Bardeson...................................................... 5,000*
M&A Investment Partnership............................................... 5,000*
Marc and Jodi Weintraub.................................................. 2,500*
Maria Tina Ursini(5)..................................................... 6,500*
Marie George............................................................. 1,375*
Mario Caputo............................................................. 50,000**
Mark Albahary............................................................ 2,000*
Mark J. Meagher.......................................................... 5,000*
Mary Anne Riordan........................................................ 5,000*
Michael Brennock......................................................... 23,700**
Michael Innerfield MD.................................................... 2,400*
Michael J. and Adeline Brennock.......................................... 50,000**
Michael J. Bellich....................................................... 600*
Myrna Mirow.............................................................. 6,250*
Napoli Assurance Co...................................................... 7,500*
Nelli and Illya Rabukhin(6).............................................. 500*
Nicholas S. Vojnovic..................................................... 500*
Nickolas Farese.......................................................... 500*
Pamela D. and Thomas J. Chiatroni(7)..................................... 500*
Patricia and Raymond Pistey Sr........................................... 1,950*
Patricia M. Gedney....................................................... 2,500*
</TABLE>
A-3
<PAGE> 91
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK OWNED
AND MAXIMUM NUMBER
SELLING SECURITYHOLDERS TO BE SOLD
- ------------------------------------------------------------------------- ------------------
<S> <C>
Ramapo Valley Surgical Assoc. Retirement Trust DTD 10-1-89 FBO Bobb
Vladeck................................................................ 2,000*
Ramapo Valley Surgical Assoc. Retirement Trust DTD 10-1-89 FBO Thomas L.
Facelle IRA............................................................ 10,000**
Rebekah Hepworth......................................................... 4,500*
Regina and Joseph Matties................................................ 500*
Richard Bellich.......................................................... 2,500*
Richard Hepworth......................................................... 1,250*
Rick Stockton............................................................ 2,500*
Riry Muhlrad............................................................. 2,400*
Robert and Janice Rosenberg.............................................. 2,500*
Robert E. Riodan and Francis A. Carille.................................. 12,500**
Robert Goldberg, MD...................................................... 2,000*
Rosemary Mocio........................................................... 16,018**
Charles Rosenberg........................................................ 6,250*
Ruth Dietz Eni........................................................... 5,750*
Sandra K. and Gerald D. Bardeson......................................... 10,000*
Sandra Silvia............................................................ 50,000**
Scott Minuto............................................................. 1,000*
Sheila E. Stein(6)....................................................... 5,000*
Stephen and Lauri Hill................................................... 600*
Steven and Janine Kolinsky............................................... 1,463*
Steven Kolinsky and Stephen Hill......................................... 5,000*
Sushi Bhardwaj........................................................... 1,000*
Tamara Lund.............................................................. 250*
Terri Shechtman.......................................................... 12,500**
Thomas F. and Carolyn L. O'Rourke........................................ 1,500*
Thomas L. Bumgardner..................................................... 3,500*
Thomas L. Facelle Trustee FBO Thomas L. Facelle IRA...................... 7,500**
Thomas L. Facelle, MD.................................................... 4,750**
Thomas W. Bardeson....................................................... 5,000**
Timothy E. Hibsman....................................................... 5,850*
Timothy J. Riordan and Sheila O'Neill Riordan............................ 2,500*
Victor D'Albora.......................................................... 500*
</TABLE>
- ---------------
(1) Child of a director of the Company.
(2) Director or executive officer of the Company.
(3) Franchisee of the Company.
(4) Affiliate of an individual listed among "Key Personnel" of the Company.
(5) Mother-in-law of an executive officer of the Company.
(6) Employee of the Company.
(7) Sister of an executive officer of the Company.
* Shares may not be sold, transferred, assigned, pledged or hypothecated in
any manner until the later of 180 days following the effective date of the
Registration Statement of which this Prospectus forms a part or 365 days
following the date of initial purchase from the Company.
** Shares may not be sold, transferred, assigned, pledged or hypothecated in
any manner until the later of 180 days following the effective date of the
Registration Statement of which this Prospectus forms a part or 365 days
following the date of initial purchase from the Company. In addition, these
shares are subject to transfer restrictions pursuant to which, for a period
of 12 months following the closing of the underwritten Offering, the holder
has agreed not to transfer, assign or sell any such shares without the
consent of the underwriters of the Company's underwritten public offering
(the "Underwriters"), unless the transferee, assignee or purchaser agrees
to be bound by the same restrictions as the original holder.
*** Shares may not be sold, transferred, assigned, pledged or hypothecated in
any manner until the later of 180 days following the effective date of the
Registration Statement of which this Prospectus forms a part or 365 days
following the date of initial purchase from the Company. In addition, these
shares are subject to transfer restrictions pursuant to which, for a period
of 24 months following the closing of the underwritten Offering, the holder
has agreed not to transfer, assign or sell any such shares without the
consent of the Underwriters, unless the transferee, assignee or purchaser
agrees to be bound by the same restrictions as the original holder.
A-4
<PAGE> 92
PLAN OF DISTRIBUTION
The sale of the Selling Securityholder Securities by the Selling
Securityholders may be effected from time to time in transactions (which may
include block transactions by or for the account of the Selling Securityholders)
in the over-the-counter market or in negotiated transactions, through the
writing of options on the securities, 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 Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the
over-the-counter market in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker-dealer may
exceed customary commissions).
The Selling Securityholders have agreed not to sell, transfer, assign,
pledge or hypothecate their shares in any manner until the later of 180 days
from the effective date of the Registration Statement of which this Prospectus
forms a part or 365 days from the date of initial purchase of such securities
from the Company. Certain Selling Securityholders (who hold an aggregate of
622,643 shares, representing approximately 20.53% of the shares of Common Stock
to be outstanding immediately after the underwritten offering described below)
also have agreed, in addition to the foregoing restriction, not to sell,
transfer or assign any shares of Common Stock for a period of 12 months
following the closing of the underwritten offering without the Underwriters'
consent, unless the transferee, assignee or purchaser agrees to be bound by the
same 12-month restriction as the original holders. The Selling Securityholders
who are officers and directors of the Company (who hold, in the aggregate,
15,000 shares) also have agreed to the foregoing restriction. In addition, all
of the directors and officers who hold Common Stock as of the closing date of
the underwritten offering have agreed not to transfer, assign or sell any shares
of the Company's Common Stock for a period of 24 months following the closing of
the underwritten offering without the Underwriter's consent, unless the
transferee, assignee or purchaser agrees to be bound by the same restrictions as
the original holders.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sale 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 on the resale of the securities might be deemed to be underwriting
discounts and commissions under the Securities Act.
CONCURRENT PUBLIC OFFERING
On the date of this Prospectus, a Registration Statement was declared
effective under the Securities Act with respect to an underwritten offering by
the Company of 1,100,000 shares of Common Stock and up to 165,000 additional
shares of Common Stock to cover over-allotments, if any.
A-5
<PAGE> 93
[ALTERNATE PAGE]
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY
OFFER TO BUY, ANY SECURITIES OFFERED HEREBY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER, OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN CONTAINED IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................
Risk Factors..........................
Dividend Policy.......................
Selected Financial Data...............
Management's Discussion and Analysis
or Plan of Operation................
Business..............................
Management............................
Certain Transactions..................
Description of Securities.............
Principal Shareholders................
Shares Eligible for Future Sale.......
Selling Securityholders...............
Plan of Distribution..................
Concurrent Public Offering............
Legal Matters.........................
Experts...............................
Additional Information................
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
886,951 SHARES
ALL AMERICAN FOOD
GROUP, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
A-6
<PAGE> 94
ALL AMERICAN FOOD GROUP, INC.
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14A:3-5 of the New Jersey Business Corporation Act (the "NJBCA")
gives the Company power to indemnify each of its directors and officers against
expenses and liabilities in connection with any proceedings involving him by
reason of his being or having been a director or officer if (a) he acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the Company and (b) with respect to any criminal proceeding,
he had no reasonable cause to believe his conduct was unlawful. However, in a
proceeding by or in the right of the Company, there shall be no indemnification
in respect of any liabilities or expenses if the officer or director shall have
been adjudged liable to the Company unless the court in such proceeding
determines he is entitled to indemnification for such liabilities and/or
expenses. Furthermore, no indemnification shall be made to or on behalf of a
director or officer if a judgment or other final adjudication adverse to such
director or officer establishes that his acts or omissions (a) were in breach of
his duty of loyalty to the Company and its stockholders, (b) were not in good
faith or involved a knowing violation of law or (c) resulted in receipt by the
director or officer of an improper personal benefit. The NJBCA defines an act or
omission in breach of a person's duty of loyalty as an act or omission which
that person knows or believes to be contrary to the best interests of the
Company or its stockholders in connection with a matter in which he has a
material conflict of interest. If a director or officer is successful in a
proceeding, the statute mandates that the Company indemnify him against
expenses.
The Company's Restated Certificate of Incorporation, as permitted by New
Jersey law, eliminates the personal liability of the directors and officers to
the Company or its shareholders for monetary damages for breaches of such
director's or officer's duty of care or other duties as a director or officer;
except liabilities for any breach of duty based upon an act or omission (a) in
breach of such person's duty of loyalty to the corporation or its shareholders,
(b) not in good faith or involving a knowing violation of law or (c) resulting
in receipt by such person of an improper personal benefit. This limitation on
liability could have the effect of limiting directors' and officers' liability
for violations of the federal securities laws. In addition, the Company's
Restated Certificate of Incorporation and Restated By-Laws provide broad
indemnification rights to directors and officers so long as the director or
officer acted in a manner believed in good faith to be in or not opposed to the
best interest of the Company and with respect to criminal proceedings if the
director had no reasonable cause to believe his or her conduct was unlawful. The
Company believes that the protection provided by these provisions will help the
Company attract and retain qualified individuals to service as officers and
directors. These provisions would provide indemnification for liabilities
arising under the federal securities laws to the extent that such
indemnification is found to be enforceable under, and to be in accordance with,
applicable law and generally will limit the remedies available to a shareholder
who is dissatisfied with a Board decision protected by these provisions, and
such shareholder's only remedy may be to bring a suit to prevent the Board's
action.
II-1
<PAGE> 95
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following expenses will be incurred in connection with the proposed
offering hereunder. All of such expenses will be borne by the Company. With the
exception of the registration and listing fees, all amounts shown are estimates:
<TABLE>
<S> <C>
SEC registration fees.......................................................... $ 5,227.15
Nasdaq listing fee............................................................. 9,352.75
NASD registration fee.......................................................... 2,016.00
Legal fees and expenses........................................................ 150,000.00
Underwriters' nonaccountable expense allowance................................. 115,500.00
Accounting fees and expenses................................................... 40,000.00
Blue sky fees and expenses (including counsel fees)............................ 25,000.00
Printing and engraving expenses................................................ 60,000.00
Transfer agent fees and expenses............................................... 2,500.00
Miscellaneous.................................................................. 28,404.10
-----------
Total.......................................................................... $438,000.00
==========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth certain information regarding sales of, and other
transactions with respect to, securities of the Company issued within the past
three years, which sales and other transactions were not registered pursuant to
the Securities Act of 1933, as amended (the "Securities Act"). All of such sales
and transactions were exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof or as otherwise indicated
herein.
In September 1993, in connection with the formation of the Company, Jutland
Enterprises Inc. ("Enterprises") acquired 468,750 shares of the Company's Common
Stock for consideration consisting of $300,000 in cash and $277,000 in assets.
Prior to January 31, 1994 (the end of the Company's first (partial) fiscal
year), Jutland contributed an additional $365,000 to the Company as additional
paid-in capital. Shortly after formation of the Company, Andrew Thorburn, the
Chief Executive Officer of the Company and of Enterprises, acquired 156,250
shares of the Company's Common Stock for consideration consisting of 400,000
shares of Enterprises common stock.
In July and August 1994, the Company entered into two separate stock
purchase agreements with Blue Chip Computerware, Inc. ("Blue Chip"). Under the
agreements, the Company issued 130,000 shares of Common Stock to a financial
services firm in exchange for its services in arranging the transaction and
600,000 shares of the Common Stock to Blue Chip in exchange for $50,000 in cash,
100,000 shares of the common stock of Enterprises and 400,000 shares of the
common stock of Blue Chip. The Company subsequently sold the shares of Blue Chip
common stock for $650,000.
In September 1994 and October 1995, the Company issued 120,000 and 70,000
shares, respectively, of Series A Partially Redeemable Convertible Preferred
Stock to Howard Goldberg in connection with the Company's acquisition of the
assets of the Goldberg Companies and as part of the reconciliation of all
outstanding indebtedness and other obligations incurred in connection therewith.
In September 1994, as part of the consideration for the acquisition of four
corporations conducting business as "Sammy's New York Bagels," the Company
issued an aggregate of 180,000 shares of Series B Redeemable Convertible
Preferred Stock to the shareholders of the acquired corporations. Each share of
Preferred Stock currently is convertible into one share of Common Stock.
Effective February 1, 1995, the Company issued 825,000 shares of Series C
Convertible Preferred Stock to Blue Chip in exchange for 412,500 shares of
Common Stock held by Blue Chip. During the nine months ended October 31, 1995,
Blue Chip purchased 425,000 shares of Series C Convertible Preferred Stock at a
price of $1.00 per share. During the three-month period ended January 31, 1996,
Blue Chip purchased an additional 50,000 shares of Series C Convertible
Preferred Stock at the price of $1.00 per share.
In April 1995, Andrew Thorburn, the President of the Company purchased
70,000 shares of Series C Preferred Stock at a price of $1.00 per share.
II-2
<PAGE> 96
On August 4 and December 4, 1995, the Company sold 21,500 and 25,000
shares, respectively, of Series C Preferred Stock to an unaffiliated investor at
a price of $1.00 per share.
On October 31, 1995, the Company issued 2,500 shares of Common Stock to an
employee in lieu of compensation in the amount of $1,750.
December 4, 1995, the Company sold 25,000 shares of Series C Preferred
Stock to an unaffiliated investor at a price of $1.00 per share.
Between January 24, 1996 and April 29, 1996, the Company sold an aggregate
of 886,951 shares of Common Stock in two separate private placements at a
purchase price of either $2.00 or $4.00 per share. In connection with the
private placements, the Company has received $2,414,000 (net of expenses of
$48,000) including cash and other consideration valued at $410,000 which was
accepted in the form of two retail bagel stores in the final stages of
construction.
Pursuant to an agreement to which the Company and the principal
shareholders of the corporation (the "Bleecker Corporation") that owned the
Goldberg's store on Bleecker Street in New York, New York were parties, and an
agreement between the Company and the corporation (the "Nanuet Corporation")
that owned the Goldberg's store in Nanuet, New York currently under development
and scheduled to open no later than December 31, 1996, the Company initially
agreed to issue a total of 60,000 shares of its Common Stock to such principal
shareholders of the Bleecker Corporation and a total of 42,501 shares of its
Common Stock to the Nanuet Corporation. At the request of these holders, stock
certificates representing an aggregate of 102,501 shares were issued in the
amounts indicated to the following persons, all of whom were shareholders in the
Bleecker Corporation and/or the Nanuet Corporation.
<TABLE>
<CAPTION>
NUMBER OF
SHAREHOLDER SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Alexander Wollman................................................................. 500
Andrew Lefkowitz.................................................................. 2,500
Andrew and Susan Halpern.......................................................... 1,500
Anthony and Ellen Goneconti....................................................... 1,200
Austin Depalma.................................................................... 1,000
Bernard Karmel & Judith M. Gardner (JTWROS)....................................... 500
Catherine Bross................................................................... 4,000
Charles Glassman, MD.............................................................. 1,000
Charles Mayer..................................................................... 2,000
David and Lorraine Kiornblatt..................................................... 2,400
Dee Pornaro....................................................................... 900
Dr. Richard Saffran............................................................... 2,500
Edward and Therese Malone......................................................... 2,400
Elliot Leffel..................................................................... 1,500
Frank Tarantino................................................................... 1,500
Glenn and Merilag Mendoza......................................................... 1,000
Helga Wollman..................................................................... 500
Henry Bareket..................................................................... 1,000
Markan Associates................................................................. 9,000
Joan Kalish....................................................................... 2,500
John Fitzpatrick, MD.............................................................. 500
John Mocio........................................................................ 500
John Mocio, Jr.................................................................... 250
Larry Laimo....................................................................... 14,020
Lee Purser........................................................................ 2,500
Louis Starace..................................................................... 1,500
Mark Albahary..................................................................... 2,000
Michael Brennock.................................................................. 7,200
Michael Innerfield MD............................................................. 2,400
Nickolas Farese................................................................... 500
Rampo Valley Surgical Assoc. Retirement Trust DTD 10-1-89 FBO Bob Vladeck......... 2,000
</TABLE>
II-3
<PAGE> 97
<TABLE>
<CAPTION>
NUMBER OF
SHAREHOLDER SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Riry Muhirad...................................................................... 2,400
Robert Goldberg................................................................... 1,000
Robert Goldberg, MD............................................................... 1,000
Rosemary Mocio.................................................................... 16,018
Scott Minuto...................................................................... 1,000
Stephen and Lauri Hill............................................................ 600
Steven and Janine Kolinsky........................................................ 1,463
Sushi Bhardwaj.................................................................... 1,000
Thomas Facelle.................................................................... 4,250
Thoms L. Facelle, MD.............................................................. 500
Victor D'Albora................................................................... 500
</TABLE>
ITEM 27. EXHIBITS.
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement. (Revised).
3.1** Restated Certificate of Incorporation of the Company.
3.2** Certificate of Designations for Series A, B & C Preferred Stock.
3.3** Form of Second Restated Certificate of Incorporation of the Company. (Revised).
3.4** Amended and Restated By-Laws of the Company.
3.5** Form of Second Amended and Restated By-Laws of the Company. (Revised).
4.1** Form of Specimen of Common Stock Certificate.
4.2* Form of Underwriter's Warrant Agreement.
5.1* Opinion of Counsel re: legality of securities being registered.
10.1** Form of Goldberg's Franchise Agreement.
10.2** Form of Sammy's Franchise Agreement.
10.3** Agreement dated January 12, 1993 with Kof-K Kosher Supervision.
10.4* All American Food Group, Inc. Amended and Restated Omnibus Stock Plan.
10.5** Market Development Agreement covering the State of Arizona.
10.6** Market Development Agreement covering the State of Ohio.
10.7** Market Development Agreement, as amended, covering portions of the State of New
York.
10.8** Form of Market Development Agreement.
10.9** Modification and Settlement Agreement between the Company and Howard Goldberg.
11* Earnings per Share Calculation.
21.1** Subsidiaries of the Company. (Revised).
23.1* Consent of DelSanto & DeFreitas (contained in Part II).
23.2* Consent of Counsel (included in their opinion filed as Exhibit 5.1).
24.1** Powers of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sales securities,
a post-effective amendment to this Registration Statement to;
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
II-4
<PAGE> 98
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission (the
"Commission") such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
The undersigned registrant hereby undertakes:
(1) For determining any liability under the Act, to treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant under Rule 424(b)(1), or (4), or
497(h) under the Act as part of this Registration Statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of the securities at that time as the initial
bona fide offering of those securities.
II-5
<PAGE> 99
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL THE
REQUIREMENTS FOR FILING ON FORM SB-2 AND HAS DULY CAUSED THIS AMENDMENT NO. 5 TO
THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED IN FAIRFIELD, NEW JERSEY, ON THIS 18TH DAY OF
NOVEMBER, 1996.
ALL AMERICAN FOOD GROUP, INC.
By: /s/ Andrew Thorburn
-----------------------------------
ANDREW THORBURN
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------- ------------------
<C> <S> <C>
/s/ ANDREW THORBURN Chairman of the Board of November 18, 1996
- ------------------------------------------ Directors, President and
ANDREW THORBURN Chief Executive Officer
/s/ CHRIS R. DECKER Director, Executive Vice November 18, 1996
- ------------------------------------------ President and Chief
CHRIS R. DECKER* Financial Officer
(Principal Financial and
Accounting Officer)
/s/ JOHN CHITVANNI Director November 18, 1996
- ------------------------------------------
JOHN CHITVANNI*
/s/ ANDREW THORBURN
- ------------------------------------------
*ANDREW THORBURN
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE> 100
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated July 1, 1996 covering the financial statements for
the nine months ended October 31, 1995 and the year ended January 31, 1995, in
Amendment No. 5 to the Registration Statement on Form SB-2 of All American Food
Group, Inc. (No. 333-4990) to be filed with the Securities and Exchange
Commission on or about November 18, 1996, and the related Prospectus contained
therein.
/s/ DELSANTO AND DEFREITAS
--------------------------------------
DELSANTO AND DEFREITAS
Closter, New Jersey
November 18, 1996
II-7
<PAGE> 101
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DOCUMENT PAGE NO.
- ----------- ---------------------------------------------------------------------- ----------
<C> <S> <C>
1.1* Form of Underwriting Agreement........................................
3.1** Restated Certificate of Incorporation of the Company..................
3.2** Certificate of Designations for Series A, B & C Preferred Stock.......
3.3** Form of Second Restated Certificate of Incorporation of the Company
(Revised).............................................................
3.4** Amended and Restated By-Laws of the Company...........................
3.5** Form of Second Amended and Restated By-Laws of the Company
(Revised).............................................................
4.1** Form of Specimen of Common Stock Certificate..........................
4.2* Form of Underwriter's Warrant Agreement...............................
5.1* Opinion of Counsel re: legality of securities being registered........
10.1** Form of Goldberg's Franchise Agreement................................
10.2** Form of Sammy's Franchise Agreement...................................
10.3** Agreement dated January 12, 1993 with Kof-K Kosher Supervision........
10.4* All American Food Group, Inc. Amended and Restated Omnibus Stock
Plan..................................................................
10.5** Market Development Agreement covering the State of Arizona............
10.6** Market Development Agreement covering the State of Ohio...............
10.7** Market Development Agreement, as amended, covering portion of the
State of New York.....................................................
10.8** Form of Market Development Agreement..................................
10.9** Modification and Settlement Agreement between the Company and Howard
Goldberg..............................................................
11* Earnings per Share Calculation........................................
21.1** Subsidiaries of the Company (Revised).................................
23.1* Consent of DelSanto & DeFreitas (contained in Part II)................
23.2* Consent of Counsel (included in their opinion filed as Exhibit 5.1)...
24.1** Powers of Attorney....................................................
27.1* Financial Data Schedule...............................................
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
<PAGE> 1
UNDERWRITING AGREEMENT
_______________, 1996
R.T.G. Richards & Company, Inc.
As Representative of the Several Underwriters
100 Quentin Roosevelt Blvd.
Suite 502
Garden City, New York 11530
Dear Sirs:
All American Food Group, Inc., a New Jersey corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the several underwriters named in Schedule I hereto, for whom
R.T.G. Richards & Company, Inc. ("R.T.G. Richards") is acting as the
Representative (the "Underwriters"), 1,100,000 shares of the common stock, no
par value (the "Common Stock") of the Company (the "Firm Shares"). In
addition, solely for the purpose of covering over-allotments, the Company
proposes to grant to you the option to purchase up to 110,000 additional shares
of Common Stock (the "Additional Shares"). The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "Shares". The Shares
are more fully described in the Registration Statement and Prospectus referred
to below. Unless the context otherwise requires, references herein to "you" are
to the Underwriters collectively, through R.T.G. Richards.
The Company confirms as follows its agreement with you:
1. REGISTRATION STATEMENT AND PROSPECTUS: The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission"), in
accordance with the Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder (the "Rules and
Regulations", and together with said Act, the "Act"), a registration statement
on Form SB-2 (File No. 333-4490) and may have filed one or more amendments
thereto, including in such registration statement and in certain amendments
thereto a related preliminary prospectus for the registration under the Act of
the Shares. In addition, subject to the provisions of Section 4(e) hereof, the
Company has filed or will promptly file a further amendment to such
registration statement prior to the effectiveness of such registration
statement, unless an amendment is not required pursuant to Rule 430A of the
Rules and Regulations. As used in this Agreement, the term "Registration
Statement" means such registration statement, including the prospectus,
financial statements and schedules thereto, exhibits and other documents filed
as part thereof, as amended when, and in the form in which, it is declared
effective by the Commission, and, in the event any post-effective amendment
thereto is filed thereafter and on or before the Closing Date (ashereinafter
defined), shall also mean (from and after the date such post-effective
amendment is effective under the Act) such registration statement as so
amended, provided that such Registration Statement, at the time it becomes
effective, may omit such information as is permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A of the
Rules and Regulations, which information ("Rule 430 Information") shall be
deemed to be included in such Registration Statement when a final prospectus is
filed with the Commission in accordance with Rules 430A and 424(b)(1) or (4) of
the Rules and Regulations; the term "Preliminary Prospectus" means each
prospectus included in the Registration Statement, or any amendments thereto,
before it becomes effective under the Act, the form of prospectus omitting Rule
430A Information included in the Registration
<PAGE> 2
Statement when it becomes effective, if applicable (the "Rule 430A
Prospectus"), and any prospectus filed by the Company with your consent
pursuant to Rule 424(a) under the Act; the term "Prospectus" means the final
prospectus included as part of the Registration Statement, except that (i) if
any prospectus (including any preliminary prospectus) which differs from such
prospectus included in the Registration Statement is provided to you for use in
connection with the offering of the Shares (whether or not such differing
prospectus is required to be filed by the Company pursuant to Rule 424(b) under
the Act), the term "Prospectus" as used herein shall mean such differing
prospectus from and after the date on which it shall have been first used, and
(ii) in the event any supplement to or amendment of such prospectus is made
after the date on which the Registration Statement is declared effective and on
or prior to the Closing Date, the term "Prospectus" shall also mean (with
respect to any supplement, from and after the date such supplement is first
used or, with respect to any amendment, the date such amendment is effective
under the Act) such prospectus as so supplemented or amended; and the term
"Effective Date" means (i) if the Company and you have determined not to
proceed pursuant to Rule 430A under the Act, the date on which the Registration
Statement becomes effective, or (ii) if the Company and you have determined to
proceed pursuant to Rule 430A under the Act, the date of this Agreement.
2. AGREEMENTS TO SELL AND PURCHASE: Subject to the terms and
conditions herein set forth, the Company agrees to sell to you and each of you
agree, severally and not jointly, to purchase from the Company, at a purchase
price of $_____ per Firm Share, the number of Shares (to be adjusted by you so
as to eliminate fractional shares) determined by multiplying the aggregate
number of Firm Shares to be sold by a fraction, the numerator of which is the
aggregate number of Firm Shares to be purchased by each of you as set forth
opposite your respective names in Schedule I hereto and the denominator of
which is the aggregate number of Firm Shares to be purchased hereunder.
Subject to the terms and conditions herein set forth, the Company
further agrees to sell to you, and you shall have the right to purchase from
the Company, up to 165,000 Additional Shares at a purchase price of $_____ per
Additional Share. Additional Shares may be purchased solely for the purpose of
covering over-allotments made in connection with the offering of the Firm
Shares. If any Additional Shares are to be purchased, each of you, severally,
agrees to purchase from the Company that proportion (subject to such
adjustments as you may both determine to avoid fractional Additional Shares) of
the number of Additional Shares to be purchased which the number of Firm Shares
set forth opposite your name in Schedule I bears to the aggregate number of
Firm Shares to be purchased from the Company hereunder. Additional Shares may
be purchased at any time and from time to time on or before the thirtieth day
following the date of this Agreement upon written notice from you to the
Company specifying the number of Additional Shares to be purchased.
You will offer the Shares for sale at the initial public offering
price set forth on the cover of the Prospectus. After the initial public
offering, you may from time to time increase or decrease the public offering
price, in your sole discretion, by reason of changes in general market
conditions or otherwise.
3. DELIVERY AND PAYMENT: Delivery of and payment for the Firm Shares
shall be made at 10:00 A.M., New York City time, on _ ______________, 1996
(such time and date are referred to herein as the "Closing Date"), at the
offices of _____________ at ___________________________________________________.
Delivery of and payment for Additional Shares shall be made at said
offices of ___________, or at such other place, and at such time(s) and date(s)
(each an "Optional Closing Date") as may be agreed upon in writing by you and
the Company; provided, however, that in no event may an Optional Closing
2
<PAGE> 3
Date be (i) earlier than the Closing Date, or (ii) earlier than three or later
than ten business days after the date on which the related notice to purchase
Additional Shares is given, or (iii) earlier than the fifth business day
following the Closing Date or the most recent Optional Closing Date.
The Closing Date, the Optional Closing Date and the time and place of
delivery of and payment for the Shares and Additional Shares may be varied by
agreement between you and the Company. Delivery of certificates for the Shares
(in definitive form, registered in such names and in such denominations as you
shall request at least two business days prior to the Closing Date by written
notice to the Company) shall be made to you against payment of the purchase
price therefor by certified or official bank check or checks payable in New
York Clearing House funds to the order of the Company. For the purpose of
expediting the checking and packaging of certificates for the Shares, the
Company agrees to make such certificates available for inspection at the
offices of __________ at least 24 hours prior to the Closing Date and each
Optional Closing Date, as the case may be.
On the Closing Date, at the time of the delivery and payment for the
Firm Shares, the Company shall (i) pay to R.T.G. Richards as a non-accountable
expense allowance a sum equal to $.________ per Share for each Firm Share
purchased by the Underwiters hereunder (or an aggregate of $__________________
in respect of the Firm Shares), less the $65,000 heretofore paid in respect
thereof, by certified or official bank check or checks payable in New York
Clearing House funds payable to the order of, and in accordance with
instructions from, R.T.G. Richards, and (ii) issue, sell and deliver to R.T.G.
Richards, for an aggregate purchase price of $110, warrants to purchase up to
an aggregate of 110,000 Shares (as the context requires, together with the
Underwriter's Warrant Agreement in connection therewith, the "Underwriter's
Warrants") in substantially in the form filed as an exhibit to the Registration
Statement. The shares of Common Stock issuable upon exercise of the
Underwriter's Warrants are hereinafter referred to collectively as the
"Underwriter's Warrants Shares". The Underwriter's Warrants will be exercisable
at an initial exercise price of $____ per Share at any time and from time to
time, in whole or in part, during a five-year period commencing one year
following the Effective Date. The Company has granted R.T.G. Richards certain
registration rights with respect to the Underwriter's Warrants and the
securities issuable upon exercise thereof, as set forth in said Underwriter's
Warrants.
On each Optional Closing Date, at the time of the delivery and payment
for the Additional Shares, the Company shall pay to R.T.G. Richards as a
non-accountable expense allowance, a sum equal to $.___ per Additional Share
for each Additional Share purchased by the Underwriters on such date by
certified or official bank check or checks payable in New York Clearing House
funds payable to the order of, and in accordance with instructions from, R.T.G.
Richards.
4. COVENANTS AND AGREEMENTS OF THE COMPANY: (A) The Company
covenants and agrees with you as follows:
(a) The Company will notify you promptly by telephone and (if
requested by you) will confirm such advice in writing, (1)
when the Registration Statement has become effective and when
any post-effective amendment thereto becomes effective, (2) if
Rule 430A under the Act is used, or the Prospectus is
otherwise required to be filed with the Commission pursuant to
Rule 424(b) under the Act, when the Prospectus is filed with
the Commission pursuant to Rule 424(b) under the Act, (3) of
any request by the Commission for amendments or supplements to
the Registration Statement or the Prospectus or for additional
information, (4) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration
Statement, preventing or suspending the
3
<PAGE> 4
use of the Preliminary Prospectus, the Prospectus, the
Registration Statement or any amendment or supplement thereto,
or refusing to permit the effectiveness of the Registration
Statement ("Stop Order"), or the initiation of any proceedings
for any of those purposes, (5) of the happening of any event
during the period mentioned in paragraph (f) below which in
the reasonable judgment of the Company makes any statement
made in the Registration Statement or the Prospectus untrue or
which requires the making of any changes in the Registration
Statement or the Prospectus in order to make the statements
therein not misleading, and (6) of the receipt of any comments
from the Commission or the Blue Sky or securities authorities
of any jurisdiction regarding the Registration Statement, any
post-effective amendment thereto, the Preliminary Prospectus,
the Prospectus, or any amendment or supplement thereto. The
Company will use its best efforts to prevent the issuance of
any Stop Order by the Commission or any notification from the
Blue Sky or securities authorities of any jurisdiction
suspending the qualification or registration of the Shares for
sale in such jurisdictions, and if at any time the Commission
shall issue any Stop Order, or if the Blue Sky or securities
authorities of any jurisdiction shall issue notification
suspending the qualification or registration of the Shares,
the Company will make every reasonable effort to obtain the
withdrawal of such Stop Order or notification at the earliest
possible moment. The Company will promptly advise you of its
receipt of any notification with respect to the suspension of
the qualification or registration of the Shares for offer or
sale in any jurisdiction or the initiation or threatening of
any action or proceeding for such purpose.
(b) Prior to any public offering of the Shares by you, the Company
will cooperate with you and your counsel in registering or
qualifying the Shares for offer or sale under the Blue Sky or
securities laws, rules or regulations of such jurisdictions as
you may reasonably request; provided that in no event shall
the Company be obligated to register or qualify to do business
as a foreign corporation in any jurisdiction where it is not
now so registered or qualified or to take any action which
would subject it to general service of process, or to taxation
as a foreign corporation doing business, in any jurisdiction
where it is not now so subject. The Company will pay all fees
and expenses relating to the registration or qualification of
the Shares under such Blue Sky or securities laws of such
jurisdictions as you may designate (including the legal fees,
expenses and disbursements of your counsel for the
registration or qualification of the Shares in such
jurisdictions as you shall determine). After registration,
qualification or exemption of the Shares for offer and sale in
such jurisdictions, and for as long as any offering pursuant
to this Agreement continues, the Company, at your reasonable
request, will file and make such statements or reports, and
pay the fees applicable thereto, at such times as are or may
be required by the laws, rules or regulations of such
jurisdictions in order to maintain and continue in full force
and effect the registration, qualification or exemption for
offer or sale of the Shares in such jurisdictions. After the
termination of the offering contemplated hereby, and as long
as any of the Shares are outstanding, the Company will use its
best efforts to file and make, and pay all fees applicable
thereto, such statements and reports and renewals of
registration as are or may be required by the laws, rules or
regulations of such jurisdictions to maintain and continue in
full force and effect the registration, qualification or
exemption for secondary market transactions in the Shares, in
the various jurisdictions in which the Shares were originally
registered, qualified or exempted for offer or sale.
4
<PAGE> 5
(c) The Company will furnish to you, without charge, four
manually-signed copies of the Registration Statement as
originally filed on Form SB-2 and of any amendments (including
post-effective amendments thereto), including financial
statements and schedules, if any, and all consents,
certificates and exhibits (including those incorporated
therein by reference to the extent not previously furnished to
you), heretofore or hereafter made, signed by or on behalf of
its officers whose signatures are required thereon and a
majority of its board of directors.
(d) The Company will use its best efforts to cause the
Registration Statement to become effective under the Act.
Upon such effectiveness, if the Company and you have
determined not to proceed pursuant to Rule 430A under the Act,
the Company will timely file a Prospectus pursuant to, and in
conformity with, Rule 424(b), if required, and if the Company
and you have determined to proceed pursuant to Rule 430A under
the Act, the Company will timely file a Prospectus pursuant
to, and in conformity with, Rules 424(b) and 430A under the
Act.
(e) The Company will give you and your counsel advance notice of
its intention to file any amendment to the Registration
Statement or any amendment or supplement to the Prospectus,
whether before or after the effective date of the Registration
Statement, and will not file any such amendment or supplement
unless the Company shall have first delivered copies of such
amendment or supplement to you and your counsel, and you and
its counsel shall have given your consent to the filing of
such amendment or supplement, which consent shall not be
unreasonably withheld or delayed. Any such amendment or
supplement shall comply with the Act.
(f) From and after the Effective Date, the Company will deliver to
you, without charge, as many copies of the Prospectus or any
amendment or supplement thereto as you may reasonably request.
The Company consents to the use of the Prospectus or any
amendment or supplement thereto by you and by all dealers to
whom the Shares may be sold, both in connection with the
offering or sale of the Shares and for such period of time
thereafter as the Prospectus is required by law to be
delivered in connection therewith. If during such period of
time any event shall occur which in the reasonable judgment of
you or your counsel should be set forth in the Prospectus in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading, or
if it is necessary to supplement or amend the Prospectus to
comply with law, the Company will forthwith prepare and duly
file with the Commission an appropriate supplement or
amendment thereto, and will deliver to you, without charge,
such number of copies thereof as you may reasonably request.
(g) The Company will promptly pay all expenses in connection with
(1) the preparation, printing, filing, distribution and
mailing (including, without limitation, express delivery
service) of the Registration Statement, each preliminary
prospectus, the Prospectus, and the preliminary and final
forms of Blue Sky memoranda (if any); (2) the issuance and
delivery of the Shares; (3) the fees and expenses of legal
counsel and independent accountants for the Company relating
to, among other things, opinions of counsel, audits, review of
unaudited financial statements and cold comfort review; (4) the
fees and expenses of a registrar or transfer agent for the
Common Stock; (5) the printing, filing,
5
<PAGE> 6
distribution and mailing (including, without limitation,
express delivery service) of this Agreement and the Selected
Dealer Agreement; (6) furnishing such copies of the
Registration Statement, the Prospectus and any preliminary
prospectus, and all amendments and supplements thereto, as may
reasonably be requested for use in connection with the
offering and sale of the Shares by you or by dealers to whom
Shares may be sold; (7) any fees and communication expenses
with respect to filings required to be made by you with the
National Association of Securities Dealers Regulation, Inc.
(the "NASDR"); and (8) the listing of the Shares on the Nasdaq
SmallCap market.
(h) On the Closing Date, the Company shall sell to R.T.G.
Richards, the Underwriter's Warrants to purchase 110,000
Shares for an aggregate purchase price of $110.
(i) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than by notice given by you
pursuant to Section 8 hereof) or if for any reason the Company
shall be unable to perform its obligations hereunder, unless
such termination or inability to perform is due, in whole or
in material part, to the default, omission, action or failure
of yours, the Company will reimburse R.T.G. Richards for all
of its out-of-pocket expenses (including the fees and expenses
of its counsel) reasonably incurred by it in connection
herewith through the date of such termination, less the
$65,000 advance paid in respect thereof. In the event such
advance exceeds such accountable out-of-pocket expenses, the
difference shall be refunded to the Company.
(j) Other than securities issued pursuant to, or the issuance of
which is contemplated by, the Registration Statement, for a
period of nine months following the effective date of the
Registration Statement, the Company will not issue more than
150,000 shares of its Common Stock, which shares will be
issued only for the purpose of satisfying vendor debt, and for
the ensuing 15 months (for a total of 24 months following the
effective date), the Company will not issue securities which,
when aggregated with any shares issued in satisfaction of
vendor debt pursuant to the foregoing clause, represent more
than 10% of the number of shares of Common Stock issued and
outstanding immediately prior to the effective date of the
Registration Statement, except with your prior written
consent, which will not unreasonably be withheld or delayed.
(k) On or prior to the Closing Date, the Company shall obtain and
provide to you the Lock-up Letters (the "Lock-up Letters")
described in the Prospectus.
(l) The Company has reserved and, so long as the Underwriter's
Warrants remain exercisable in accordance with their terms
shall continue to reserve and keep available the maximum
number of shares of its authorized but unissued Common Stock
and other securities which are issuable upon exercise of the
Underwriter's Warrants.
(m) For a period of five years after the date of this Agreement,
the Company shall:
(1) retain DelSanto and DeFreitas or another firm of
independent public accountants, reasonably acceptable
to you, as its auditors, and at its own expense,
shall cause such independent certified public
accountants to review (but not audit) the Company's
financial statements and those of its subsidiaries
for each of the first three fiscal quarters of each
fiscal year prior to the announcement of quarterly
financial information, the filing of the Company's
10-Q quarterly reports and the mailing of quarterly
financial information to its stockholders;
6
<PAGE> 7
(2) cause the Company's Board of Directors to meet not
less frequently than twice in each calendar year,
upon proper notice for each such meeting to be
distributed to directors prior to such meeting (or
upon proper waiver of such notice), together with
minutes of the preceding meeting, provided that if
not practicable, such minutes shall be distributed as
soon thereafter as is reasonably possible;
(3) distribute to its security holders, within 120 days
after the end of each fiscal year, or such longer
period as may be permitted by applicable law, an
annual report (containing certified financial
statements of the Company and its subsidiaries)
prepared in accordance with those required under Rule
14a-3(b) of Regulation 14A promulgated by the
Commission under the Securities Exchange Act of 1934,
as amended; and
(4) appoint Continental Stock Transfer and Trust Company
or another transfer agent reasonably acceptable to you
as transfer agent for the Common Stock and warrant
agent for the Warrants, in each case reasonably
acceptable to you.
(n) For a period of five years after the date of this Agreement,
the Company shall furnish you, free of charge, with the
following:
(1) within 90 days after the end of each fiscal year,
financial statements for the Company and its
subsidiaries certified by the independent certified
public accountants referred to in Section 4(m)(1)
above, including a balance sheet, statement of
operations, statement of stockholders' equity and
statement of cash flows, in each case for the Company
and its subsidiaries, with supporting schedules,
prepared in accordance with generally accepted
accounting principles, as at the end of such fiscal
year and for the twelve months then ended,
accompanied by a copy of the certificate or report
thereon of such independent certified public
accountants;
(2) (x) for so long as the Company is a reporting company
under any of Sections 12(b), 12(g) or 15(d) of the
Securities Exchange Act, as amended, and the rules
and regulations of the Commission promulgated
thereunder (collectively, the "Exchange Act"),
promptly after filing with the Commission, copies of
all reports and proxy soliciting material which the
Company is required to file under the Exchange Act,
or (y) at such times as the Company is not a
reporting company under the aforesaid provisions of
the Exchange Act, as soon as practicable after the
end of each of the first three fiscal quarters of
each fiscal year, financial statements of the Company
and its subsidiaries, including a balance sheet,
statement of operations, statement of stockholders'
equity and statement of cash flows as at the end of,
or for each such fiscal quarter and the comparable
period of the preceding year, which statements need
not be audited;
(3) as soon as practicable after they have first been
distributed to stockholders of the Company, copies of
each annual and interim financial or other report or
communication sent by the Company to its stockholders
(except to the extent duplicative of information
furnished pursuant to any other clause of this
Section 4(n));
7
<PAGE> 8
(4) as soon as practicable following release or other
dissemination, copies of every press release and
every material news item and article in respect of
the Company or its affairs released or otherwise
disseminated by the Company;
(5) such additional documents and information with
respect to the Company and its affairs and the
affairs of its subsidiaries, if any, as you may from
time to time reasonably request.
(o) The Company agrees to expand its Board of Directors from three
(3) to no more than five (5) members within thirty (30) days
following the Effective Date, at least two (2) of which
members will be unaffiliated with the Company; and that for a
period of five years after the date of this Agreement, to use
its best efforts to cause the Company's Board of Directors to
nominate a designee of you for election to the Company's Board
of Directors, and to solicit proxies for the election of such
designee as a director of the Company, so long as, during such
time, you elects to select such a designee and such designee
otherwise meets the qualification for election as director of
the Company. At least 60 days prior to the earlier of any
election of the Board of Directors or the commencement of any
solicitation of proxies for such election, the Company shall
notify you of the date of such election or of the commencement
of such solicitation. You shall have the right to furnish
written notice to the Company of the name of the person
designated by you to serve as director no more than 30 days
following receipt of such notice. In the absence of such
notice from you, the director then serving and previously
designated by you, if any, shall be nominated and shall stand
for reelection. In the event you shall choose not to
designate a representative for election to the Company's Board
of Directors, a representative designated by you shall be duly
authorized to attend all meetings of the Company's Board of
Directors in a nonvoting observer capacity and, in such event,
the Company shall give such representative copies of all
notices, minutes, consents, and other materials that it
provides its directors; provided, however, that such
representative shall agree to hold in confidence and trust and
to act in a fiduciary manner with respect to all information
so provided. If the Company maintains a liability insurance
policy offering coverage for acts or omissions of its officers
and directors, it agrees to include your designee as an
insured under such policy.
(p) On or prior to the Effective Date, the Company will have
obtained the listing of the Shares on the Nasdaq SmallCap
Market, subject only to notice of issuance and the
registration of such securities under the Exchange Act. For a
period of five years from the date of this Agreement, the
Company agrees, at its sole cost and expense, to use its best
efforts to ensure that its securities continue to be listed on
the Nasdaq SmallCap Market (or such other market or exchange
to which you reasonably consents), provided that the Company
otherwise complies with the prevailing requirements for such
listing.
(q) For a period of twenty-four (24) months after the date of this
Agreement the Company will not seek to amend its certificate
of incorporation to authorize the issuance
8
<PAGE> 9
of any other class of its capital stock, including, without
limitation, any preferred stock, without your prior written
consent, which consent shall not be unreasonably withheld or
delayed.
(r) As soon as practicable after the date of this Agreement, the
Company shall apply for listing in Standard and Poor's
Corporate Record Service and Annual Report Service and ensure
the Company's continued listing for a period of not less than
five years, provided that the Company's otherwise complies
with prevailing requirements for such listing.
(s) The Company agrees, at its own cost and expense, to deliver to
you and its counsel, within a reasonable period after the last
Optional Closing Date, or the expiration of the period in
which you may exercise the over-allotment option, two bound
volumes containing copies of all documents and correspondence
filed with, or received from, the Commission and the NASDR
relating to the offering of the Shares and the closing
thereof, including related matters. In addition, the Company
shall bear the costs of such "tombstone" advertisements as you
may reasonably request and of 12 "embodiments."
(t) The Company will make generally available to its security
holders and deliver to you as soon as it is practicable to do
so (but in no event later than the 45th day after the end of
the twelve-month period beginning at end of fiscal quarter of
the Company during which the Registration Statement
becomes effective, or, if the Registration Statement becomes
effective during the Company's last fiscal quarter, the 90th
day after the end of such twelve-month period), an earnings
statement of the Company and its subsidiaries (which need not
be audited) covering a period of at least twelve consecutive
months commencing after the effective date of the Registration
Statement, which shall satisfy the requirements of Section
11(a) of the Act.
(u) The Company will, promptly upon your reasonable request,
prepare and file with the Commission any amendments or
supplements to the Registration Statement, any Preliminary
Prospectus or the Prospectus and take any other action, which
in the reasonable opinion of Lehman & Eilen, counsel to you,
may be reasonably necessary or advisable in connection with
the distribution of the Shares, and will use its best efforts
cause the same to become effective as promptly as reasonably
possible.
(v) The Company will furnish to you as early as practicable prior
to the Closing Date and any Optional Closing Date, as the case
may be, but no less than two full business days prior thereto,
a copy of the latest available unaudited interim financial
statements of the Company and its subsidiaries which have been
reviewed by the Company's independent certified public
accountants, as stated in their letters to be furnished
pursuant to Section 7(e) hereof; provided, however, that if
that latest available unaudited interim financial statements
theretofore have been included in the Registration Statement,
a Preliminary Prospectus, a Rule 430A Prospectus or a
Prospectus previously filed with the Commission, no additional
financial statements need be furnished pursuant hereto. Any
such financial statements will be on a consolidated basis to
the extent the accounts of the
9
<PAGE> 10
Company and its subsidiaries are generally consolidated in
reports furnished to the Company's stockholders.
(w) The Company will apply the net proceeds from the issuance and
sale of the Shares for the purposes and in the manner set
forth under the caption "Use of Proceeds" in the Prospectus,
and will file on a timely basis such reports with the
Commission with respect to the sale of the Shares and the
application of the proceeds therefrom as may be required
pursuant to Rule 463 under the Act. The Company will operate
its business in such a manner and, pending application of the
net proceeds of the offering for the purposes andin the manner
set forth under the caption "Use of Proceeds" in the
Prospectus, will invest such net proceeds in certain types of
securities so as not to become an "investment company" as such
term is defined under the Investment Company Act of 1940, as
amended (the "Investment Company Act").
(x) The Company has filed a registration statement on Form 8-A
covering the Shares pursuant to Section 12(b) of the Exchange
Act and will use its best efforts to cause said registration
statement to become effective on the Effective Date. The
Company will comply with all registration, filing and
reporting requirements of the Exchange Act, which may from
time to time be applicable to the Company. The Company shall
comply with the provisions of all undertakings contained in
the Registration Statement.
(y) Prior to the Closing Date or any Optional Closing Date, as the
case may be, the Company shall neither issue any press release
or other communication, directly or indirectly, nor hold any
press conference with respect to the offering of the Shares,
the Company, its subsidiaries or its business, results of
operations, condition (financial or otherwise), property,
assets, liabilities or prospects of the Company or any of its
subsidiaries, without the prior written consent of you, which
consent shall not unreasonably be denied or delayed; provided,
however, that if counsel to the Company is of the opinion that
the issuance of a press release or other communication or a
press conference is required to comply with or avoid a
violation of applicable law, and having been so informed you
decline to consent thereto, the Company shall be permitted to
issue such press release or other communication or hold such
press conference in the manner advised by its counsel.
(z) For a period of ninety (90) days after the date hereof, the
Company will not, directly or indirectly, take any action
designed, or which will constitute or which might reasonably
be expected to cause or result in, stabilization or
manipulation of the market price of the Shares, or the
facilitation of the sale or resale of the Shares.
(aa) Neither the Company nor any of its subsidiaries will grant any
person or entity registration rights with respect to any of
its securities, except such rights as are subordinate to the
registration rights contained in the Underwriter's Warrant
Agreement and are exercisable no earlier than six months after
the securities to be registered upon exercise of such
registration rights have been offered for sale pursuant to an
effective registration statement under the Act and registered
or qualified for sale under the Blue Sky or state securities
law, rules or regulations of the jurisdictions in which such
securities are to be offered for sale.
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<PAGE> 11
(bb) The Company hereby agrees to retain R.T.G. Richards for a
period of three (3) years following the Closing Date to
provide consultations, discussions and analysis of financial,
market and industry matters at an annual fee of $30,000, such
fee to be due and payable in full on the Closing Date.
(cc) The Company hereby agrees to enter into a Merger and
Acquisition Agreement with R.T.G. Richards pursuant to which
R.T.G. Richards will receive a finder's fee ranging from 10%
of the first $1,000,000, 5% of the next $1,000,000, 4% of the
next $1,000,000, 3% of the next $1,000,000 and 2% of any
excess over $4,000,000 of the consideration involved in any
transaction involving the Company introduced by R.T.G.
Richards and consummated with three years following the
closing of the Offering.
(dd) The Company hereby agrees as promptly as practicable to obtain
Key Man Life Insurance on the life of Andrew Thorburn, payable
to the Company, in the amount of $4,000,000, or such lesser
amount as is the maximum obtainable for an annual premium not
to exceed $7,500. The Company shall cause such Key Man
Insurance to be maintained in force until the second
anniversary of the Closing Date; provided, however, that the
amount thereof may be reduced by the amount necessary to
maintain the annual premium at not more than $7,500.
(ee) The Company hereby agrees, that for a period of three years
following the Closing Date, promptly upon request therefor, it
will provide to you, free of charge, copies of the Company's
daily transfer sheets prepared by the Company's transfer agent
and a list of the Company's stockholders.
(ff) The Company hereby agrees to retain a public relations firm
reasonably acceptable to you to provide financial public
relations advice and assistance in a manner reasonably
acceptable to you and, until the fifth anniversary of the
Closing Date (or such earlier date on which R.T.G. Richards
shall cease to own any Underwriter's Warrants or shares
of Common Stock issued in respect thereof), to continue to
retain such firm or another firm reasonably acceptable to you
to provide such financial public relations advice and
assistance.
(gg) The Company hereby agrees that, during the period ending
December 31, 1997, it will not, without your prior consent,
increase the compensation paid or payable, or grant any stock
options, to any executive officer of the Company, except
pursuant to the Company's Stock Option Plan as described in
the Registration Statement.
(hh) The Company hereby agrees that, until the fifth anniversary of
the Closing (or such earlier date on which R.T.G. Richards
shall cease to own any Underwriter's Warrants or shares
of Common Stock issued in respect thereof), the Company will
consult with R.T.G. Richards concerning, and furnish to it
for its review, copies of any financial information,
news releases and/or other publicity regarding the Company,
its business, or any terms of any proposed offering of the
Company's securities, before disclosing such information,
releases, publicity or terms to any third party.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY: (A) The Company
represents and warrants to you that:
(a) When the Registration Statement becomes effective, and at all
times subsequent thereto to and including the Closing Date and
each Optional Closing Date, and during such longer period as
the Prospectus may be required to be delivered in connection
with sales by you or any dealer, and during such longer period
until any post-effective amendment thereto shall become
effective, the Registration Statement (and any post-effective
amendment thereto) and the Prospectus (as amended or as
supplemented if the Company shall have filed with the
Commission any amendment or supplement to the Registration
Statement or the Prospectus) will contain all material
statements which are required to be stated therein in
accordance with the Act, will comply in all material respects
with the Act, and will not contain any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein
not misleading, and no event will have occurred which should
have been set forth in an amendment or supplement to the
Registration Statement or the Prospectus which has not then
been set forth in such an amendment or supplement; if a Rule
430A Prospectus is included in the Registration Statement at
the time it becomes effective, the Prospectus filed pursuant
to Rules 430A and 424(b) (1) or (4) will contain all Rule 430A
Information and all statements which are required to be stated
therein in accordance with the Act, will comply in all
material respects with the Act, and will not contain any
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading; and each
Preliminary Prospectus, as of the date filed with the
Commission, did not include any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not
misleading; except that no representation or warranty is made
in this Section 5(A)(a) with respect to statements or
omissions made in reliance upon and in conformity with written
information furnished to the Company as stated in Section 6(b)
with respect to you expressly for inclusion in any Preliminary
Prospectus, the Registration Statement, or the Prospectus, or
any amendment or supplement thereto.
(b) Neither the Commission nor the Blue Sky or securities
authorities of any jurisdiction has issued an order suspending
the effectiveness of the Registration Statement, preventing or
suspending the use of any Preliminary Prospectus, the
Prospectus, the Registration Statement, or any amendment or
supplement thereto, refusing to permit the effectiveness
11
<PAGE> 12
of the Registration Statement, or suspending the registration
or qualification of the Shares, nor has the Commission or any
of such authorities instituted or, to the knowledge of the
Company, threatened to institute any proceedings with respect
to such an order.
(c) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of New Jersey, its
jurisdiction of incorporation. The Company and each of its
subsidiaries have full corporate power and authority and has
obtained all necessary consents, authorizations, approvals,
orders, licenses, certificates, declarations and permits of
and from, and have made all required filings with, all
federal, state, local and other governmental authorities and
all courts and other tribunals, to own, lease, license and use
their properties and assets and to carry on their respective
businesses in the manner described in the Prospectus, except
where the failure to do so will not have a material adverse
effect on the business, properties or financial condition of
the Company and its subsidiaries, taken as a whole. All such
consents, authorizations, approvals, orders, licenses,
certificates, declarations, permits and filings are in full
force and effect and the Company and/or its subsidiaries, are
in all material respects complying therewith. The Company and
its subsidiaries are duly registered or qualified to do
business as foreign corporations and are in good standing in
each other jurisdiction in which their ownership, leasing,
licensing, or use of property and assets or the conduct of
their respective businesses require such registration or
qualification, except where the failure to be so qualified
does not have a material adverse effect on the business,
properties or financial condition of the Company and its
subsidiaries, taken as a whole.
(d) The authorized capital stock of the Company consists of
____________ shares of Common Stock, of which _____________
shares are outstanding and ____________ shares of Preferred
Stock, of which _____________ shares are outstanding. Each
outstanding share of capital stock of the Company and each
subsidiary of the Company, is duly authorized, validly issued,
fully paid, and nonassessable, without any personal liability
attaching to the ownership thereof, and has not been issued
and is not owned or held in violation of any preemptive rights
of stockholders. There is no commitment, plan or arrangement
to issue, and no outstanding option, warrant or other right
calling for the issuance of, any share of capital stock of the
Company, or that of any of its subsidiaries or any security or
other instrument which by its terms is convertible into,
exercisable for, or exchangeable for capital stock of the
Company or that of any of its subsidiaries, except as
disclosed in the Prospectus. There is outstanding no security
or other instrument which by its terms is convertible into or
exchangeable for capital stock of the Company or that of any
of its subsidiaries, except as disclosed in the Prospectus.
(e) The financial statements of the Company and its subsidiaries,
together with the related notes and schedules, included in the
Registration Statement and the Prospectus fairly present the
financial position, the results of operations and the other
information purported to be shown therein at the respective
dates and for the respective periods to which they apply.
Such financial statements have been prepared in accordance
with generally accepted accounting principles and are prepared
in accordance with the books and records of the Company and
its subsidiaries. The accountants whose reports on the
audited financial statements are filed with the Commission as
a part of the Registration Statement are, and as of the
dates of their report(s) included in the
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<PAGE> 13
Registration Statement and the Prospectus were, independent
certified public accountants with respect to the Company and
its subsidiaries within the meaning of the Act. No other
financial statements are required by Form SB-2 or otherwise to
be included in the Registration Statement or the Prospectus.
Except as disclosed in the Prospectus, there has at no time
been a material adverse change in the condition (financial or
otherwise), results of operations, business, property, assets,
liabilities or prospects of the Company or any of its
subsidiaries from the latest information set forth in the
Registration Statement or the Prospectus.
(f) There is no litigation, arbitration, claim, governmental or
other proceeding (formal or informal), or investigation
pending or threatened (or any basis therefor known to the
Company or any of its subsidiaries) with respect to or
affecting the Company or any of its subsidiaries, their
operation, businesses, property or assets, or related to the
offer for sale or the offer of franchises for the operation of
a Goldberg's Original Old World Bagels or Sammy's New York
Bagels facility, except as disclosed in the Prospectus or such
as individually or in the aggregate do not now have and are
not expected to have a material adverse effect upon the
operations, businesses, property, assets, condition (financial
or otherwise) or prospects of the Company or any of its
subsidiaries. Neither the Company nor any of its subsidiaries
are in violation of, or in default with respect to, any law,
rule, regulation, order, judgment, or decree, except as
disclosed in the Prospectus or such as individually or in the
aggregate do not now have and are not expected to have a
material adverse effect upon the operations, businesses,
property, assets, condition (financial or otherwise) or
prospects of the Company or any of its subsidiaries; nor is
the Company or any of its subsidiaries required to take any
action in order to avoid any such violation or default. At
all times since the Company and its subsidiaries began
offering for sale franchises for the operation of Goldberg's
Original Old World Bagels or Sammy's New York Bagels
facilities, the Company and its subsidiaries have been, and
currently are, in compliance with all material requirements of
all laws, rules and regulations applicable to the offer for
sale or sale of franchises in all jurisdictions in which the
Company and its subsidiaries have offered for sale or sold, or
are offering for sale or proposes to offer or to sell
franchises for the operation of a Goldberg's Original Old
World Bagels or Sammy's New York Bagels facility.
(g) The Company and its subsidiaries have good and marketable
title in fee simple absolute to all real properties and good
title to all other properties and assets which the Prospectus
indicates are owned by them, free and clear of all liens,
security interests, pledges, charges, mortgages and other
encumbrances (except as disclosed in the Prospectus or which
are not material in amount). The properties held under lease
by the Company and its subsidiaries are held by it under valid
and enforceable leases and the interests of the Company and
its subsidiaries in such leases are free and clear of all
liens, encumbrances and defects, except as disclosed in the
Prospectus or which are not material in amount, and the
Company and its subsidiaries are in full compliance with all
material terms and conditions thereunder and such leases are
in full force and effect. No real property owned, leased,
licensed or used by the Company or its subsidiaries is
situated in an area which is, or to the knowledge of the
Company or its subsidiaries will be, subject to zoning, use,
or building code restrictions which would prohibit (and no
state of facts relating to the actions or inaction of another
person or entity or his or its ownership,
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<PAGE> 14
leasing, licensing, or use of any real or personal property
exists or will exist which would prevent) the continued
effective ownership, leasing, licensing, or use of such real
property in the business of the Company or its subsidiaries as
presently conducted or as the Prospectus indicates any of them
contemplate conducting (except as disclosed in the
Prospectus).
(h) Neither the Company nor any of its subsidiaries nor any other
party is now or, to the knowledge of the Company, is expected
by the Company or any of its subsidiaries to be in violation
or breach of, or in default with respect to complying with,
any material provision of any indenture, mortgage, deed of
trust, debenture, note or other evidence of indebtedness,
contract, agreement, instrument, lease or license, or
arrangement or understanding which is material to the Company
and its subsidiaries, taken as a whole, and each such
indenture, mortgage, deed of trust, debenture, note or other
evidence of indebtedness, contract, agreement, instrument,
lease or license is in full force and is the legal, valid and
binding obligation of the Company and/or its subsidiaries, and
to the knowledge of the Company and its subsidiaries, of the
other contracting party and is enforceable as to them in
accordance with its terms. The Company and its subsidiaries
enjoy peaceful and undisturbed possession under all leases and
licenses under which they are operating. Neither the Company
nor any of its subsidiaries is a party to or bound by any
contract, agreement, instrument, lease, license, arrangement
or understanding, or subject to any charter or other
restriction, which has had or is expected in the future to
have a material adverse effect on the condition (financial or
otherwise), results of operations, businesses, property,
assets or liabilities of the Company and its subsidiaries,
taken as a whole. Neither the Company nor any of its
subsidiaries is in violation or breach of, or in default with
respect to, any term of its Certificate of Incorporation or
By-laws.
(i) Goldberg's Original Old World Bagels and Sammy's New York
Bagels are trademarks of the Company. Except for said
trademarks, neither the Company nor any of its subsidiaries
owns or has any licensed rights to, in or under any patents,
patent applications, trademarks, trademark applications, trade
names, service marks, copyrights, technology, know-how or
other intangible properties or assets (all of the foregoing
being herein called "Intangibles") that are material to the
business of the Company and its subsidiaries, taken as a
whole. There is no right under any Intangibles of the Company
or its subsidiaries necessary to the business of the Company
and its subsidiaries as presently conducted or as proposed to
be conducted as indicated in the Prospectus, except as
disclosed in the Prospectus. Neither the Company nor any of
its subsidiaries has received notice of infringement with
respect to asserted Intangibles of others. To the knowledge
of the Company and its subsidiaries, there is no infringement
by others of Intangibles of the Company or its subsidiaries.
To the knowledge of the Company and its subsidiaries, there is
no Intangible of others which has had or may in the future
have a materially adverse effect on the condition (financial
or otherwise), results of operations, businesses, property,
assets, liabilities or prospects of the Company and its
subsidiaries, taken as a whole.
(j) Neither the Company, its subsidiaries, any director or officer
of the Company or its subsidiaries, or to the knowledge of the
Company and its subsidiaries, any agent,
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<PAGE> 15
employee, or other person authorized to act on behalf of the
Company or its subsidiaries has, directly or indirectly: used
any corporate funds of the Company or its subsidiaries for
unlawful contributions, gifts, entertainment, or other
unlawful expenses relating to political activity; made any
unlawful payment to foreign or domestic government officials
or employees or to foreign or domestic political parties or
campaigns from corporate funds of the Company or its
subsidiaries; violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended, as relates to the business
of the Company and its subsidiaries; or made any bribe,
rebate, payoff, influence payment, kickback, or other unlawful
payment in connection with the business of the Company or its
subsidiaries.
(k) The material terms of any contract, agreement, instrument,
lease or license required to be described in the Registration
Statement or the Prospectus have been properly described
therein. Any contract, agreement, instrument, lease or
license required to be filed as an exhibit to the Registration
Statement has been filed with the Commission as an exhibit to
or has been incorporated as an exhibit by reference into the
Registration Statement.
(l) The Company has all requisite corporate power and authority to
execute, deliver and perform under the terms and conditions of
this Agreement and the Underwriter's Warrants. All necessary
corporate proceedings of the Company have been duly taken to
authorize the execution, delivery and performance by the
Company of this Agreement and the Underwriter's Warrants. This
Agreement has been duly authorized, executed and delivered by
the Company, is a legal, valid, and binding agreement of the
Company, and is enforceable as to the Company in accordance
with its terms. The Underwriter's Warrants have been duly
authorized by the Company and, when executed and delivered by
the Company, assuming the due execution and delivery thereof
by the other parties thereto, will be a legal, valid and
binding agreement of the Company, enforceable against the
Company in accordance with its terms. No consent,
authorization, approval, order, license, certificate,
declaration or permit of or from, or filing with, any
governmental or regulatory authority, agent, board or other
body is required for the issue and sale of the Shares by the
Company and the execution, delivery or performance by the
Company of this Agreement or the Underwriter's Warrants (except
filings with and orders of the Commission pursuant to the Act
which have been or will be made or obtained prior to the
Closing Date, and such filings, consents or permits as are
required under Blue Sky or securities laws in connection with
the transactions contemplated by this Agreement). No consent
of any party to any contract, agreement, instrument, lease,
license, arrangement or understanding to which the Company or
any of its subsidiaries are a party, or to which any of their
properties or assets are subject, is required for the
execution, delivery or performance of this Agreement or the
Underwriter's Warrants; and the execution, delivery and
performance of this Agreement and the Underwriter's Warrants
will not violate, result in a breach of, conflict with, or
(with or without the giving of notice or the passage of time
or both) entitle any party to terminate or call a default
under any such contract, agreement, instrument, lease,
license, arrangement or understanding, result in the creation
or imposition of, any lien, security interest, pledge, charge,
or other encumbrance upon any of the property or assets of the
Company or its subsidiaries pursuant to the terms of any
indenture, mortgage, deed of trust, loan or credit agreement,
lease or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or
any of its subsidiaries is bound or to which any
15
<PAGE> 16
of the property or assets of the Company or any of its
subsidiaries are subject or violate or result in a breach of
any term of the Certificate of Incorporation or By-laws of the
Company or any of its subsidiaries, or violate, result in a
breach of, or conflict with any law, rule, regulation, order,
judgment or decree binding on the Company or any of its
subsidiaries or to which any of their operations, businesses,
properties or assets are subject.
(m) The Shares are duly authorized, and when issued, paid for and
delivered in accordance with this Agreement, will be validly
issued, fully paid, and nonassessable, without any personal
liability attaching to the ownership thereof, and will not be
issued in violation of any preemptive rights of stockholders.
You will receive good title to the Shares and R.T.G. Richards
will receive good title to the Underwriter's Warrants purchased
by it, upon payment of the purchase price therefor in
accordance with the provisions thereof and of this Agreement,
free and clear of all liens, security interests, pledges,
charges, encumbrances, stockholders' agreements and
votingtrusts (collectively, "Encumbrances").
(n) The Underwriter's Warrants Shares are duly authorized and
validly reserved for issuance and, when issued, paid for and
delivered upon exercise of the Underwriter's Warrants, in
accordance with the provisions thereof and of this Agreement
will be validly issued, fully paid and nonassessable and will
not be issued in violation of any preemptive rights of
stockholders; and the holders of the Underwriter's Warrants
Shares will receive good title to them, free and clear of all
Encumbrances.
(o) The Shares and the Underwriter's Warrants conform to all
statements relating thereto contained in the Registration
Statement and the Prospectus.
(p) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, and except as
otherwise may be stated therein, (i) neither the Company, nor
its subsidiaries have entered into any transaction or incurred
any liability or obligation, contingent or otherwise, which is
material to the Company and its subsidiaries, taken as a
whole, except in the ordinary course of business, (ii) there
has not been any change in the outstanding capital stock of
the Company or its subsidiaries, or any issuance of options,
warrants or rights to purchase the capital stock of the
Company or its subsidiaries, or any material increase in the
long-term debt of the Company or its subsidiaries, or any
material adverse change in the business, condition (financial
or otherwise) or results of operations of the Company or its
subsidiaries, (iii) no loss or damage (whether or not insured)
to the properties of the Company or its subsidiaries has been
sustained which is material to the Company and its
subsidiaries, taken as a whole, (iv) neither the Company nor
its subsidiaries have paid or declared any dividend or other
distribution with respect to their stock, and (v) there has
not been any change, contingent or otherwise, in the direct or
indirect control of the Company or its subsidiaries nor, to
the best knowledge of the Company and its subsidiaries, do
there exist any circumstances which would likely result in
such a change.
(q) Neither the Company, its subsidiaries, nor any officers or
directors of the Company or its subsidiaries or Affiliates (as
defined in Rule 405 of the Rules and Regulations), has taken
or will take, directly or indirectly, prior to the termination
of the offering
16
<PAGE> 17
contemplated by this Agreement, any action designed to
stabilize or manipulate the price of any security of the
Company, or which has caused or resulted in, or which might in
the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any security of
the Company, to facilitate the sale or resale of any of the
Shares.
(r) Neither the Company nor its subsidiaries, have incurred,
directly or indirectly, any liability for a fee, commission or
other compensation on account of the employment of a broker or
finder in connection with the offering of the Shares
contemplated by this Agreement.
(s) The Company is not conducting, and does not intend to conduct,
its business in a manner in which it would become an
"investment company" as defined in Section 3(a) of the
Investment Company Act.
(t) The Company has obtained, or prior to the Closing Date will
obtain the Lock-up Letters, as contemplated by Section 4(k)
hereof.
(u) The Company has retained, or prior to or on the Closing Date
shall have retained, R.T.G. Richards in a financial consulting
capacity, as contemplated by Section 4(bb) hereof.
(v) The Company and R.T.G. Richards have entered into, or prior
to or on the Closing Date shall have entered into, the Merger
and Acquisition Agreement contemplated by Section 4(cc) hereof
(w) The Company has retained a public relations firm as
contemplated by Section 4 (ff) hereof.
(x) Except as disclosed in the Prospectus, no person or entity has
the right to require registration of shares of Common Stock or
other securities of the Company because of the filing or
effectiveness of the Registration Statement who has not waived
such right.
(y) The Company and its subsidiaries have adequately insured their
properties against loss or damage by fire, maintain adequate
insurance against liability for negligence and maintain such
other insurance as is usually maintained by companies engaged
in the same or similar businesses, including product liability
insurance.
(z) The Company and its subsidiaries have filed all federal, state
and local tax returns required to be filed (or have obtained
extensions therefor) and have paid all taxes shown on such
returns and all assessments received by it to the extent that
payment has become due, except federal payroll taxes in the
approximate amount of $________________ . The Company and its
subsidiaries have made adequate accruals for all taxes which
may be owed by them but have not been paid.
(aa) DelSanto & DeFreitas, who have certified certain financial
statements of the Company and its subsidiaries, are
independent public accountants as required by the Act and the
rules and regulations of the Commission thereunder.
(bb) The Company and its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability;
(iii) access to cash and cash equivalents is permitted only in
accordance with management's general or specific
authorization; and (iv) the recorded accountability for cash
and cash equivalents is compared with the existing cash and
cash equivalents at reasonable intervals and appropriate
action is taken with respect to any differences.
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(cc) There are no business relationships or related party
transactions of the nature described in Item 404 of Regulation
S-B of the Rules and Regulations involving the Company, any of
its subsidiaries and any person referred to in Items 401 or
404, except as required to be described in the Prospectus and
as so described.
6. INDEMNIFICATION AND CONTRIBUTION:
(a) The Company agrees to indemnify and hold harmless you, your
officers, directors, partners, employees, agents and counsel,
and each person, if any, who controls you within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act,
against any and all loss, liability, claim, damage, and
expense whatsoever (which shall include, for all purposes of
this Section 6, but not be limited to, attorneys' fees and any
and all expense whatsoever incurred in investigating,
preparing, or defending against any litigation, commenced or
threatened, or any claim whatsoever and any and all amounts
paid in settlement of any claim or litigation) as and when
incurred arising out of, based upon, or in connection with (i)
any untrue statement or alleged untrue statement of a material
fact contained (1) in any Preliminary Prospectus, the Rule
430A Prospectus, the Registration Statement, or the Prospectus
(as from time to time amended and supplemented), or any
amendment or supplement thereto, or (2) in any application or
other document or communication (in this Section 6
collectively called an "application") executed by or on behalf
of the Company or based upon written information furnished by
or on behalf of the Company filed in any jurisdiction in order
to qualify the Shares under the Blue Sky or securities laws
thereof (or the rules and regulations promulgated thereunder)
or filed with the Commission or any securities exchange or
automated quotation system; or any omission or alleged
omission to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading, unless such statement or omission was made in
reliance upon and in conformity with written information
furnished to the Company as stated in Section 6(b) by you for
inclusion in any Preliminary Prospectus, the Rule 430A
Prospectus, the Registration Statement, of the Prospectus, or
any amendment or supplement thereto, or in any application, as
the case may be, provided that the Company will not be liable
pursuant hereto with respect to any such statement or omission
made in any Preliminary Prospectus that is corrected in the
Prospectus (or and amendment or supplement thereto) if the
person asserting such loss, liability, damage, claim or
expense purchased shares from you but was not sent or given a
copy of the Prospectus (as amended or supplemented) at or
prior to the written confirmation of the sale of the Shares to
such person in any case where such delivery is required by the
Act, unless such failure to deliver was the result of
noncompliance, by the Company, with Section 4(f) hereof, or
(ii) any breach of any representation, warranty, covenant or
agreement of the Company contained in this Agreement. The
foregoing agreement to indemnify shall be in addition to any
liability the Company may otherwise have, including
liabilities arising under this Agreement.
If any action is brought against you or any of its officers,
directors, partners, employees, agents or counsel, or any
controlling persons of you (each, an "indemnified party") in
respect of which indemnity may be sought against the Company
pursuant to the foregoing paragraph, such indemnified party or
parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall
not relieve the Company from any liability it may have
pursuant to this Section
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6(a)) and the Company shall promptly assume the defense of such
action, including the employment of counsel (reasonably
satisfactory to such indemnified party or parties) and payment
of expenses. Such indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but
the fees and expenses of such counsel shall be at the sole
expense of such indemnified party or parties, unless the
employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such
action or the Company shall not have promptly employed counsel
reasonably satisfactory to such indemnified party or parties
to have charge of the defense of such action or such
indemnified party or parties shall have reasonably concluded
that there may be one or more legal defenses available to it
or them or to other indemnified parties which are different
from or additional to those available to the Company, in any
of which events such fees and expenses shall be borne by the
Company and the Company shall not have the right to direct the
defense of such action on behalf of the indemnified party or
parties. Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any
settlement of any such claim or action effected without its
prior written consent. The Company agrees promptly to notify
you of the commencement of any litigation or proceedings
against the Company or any of its officers or directors in
connection with the sale of the Shares, any Preliminary
Prospectus, the Rule 430A Prospectus, the Registration
Statement, or the Prospectus, or any amendment or supplement
thereto, or any application.
(b) You agree to indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who shall
have signed the Registration Statement, and each other person,
if any, who controls the Company within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, and each
Selling Shareholder, to the same extent as the foregoing
indemnity from the Company to you in Section 6(a), but only
with respect to statements or omissions, if any, made in any
Preliminary Prospectus, the Rule 430A Prospectus, the
Registration Statement, or the Prospectus (as from time to
time amended and supplemented), or any amendment or supplement
thereto, or in any application, in reliance upon and in
conformity with written information furnished to the Company
by you expressly for inclusion in any Preliminary Prospectus,
the Rule 430A Prospectus, the Registration Statement, or the
Prospectus, or any amendment or supplement thereto, or in any
application, as the case may be. For all purposes of this
Agreement, the public offering price, the amounts of the
selling concession and re-allowance set forth in the
Prospectus and the information as to the stabilization set
forth on the inside front cover, under the heading "Risk
Factors - Inexperience of Underwriter" and in the ___________
paragraph under "Underwriting" constitute the only information
furnished in writing by or on behalf of you expressly for
inclusion in any Preliminary Prospectus, the Rule 430A
Prospectus, the Registration Statement or the Prospectus (as
from time to time amended or supplemented), or any amendment
or supplement thereto, or in any application, as the case may
be. If any action shall be brought against the Company or any
other person so indemnified based upon any Preliminary
Prospectus, the Rule 430A Prospectus, the Registration
Statement, or the Prospectus, or any amendment or supplement
thereto, or any application, and in respect of which indemnity
may be sought against you pursuant to this Section 6(b), you
shall have the rights and duties given to the Company, and the
Company and each other person so indemnified shall have the
rights and duties given to the indemnified parties, by the
provisions of Section 6(a).
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<PAGE> 20
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant
to Section 6(a) or 6(b) (subject to the limitations thereof)
but it is found in a final judicial determination, not subject
to further appeal, that such indemnification may not be
enforced in such case, even though this Agreement expressly
provides for indemnification in such case, or (ii) any
indemnified or indemnifying party seeks contribution under the
Act, the Exchange Act, or otherwise, then the Company
(including for this purpose any contribution made by or on
behalf of any director of the Company, any officer of the
Company who signed the Registration Statement, and any
controlling person of the Company), as one entity, and you
(including for this purpose any contribution made by or on
behalf of any directors, officers, partners, employees, agents
or controlling persons of you), as a second entity, shall
contribute to the losses, liabilities, claims, damages and
expenses whatsoever to which any of them may be subject, so
that you are responsible for the proportion thereof equal to
the percentage which the aggregate underwriting discount set
forth on the cover page of the Prospectus represents of the
initial public offering price of the Shares set forth on the
cover page of the Prospectus and the Company is responsible
for the remaining portion, in proportion to the net proceeds
from the offering received by them; provided, however, that if
applicable law does not permit such allocation, then other
relevant equitable considerations such as the relative fault
of the Company and you in the aggregate in connection with the
facts which resulted in such losses, liabilities, claims,
damages and expenses shall also be considered. The relative
fault, in the case of an untrue statement, alleged untrue
statement, omission, or alleged omission, shall be determined
by, among other things, whether such statement, alleged
statement, omission, or alleged omission relates to
information supplied by the Company or by you, and the
parties' relative intent, knowledge, access to information,
and opportunity to correct or prevent such statement, alleged
statement, omission or alleged omission. The Company and you
agree that it would be unjust and inequitable if the
respective obligations of the Company and you for contribution
were determined by pro rata or per capita allocation of the
aggregate losses, liabilities, claims, damages and expenses or
by any other method of allocation that does not reflect the
equitable considerations referred to in this Section 6(c). No
person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such
fraudulent misrepresentation. For purposes of this Section
6(c), each person, if any, who controls you within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act,
each officer of the Company who shall have signed the
Registration Statement and each director of the Company, shall
have the same rights to contribution as the Company, subject
in each case to the provisions of this Section 6(c). Anything
in this Section 6(c) to the contrary notwithstanding, no party
shall be liable for contribution with respect to the
settlement of any claim or action effected without its written
consent. This Section 6(c) is intended to supersede any right
to contribution under the Act, the Exchange Act, or otherwise.
7. CONDITIONS OF YOUR OBLIGATIONS: Your obligations hereunder are
subject to the continuing accuracy of the representations and warranties of the
Company contained herein and in each certificate and document contemplated
under this Agreement to be delivered to you, as of the date hereof, as of the
Closing Date, and each Optional Closing Date, as the case may be, to the
performance by the Company of its obligations hereunder, and to the following
additional conditions:
20
<PAGE> 21
(a) Notification that the Registration Statement has become
effective shall be received by you not later than 6:30 p.m.,
New York City time, on the date of this Agreement or at such
later date and time as shall be consented to in writing by
you. If the Company has elected to rely upon Rule 430A of the
Rules and Regulations, the price of the Shares and any
price-related information previously omitted from the
effective Registration Statement pursuant to such Rule 430A
shall have been transmitted to the Commission for filing
pursuant to Rule 424(b) of the Rules and Regulations within
the prescribed time period, and prior to the Closing Date the
Company shall have provided evidence reasonably satisfactory
to you of such timely filing, or a post-effective amendment
providing such information shall have been promptly filed and
declared effective in accordance with the requirements of Rule
430A of the Rules and Regulations.
(b) The Commission shall not have issued a Stop Order and no Blue
Sky or securities authority of any jurisdiction shall have
issued an order suspending the registration or qualification
of the Securities, and no proceedings for such purpose shall
have been instituted or shall be pending, or to the knowledge
of the Company, be threatened or contemplated by the
Commission or the Blue Sky or securities authorities of any
such jurisdiction.
(c) You shall have received an opinion, dated the Closing Date and
satisfactory in form and substance to counsel for you from
Venable, Baetjer, Howard & Civiletti, LLP, counsel to the
Company and its subsidiaries, to the effect that:
(1) The Company is a corporation validly existing in good
standing under the laws of New Jersey, its
jurisdiction of incorporation, with full corporate
power and authority to own its property and conduct
its business in the manner described in the
Prospectus. Each subsidiary of the Company is
validly existing and in good standing in its
jurisdiction of incorporation, with full corporate
power and authority to own its property and conduct
its business. To the knowledge of such counsel,
after reasonable investigation, the Company and its
subsidiaries have obtained all necessary consents,
authorizations, approvals, orders, licenses,
certificates, declarations and permits of and from,
and have made all required filings with, all federal,
state, local and other governmental authorities and
all courts and other tribunals, to own, lease,
license and use their respective properties and
assets and to carry on their respective businesses in
the manner described in the Prospectus, except where
the failure to do so will not have a material adverse
effect on the business, properties or financial
condition of the Company and its subsidiaries,
considered as a single enterprise. The Company and
its subsidiaries are duly registered or qualified to
do business as foreign corporations and are in good
standing in the States of ___________________________
___________ , which, to the knowledge of such
counsel, after reasonable investigation, are the
only jurisdictions in which their ownership, leasing,
licensing, or use of property and assets or the
conduct of their respective businesses require such
registration or qualification.
(2) The authorized capital stock of the Company consists
of ___________ shares of Common Stock, of which
_______ ___ shares are outstanding and ___________
shares of Preferred Stock, of which ___________
shares
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<PAGE> 22
of Preferred Stock, of which _________________ shares
are outstanding. Each outstanding share of such
capital stock is duly authorized, validly issued,
fully paid, and nonassessable, with no personal
liability attaching to the ownership thereof, has not
been issued and is not owned or held in violation of
any preemptive right of stockholders. To the
knowledge of such counsel, after reasonable
investigation, there is no commitment, plan or
arrangement to issue, and no outstanding option,
warrant or other right calling for the issuance of,
any share of capital stock of the Company, or its
subsidiaries, or any security or other instrument
which by its terms is convertible into, exercisable
for, or exchangeable for capital stock of the Company
or its subsidiaries, except as disclosed in the
Prospectus. To the knowledge of such counsel, after
reasonable investigation, there is outstanding no
security or other instrument which by its terms is
convertible into or exchangeable for capital stock of
the Company or its subsidiaries, except as disclosed
in the Prospectus.
(3) To the knowledge of such counsel, after reasonable
investigation, there is no litigation, arbitration,
claim, governmental or other proceeding (formal or
informal), or investigation pending or threatened,
with respect to the Company, its subsidiaries, or any
of their operations, businesses, property or assets,
or related to the offer for sale or the sale of
franchises for the operation of a Goldberg's
Original Old World Bagels and Sammy's New York Bagels
facility, except as disclosed in the Prospectus or
such as individually or in the aggregate do not now
have and are not expected to have a material adverse
effect on the operations, business, property, assets
or condition (financial or otherwise) of the Company
and subsidiaries, considered as a single enterprise.
To the knowledge of such counsel, after reasonable
investigation, neither the Company nor its
subsidiaries are in violation of, or in default with
respect to, any law, rule, regulation, order,
judgment or decree, except as disclosed in the
Prospectus or such as individually or in the
aggregate do not now have and are not expected to
have a material adverse effect on the operations,
businesses, property, assets or condition (financial
or otherwise) of the Company and its subsidiaries,
considered as a single enterprise; nor is the
Company, or its subsidiaries, required to take any
action in order to avoid any such violation or
default.
(4) To the knowledge of such counsel, after reasonable
investigation, except as disclosed in the Prospectus,
neither the Company, its subsidiaries, nor any other
party is now in violation or breach of, or in default
with respect to complying with, any material
provision of any indenture, mortgage, deed of trust,
debenture, note or other evidence of indebtedness,
contract, agreement, instrument, lease or license, or
arrangement or understanding which is material to the
Company and its subsidiaries, considered as a single
enterprise and each such indenture, mortgage, deed of
trust, debenture, note or other evidence of
indebtedness, contract, agreement, instrument, lease
or license is in full and force and is the legal,
valid and binding obligation of the Company or its
subsidiaries.
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<PAGE> 23
(5) Neither the Company nor its subsidiaries are in
violation or breach of, or in default with respect
to, any term of their respective Certificates of
Incorporation or By-laws.
(6) The Company has all requisite corporate power and
authority to execute, deliver and perform this
Agreement and the Underwriter's Warrants. All
necessary corporate proceedings of the Company have
been taken to authorize the execution, delivery, and
performance by the Company of this Agreement and the
Underwriter's Warrants. This Agreement and the
Underwriter's Warrants have been duly authorized,
executed and delivered by the Company, constitute
legal, valid, and binding agreements of the Company,
and (subject to applicable bankruptcy, insolvency,
reorganization and other laws affecting the
enforceability of creditors' rights generally, and
the application of equitable principles affecting the
enforceability of remedies in the nature of specific
enforcement, and except as the enforceability of the
indemnification and contribution provisions of this
Agreement and the Underwriter's Warrants may be
limited under applicable securities laws) is
enforceable as to the Company in accordance with its
terms. The Underwriter's Warrants have been duly
authorized by the Company and, when executed, issued
and delivered by the Company and paid for by R.T.G.
Richards in accordance with the provisions thereof
and of this Agreement, will be a legal, valid and
binding obligation of the Company, enforceable
against the Company in accordance with the terms
hereof and thereof, except as may be limited by
applicable bankruptcy, insolvency, registration and
other laws affecting the enforceability of creditors'
rights generally and the application of equitable
principles affecting the availability of remedies in
the nature of specific enforcement.
(7) All legally required proceedings in connection with
the authorization, issue and sale of the Shares by
the Company in accordance with the provisions of this
Agreement have been taken, and, to the knowledge of
such counsel, after reasonable investigation, no
consent, authorization, approval, order, license,
certificate, declaration or permit of or from, or
filing with, any governmental or regulatory
authority, agency, board, bureau or other body or is
required for the execution, delivery or performance
by the Company of this Agreement and the
Underwriter's Warrants (except filings with and orders
of the Commission pursuant to the Act which have been
made or received and matters under Blue Sky or state
securities laws, rules or regulations, as to which
such counsel need not express an opinion).
(8) No consent of any party to any material contract,
agreement, instrument, lease or license, or
arrangement or understanding known to such counsel,
to which the Company or its subsidiaries are a party,
or to which any of the property or assets of the
Company or its subsidiaries are subject, is required
for the execution, delivery or performance of this
Agreement or the Underwriter's Warrants; and the
execution, delivery and performance of this Agreement
and the Underwriter's Warrants will not violate,
result in a breach of, conflict with, or (with or
without the giving of notice or the passage of time
or both) entitle any party to terminate or call a
default under any such contract, agreement,
instrument, lease, license,
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<PAGE> 24
arrangement or understanding, result in the creation
or imposition of any lien, security interest, pledge,
charge or other encumbrance upon any of the property
or assets of the Company or its subsidiaries pursuant
to the terms of any indenture, mortgage, deed of
trust, loan or credit agreement, lease or other
agreement or instrument to which the Company or its
subsidiaries are a party or by which the Company or
its subsidiaries are bound or to which any of the
property or assets of the Company or its subsidiaries
are subject, known to such counsel, or violate or
result in a breach of any term of the Certificate of
Incorporation or By-laws of the Company or its
subsidiaries, or violate, result in a breach of, or
conflict with any law, rule, regulation, order,
judgment or decree binding on the Company or its
subsidiaries or to which any of the operations,
businesses, property or assets of the Company or its
subsidiaries are subject.
(9) The Shares are duly authorized. Upon payment of the
purchase price therefor in accordance with the
provisions thereof and of this Agreement, the
Underwriter's Warrants will be duly delivered. The
Shares, when issued, paid for and delivered in
accordance with the provisions of this Agreement,
will be duly issued, fully paid and nonassessable,
without any personal liability attaching to the
ownership thereof, and will not be issued in
violation of any preemptive rights of stockholders.
Upon payment of the purchase price therefor in
accordance with the provisions thereof and of this
Agreement, you will receive good title to the Shares
and the Underwriter's Warrants purchased by it from
the Company, free and clear of all Liens.
(10) The Underwriter's Warrants Shares are duly authorized
and have been validly reserved for issuance, and when
issued, paid for and delivered upon exercise of the
Underwriter's Warrants in accordance with the
provisions of the Underwriter's Warrants will be duly
authorized, duly issued, fully paid, and
nonassessable, with no personal liability attaching
to the ownership thereof, and will not have been
issued in violation of any preemptive rights of
stockholders, and the holders of the Underwriter's
Warrants Shares will receive good title to them, free
and clear of all Encumbrances.
(11) The Shares and the Underwriter's Warrants Shares
conform to all statements relating thereto contained
in the Registration Statement and the Prospectus.
(12) To the knowledge of such counsel, any contract,
agreement, instrument, lease or license required to
be described in the Registration Statement or the
Prospectus has been properly described therein. To
the knowledge of such counsel, any contract,
agreement, instrument, lease, or license required to
be filed as an exhibit to the Registration Statement
has been filed with the Commission as an exhibit to
or has been incorporated as an exhibit by reference
into the Registration Statement.
(13) The Shares are duly authorized for listing as the
Nasdaq SmallCap market, subject to notice of
issuance.
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<PAGE> 25
(14) To the knowledge of such counsel, except as disclosed
in the Prospectus, no person or entity has the right
to require registration of shares of Common Stock or
other securities of the Company or its subsidiaries
because of the filing or effectiveness of the
Registration Statement who has not waived such right.
(15) Neither the Company nor its subsidiaries are an
"investment company" by reason of its assets and
operations as defined in Section 3(a) of the
Investment Company Act.
(16) All shares of Common Stock outstanding as of the date
hereof have been duly authorized and validly issued,
and are fully paid and non-assessable, with no
personal liability attaching to the ownership
thereof, and have not been issued in violation of any
preemptive rights of stockholders.
(17) The statements in the Prospectus under captions
"Business", "Risk Factors", "Use of Proceeds",
"Management" and "Description of Capital Stock" have
been reviewed by such counsel and insofar as such
statements refer to descriptions of agreements,
instruments, leases or franchises, summarize the
status of litigation or other proceedings, or the
provisions of orders, judgments or decrees, or
constitute statements of law, descriptions of
statutes, rules or regulations, or conclusions of
law, such statements fairly present the information
called for and are accurate and complete in all
material respects.
(18) At all times during which the Company or its
subsidiaries offered for sale franchises for the
operation of a Goldberg's Original Old World Bagels
and Sammy's New York Bagels facility, the Company and
its subsidiaries were in compliance with all material
requirements of all laws, rules and regulations
applicable to the offer for sale or sale of
franchises in all jurisdictions in which the Company
or its subsidiaries have offered for sale or sold,
franchises for the operation of a Goldberg's Original
Old World Bagels and Sammy's New York Bagels
facility;
(19) (i) except for liabilities and obligations incurred
in the ordinary course of business, to the knowledge
of such counsel, after due inquiry, there are no
claims (absolute, accrued, contingent or otherwise),
against the Company or its subsidiaries related to
the offer for sale or the sale of franchises for the
operation of Goldberg's Original Old World Bagels and
Sammy's New York Bagels, except as disclosed in the
Prospectus or such as individually or in the
aggregate do not have and are not expected to have a
material adverse effect upon the operations,
businesses, property, assets or condition (financial
or otherwise) of the Company or its subsidiaries;
(ii) no franchisee has a cause of action against the
Company or its subsidiaries under applicable federal
or state laws, rules and regulations governing the
offer and sale of franchises arising out of the offer
and sale by the Company or its subsidiaries of the
franchise(s) purchased by such franchisee; and (iii)
neither the Company nor its subsidiaries have been
charged with any violation of any state or other
applicable law or administrative regulation in
respect of the offer for sale or sale of such
franchises; and
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<PAGE> 26
(20) The Registration Statement has become effective under
the Act, and to the knowledge of such counsel, no
Stop Order has been issued and no proceedings for
that purpose have been instituted or threatened.
(21) The Registration Statement, any Rule 430A Prospectus,
and the Prospectus, and any amendment or supplement
thereto (except for the financial statements and the
notes and schedules related thereto, and other
financial information and statistical data contained
therein or omitted therefrom, as to which such
counsel need express no opinion), comply as to form
in all material respects with the applicable
requirements of the Act.
(22) Such counsel has participated in conferences with
officers and other representatives of the Company,
its subsidiaries, representatives of the independent
certified public accountants for the Company and its
subsidiaries and representatives of you at which the
contents of the Registration Statement and Prospectus
and related matters were discussed and, although such
counsel has not verified and is not passing upon and
does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained
in the Registration Statement and Prospectus, or any
amendment or supplement thereto, on the basis of the
foregoing, no facts have come to the attention of
such counsel which lead them to believe that either
the Registration Statement or any amendment thereto
at the time such Registration Statement or such
amendment became effective or the Prospectus as of
its date or any amendment or supplement thereto as of
its date contained an untrue statement of a material
fact or omitted to state a material fact required to
be stated therein or necessary to make the statements
therein not misleading (it being understood that such
counsel need express no comment with respect to the
financial statements, and the notes and schedules
related thereto, and other financial information and
statistical data included in the Registration
Statement or Prospectus).
(23) To the knowledge of such counsel, since the effective
date of the Registration Statement, no event has
occurred which should have been set forth in an
amendment or supplement to the Registration Statement
or the Prospectus which has not been set forth in
such an amendment or supplement.
In rendering such opinion, counsel for the Company may rely (i) as to
matters involving the application of laws other than the laws of the United
States to the extent counsel for the Company deems proper and to the extent
specified in such opinion, upon an opinion or opinions of local counsel (in
form and substance reasonably satisfactory to counsel for you) acceptable to
counsel for you, familiar with the applicable laws, in which case the opinion
of counsel for the Company shall state that the opinion or opinions of such
other counsel are satisfactory in scope, form and substance to counsel for the
Company and that reliance thereon by counsel for the Company is reasonable;
(ii) as to matters of fact, to the extent they deem proper, on certificates of
responsible officers of the Company; and (iii) to the extent they deem proper,
upon written statements or certificates of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company, provided that copies of any such statements or
certificates shall be delivered to counsel for you.
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<PAGE> 27
(d) You shall have received letters addressed to you and dated the
date hereof and the Closing Date from DelSanto & DeFreitas,
independent certified public accountants for the Company and
its subsidiaries, addressed to you, and in form and substance
satisfactory to you, to the effect that:
(1) Such accountants are independent public accountants
as required by the Act and the rules and regulations
of the Commission thereunder and no information need
be supplied with respect to them in answer to Item 13
of Form SB-2.
(2) In their opinion, the financial statements and
related notes and schedules of the Company and its
subsidiaries examined by them, at all dates and for
all periods referred to in their report therein, and
included in the Registration Statement and the
Prospectus on their authority as experts comply as to
form in all material respects with the applicable
accounting requirements of the Act and the Rules and
Regulations of the Commission promulgated thereunder.
(3) On the basis of limited procedures not constituting
an audit, including a reading of the latest available
unaudited interim financial statements of the Company
and its subsidiaries and the financial data and
accounting records of the Company and its
subsidiaries, inquiries of officials of the Company
and its subsidiaries and others responsible for
financial and accounting matters, a reading of the
minute books of the Company and its subsidiaries,
including without limitation the minutes (if any) of
meetings or consents in lieu of meetings of the
stockholders and of the Board of Directors (and any
executive committee, audit committee or other
committees thereof) of the Company and its
subsidiaries, and other specified procedures and
inquiries requested by you, if any, nothing has come
to their attention which causes them to believe that:
(i) the unaudited financial statements of the
Company and its subsidiaries contained in the
Registration Statement and the Prospectus (if
any) do not comply as to form in all material
respects with the applicable accounting
requirements of the Act and the Rules and
Regulations of the Commission promulgated
thereunder or were not prepared in conformity
with generally accepted accounting principles
applied on a basis consistent, in all
material respects, with those followed in the
preparation of the audited financial
statements therein;
(ii) except as disclosed in, or as contemplated by
the Registration Statement or the Prospectus,
during the period from the date of the last
audited balance sheet of the Company and its
subsidiaries included in the Registration
Statement and the Prospectus to a specified
date not more than five (5) days prior to the
date of such letter there were any decreases,
as compared with the corresponding period of
the preceding year, in net sales and
revenues, cost of sales, selling general and
administrative expenses, income (loss) from
operations, the total or per share amounts of
net income, or weighted number of shares
outstanding;
27
<PAGE> 28
(iii) except as disclosed in or contemplated by the
Registration Statement and the Prospectus,
during the period from the date of the last
audited balance sheet of the Company and its
subsidiaries included in the Registration
Statement and Prospectus to a specified date
not more than five (5) days prior to the date
of such letter, there has been any change in
the capital stock or other securities of the
Company and its subsidiaries or any payment
or declaration of any dividend or other
distribution in respect thereof or in
exchange therefor, or any increase in the
long-term debt of the Company and its
subsidiaries or any decrease in the net
current assets or net assets of the Company
and its subsidiaries as compared with the
amounts shown on the last audited balance
sheet of the Company and its subsidiaries,
included in the Registration Statement and
the Prospectus (other than in the ordinary
course of business); and
(iv) On the basis of their examinations referred
to in their report and consent included in
the Registration Statement and Prospectus and
the indicated procedures and inquiries
referred to above, nothing has come to their
attention which, in their judgment, would
cause them to believe or indicate that the
financial statements and related notes and
schedules of the Company and its subsidiaries
included in the Registration Statement and
Prospectus do not present fairly the
financial position and results of operations
of the Company and its subsidiaries, as at
the dates and for the periods indicated, in
conformity with generally accepted accounting
principles applied on a consistent basis, and
are not in all material respects a fair
presentation of the information purported to
be shown.
(4) In addition to their examination referred to in their
report included in the Registration Statement and the
Prospectus and the inquiries and limited procedures
referred to in clause (iii) of this Section 7(d),
they have performed other procedures, not
constituting an audit, with respect to the numerical
data, percentages, dollar amounts and other financial
information appearing in the Registration Statement
and the Prospectus, which are derived from the
general accounting records of the Company and its
subsidiaries, and have compared certain of such data
and information with the accounting records of the
Company and its subsidiaries and found them to be in
agreement.
(5) Such other matters as you may have reasonably
requested.
(e) The representations and warranties of the Company in this
Agreement shall be true and correct with the same effect as if
made on and as of the Closing Date and the Company shall have
complied with all agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to the
Closing Date.
(f) The Registration Statement and the Prospectus and any
amendments or supplements thereto shall contain all statements
which are required to be stated therein in accordance with the
Act and the Rules and Regulations, and shall in all material
respects conform to the requirements thereof, and neither the
Registration Statement nor the Prospectus nor
28
<PAGE> 29
any amendment or supplement thereto shall contain any untrue
statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading.
(g) There shall have been, since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, no material adverse change in the business,
property, condition (financial or otherwise), results of
operations, capital stock, long-term or short-term debt or
general affairs of the Company and its subsidiaries, taken as
a whole, except changes which the Registration Statement and
the Prospectus indicate might occur after the effective date
of the Registration Statement, and neither the Company nor its
subsidiaries shall have incurred any material liabilities or
entered into any agreements not in the ordinary course of
business, except as disclosed in the Registration Statement
and the Prospectus.
(h) No action, suit or proceeding, at law or in equity, shall be
pending or threatened against the Company or its subsidiaries
which would be required to be set forth in the Registration
Statement, and no proceedings shall be pending or threatened
against the Company or its subsidiaries before or by any
commission, board or administrative agency in the United
States or elsewhere, wherein an unfavorable decision, ruling
or finding would have a materially adverse affect on the
business, property, condition (financial or otherwise),
results of operations or general affairs of the Company or its
subsidiaries.
(i) The Company shall have furnished to you or caused to be
furnished to you at the Closing Date, certificates of the
President and chief financial officer of the Company in form
and substance reasonably satisfactory to you, as to the
accuracy of the representations and warranties of the Company
herein at and as of the Closing Date and as to the performance
by the Company of all of its obligations hereunder to be
performed at or prior to the Closing Date and the Company
shall have furnished to you a certificate of the President and
chief financial officer of the Company reasonably satisfactory
to you as to the matters set forth in Sections 7(a) and (b)
above.
(j) The NASDR, upon review of the terms of the public offering of
the Shares, shall have indicated that it has no objections to
the underwriting arrangements pertaining to the sale of the
Shares and the participation by you in the sale of the Shares.
(k) Prior to or on the Closing Date, the Company shall have
executed and delivered the Underwriter's Warrants to
R.T.G Richards.
(l) Prior to or on the Closing Date, the Company shall have
delivered to you executed copies of the Lock-up Letters.
(m) Prior to or on the Closing Date, the Company shall have
retained R.T.G. Richards in a financial consulting capacity,
as contemplated by Section 4(bb) hereof.
(n) Prior to or on the Closing Date, the Company and R.T.G.
Richards shall have entered into the Merger and Acquisition
Agreement contemplated by Section 4(cc) hereof.
(o) The Company shall have retained a public relations firm as
contemplated by Section 4 (ff) hereof.
(p) The compensation arrangements applicable to the Company's
executive officers shall be reasonably acceptable to you.
(q) Immediately prior to the date on which the Registration
Statement becomes effective, the Company shall have had
outstanding no more than 1,867,661 Shares of Common Stock, no
par value, after a one for two reverse stock split to be
effected prior to such effective date.
(r) Subsequent to the date hereof, there shall not have occurred
any change, or any development involving a prospective change,
in or affecting particularly the business or financial affairs
of the Company which, in your reasonable opinion, would
materially and adversely affect the market for the Shares.
29
<PAGE> 30
(s) Subsequent to the date hereof, no executive officer of the
Company listed as such in the Prospectus shall have died,
become physically or mentally disabled, resigned or have been
removed or discharged.
(t) The Company shall furnish you with such further certificates
and documents as you or its counsel shall have reasonably
requested.
All opinions, certificates, letters and other documents required by
this Section 7 to be delivered to you by the Company will be in compliance with
the provisions hereof only if they are satisfactory in form and substance to
you and your counsel. The Company will furnish you with such conformed copies
of such opinions, certificates, letters and other documents as you shall
reasonably request.
(u) Upon the exercise, in whole or in part, by you of the option
to purchase the Additional Shares, referred to in Section 2
hereof, your obligations to purchase and pay for the
Additional Shares will be subject to the continuing accuracy
of the representations and warranties of the Company contained
herein and in each certificate and document contemplated under
this Agreement to be delivered to you, as of the date hereof
and as of each Optional Closing Date, to the performance by
the Company of its obligations hereunder, and the following
additional conditions:
(1) The Registration Statement shall remain effective at
the Optional Closing Date, and no Stop Order shall
have been issued by the Commission and no proceedings
for that purpose shall have been instituted or shall
be pending, or to your knowledge or the knowledge of
the Company, shall be contemplated by the Commission,
and any reasonable request on the part of the
Commission for additional information shall have been
complied with to the satisfaction of Lehman & Eilen,
counsel to you.
(2) You shall have received an opinion, dated the
Optional Closing Date and satisfactory in form and
substance to counsel to you, from Venable, Baetjer,
Howard & Civiletti, LLP, counsel to the Company,
which opinion shall be substantially the same in
scope and substance as the opinion furnished to you
on the Closing Date pursuant to Section 7(c) hereof,
except that such opinion, where appropriate, shall
cover the Additional Shares.
(3) You shall have received a letter in form and
substance satisfactory to you from DelSanto &
DeFreitas, independent certified public accountants
for the Company, dated the Optional Closing Date and
addressed to you confirming the information in their
letter referred to in Section 7(e) hereof and stating
that nothing has come to their attention during the
period from the ending date of their review referred
to in said letter to a date not more than five (5)
days prior to the Optional Closing Date, which would
require any change in said letter if it were required
to be dated the Optional Closing Date.
(4) You shall have received a certificate of the
President and chief financial officer of the Company,
dated the Optional Closing Date, in form and
substance satisfac-
30
<PAGE> 31
tory to you, substantially the same in scope and
substance as the certificate furnished to you on the
Closing Date pursuant to Section 7(j) hereof.
8. CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligations of the
Company to sell and deliver the Shares as and when specified by this Agreement
are subject to the condition that at the Closing Date or any Optional Closing
Date, as the case may be, the Registration Statement or any post-amendment
thereto shall have been declared effective and a no Stop Order suspending the
effectiveness thereof shall have been issued and remain in effect or
proceedings therefor initiated or threatened.
9. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
(a) This Agreement shall become effective at 9:30 A.M., New York
City time, on the first full business day following the day on
which the Registration Statement becomes effective or at the
time of the initial public offering by you of the Shares,
whichever is earlier. The time of the initial public offering
shall mean the time, after the Registration Statement becomes
effective, of the release by you for publication of the first
newspaper advertisement which is subsequently published
relating to the Shares or the time, after the Registration
Statement becomes effective, when the Shares are first
released by you for offering by you or dealers by letter or
telegram, whichever shall first occur. you or the Company may
prevent this Agreement from becoming effective without
liability of any party to any other party, except as noted
below in this Section 9, by giving the notice indicated in
Section 9(c) before the time this Agreement becomes effective.
(b) In addition to the right to terminate this Agreement
pursuant to Section 7 hereof by reason of the Company's
failure, refusal or inability to perform all obligations and
satisfy all conditions on its part to be performed or
satisfied hereunder prior to the Closing Date or Optional
Closing Date, as the case may be, you shall have the right to
terminate this Agreement at any time prior to the Closing Date
or any Optional Closing Date, as the case may be, by giving
notice to the Company, if the Company shall have sustained a
material adverse loss or material adverse interference with
its business or properties from fire, flood, accident,
hurricane, earthquake, theft, sabotage, or other calamity or
malicious act, including the death or disability of Mr.
Thorburn, whether or not covered by insurance, or from any
labor dispute or any court or governmental action, order or
decree, of such a character as to have a material adverse
effect with the conduct of the business and operations of the
Company; or if there shall have been a general suspension of,
or a general limitation on prices for, trading in securities
on the New York Stock Exchange, the American Stock Exchange or
in the over-the-counter market; or if a banking moratorium has
been declared by a state or federal authority; or if there
shall have been an outbreak of major hostilities between the
United States and any foreign power, or any other
insurrection, armed conflict or national calamity, which in
the judgment of a majority-in-interest of the underwriters,
makes it impracticable or inadvisable to proceed with the
offering, sale or delivery of the Firm Shares or the
Additional Shares, as the case may be.
(c) If you elect to prevent this Agreement from becoming effective
as provided in this Section 9, or to terminate this Agreement
pursuant to Section 7, or this Section 9, you shall notify the
Company promptly by telephone, facsimile, telex, or telegram,
31
<PAGE> 32
confirmed by letter. If, as so provided in this Section 9,
the Company elects to prevent this Agreement from becoming
effective, the Company shall notify you promptly by telephone,
facsimile, telex, or telegram, confirmed by letter.
(d) Anything in this Agreement to the contrary notwithstanding
other than Section 9(e), if this Agreement shall not become
effective by reason of an election pursuant to this Section 9
or if this Agreement shall terminate or shall otherwise not be
carried out within the time specified herein by reason of any
failure on the part of the Company to perform any covenant or
agreement or satisfy any condition of this Agreement by it to
be performed or satisfied, the sole liability of the Company
to you, in addition to the obligations the Company assumed
pursuant to Section 4(g), will be to reimburse you for such
reasonable out-of-pocket expenses (including the fees and
disbursements of their counsel) as shall have been incurred by
them in connection with this Agreement or the proposed offer,
sale, and delivery of the Shares, and upon demand the Company
agrees to pay promptly the full amount thereof to you.
(e) Notwithstanding any election hereunder or any termination of
this Agreement, and whether or not this Agreement is otherwise
carried out, the provisions of Sections 4(b), 4(g), 6, 10(b)
and 10(c) shall not be in any way affected by such election or
termination or failure to carry out the terms of this
Agreement or any part hereof.
10. MISCELLANEOUS.
(a) Notices required to be in writing shall be mailed or delivered
(i) to the Company at its office at 9 Law Drive, Fairfield,
New Jersey 07006, Attention: Andrew Thorburn, Chairman & CEO,
with copies to Venable, Baetjer, Howard & Civiletti, LLP, 1201
New York Avenue, N.W., Washington, D.C. 20005, Attention:
David J. Levenson, Esq. or (ii) to you c/o R.T.G. Richards and
Company, Inc. at its office at 100 Quentin Roosevelt Blvd.,
Suite 502, Garden City, New York 11530, Attention: Thomas
Souran, Director of Corporate Finance, with copies to Lehman &
Eilen, 50 Charles Lindbergh Boulevard, Suite 505, Uniondale,
New York 11553, Attention: Hank Gracin, Esq., and shall be
deemed given when received. Any notice not required to be in
writing, including but not limited to notices under Section
7(a) or 8 hereof, may be made by telex, facsimile or
telephone and shall be deemed given at the time the telex, or
facsimile communication is received or the telephone call is
made, but if so made shall be subsequently confirmed in
writing.
(b) The representations, warranties, covenants and agreements of
the Company, and the indemnity and contribution agreements,
contained in Sections 4, 5 and 6 of this Agreement will remain
in full force and effect, regardless of any investigation made
by or on behalf of you, the Company or any of its officers or
directors or any controlling persons of you or the Company and
will survive acceptance of and payment for any of the Shares
and the termination of this Agreement.
(c) This Agreement has been and is made solely for the benefit of
you and the Company and the controlling persons, directors and
officers referred to in Section 6 hereof and their respective
successors and assigns, and no other person shall acquire or
have any right
32
<PAGE> 33
under or by virtue of this Agreement. The term "successors
and assigns" as used in this Agreement shall not include a
purchaser, as such purchaser, of Shares from you.
(d) This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, applicable
to contracts made and to be performed entirely with such
State, without regard to conflict of laws provisions thereof.
Please confirm that the foregoing correctly sets forth the agreement among the
Company and you.
Very truly yours,
ALL AMERICAN FOOD GROUP, INC.
By:
--------------------------------
Andrew Thorburn, President,
Chairman & CEO
Confirmed, as of the date first above mentioned.
R.T.G. RICHARDS & COMPANY, INC.
By:
---------------------------
33
<PAGE> 34
SCHEDULE I
Underwriting Agreement, dated _____________, 1996
<TABLE>
<S> <C>
Underwriter Number of Firm Shares
- ----------- ---------------------
R.T.G. Richards & Company, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ________ shares
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000 shares
</TABLE>
34
<PAGE> 1
EXHIBIT 4.2
ALL AMERICAN FOOD GROUP, INC.
UNDERWRITER'S WARRANT AGREEMENT
UNDERWRITER'S WARRANT AGREEMENT dated as of ___________, 1996 by and
between ALL AMERICAN FOOD GROUP, INC., a New Jersey corporation (the
"Company"), and R.T.G. RICHARDS & COMPANY, INC. (the "Underwriter").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue warrants to the Underwriter
("Warrants") to purchase up to 110,000 shares of common stock, no par value, of
the Company (the "Common Stock"); and
WHEREAS, the Underwriter has agreed, pursuant to the underwriting
agreement (the "Underwriting Agreement") dated _________, 1996 to which the
Underwriter and the Company are parties, to act as an underwriter in connection
with the Company's public offering of up to 1,100,000 shares of its Common
Stock at a public offering price of $_____ per share (the "Public Offering");
and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Underwriter in consideration for, and as part
of their compensation in connection with acting as underwriter pursuant to the
Underwriting Agreement;
NOW, THEREFORE, in consideration of the foregoing premises which are
incorporated into the terms hereof, of the payment by the Underwriter to the
Company of $110.00 for the Warrants purchased hereunder, the agreements herein
set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. GRANT. The holders of the Warrants issued hereunder are hereby granted the
right to purchase, at any time from ________, 1997 until 5:00 p.m., New York
time, on ________, 2001, up to 110,000 shares of the Common Stock of the
Company, at an initial exercise price (subject to adjustment as provided in
Section 8 hereof) of $____ per Share (140% of the public offering price per
share), subject to the terms and conditions of this Agreement. The shares
issuable upon exercise of the Warrants are referred to as the "Warrant Shares".
2. WARRANT CERTIFICATES. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall
be in the form set forth in Exhibit A, attached hereto and made a part hereof,
with such appropriate insertions, omissions, substitutions, and other
variations as required or permitted by this Agreement.
3. EXERCISE OF WARRANTS. The Warrants are exercisable during the term set
forth in Section 1 hereof at the Exercise Price (defined below) per Share set
forth in Section 6 hereof payable by certified or cashier's check or money
order payable in lawful money of the United States, subject to adjustment as
provided in Article 8 hereof. Upon surrender of a Warrant Certificate with the
annexed Form of Election to Purchase duly executed, together with payment of
the Exercise Price (as hereinafter defined) for the Warrant Shares (and such
other amounts, if any, arising pursuant to Section 4 hereof) at the Company's
principal office, the registered holder of a Warrant Certificate ("Holder" or
"Holders") shall be entitled to receive a certificate or certificates for the
Warrant Shares so purchased. The purchase rights represented by each Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part, (but not as to fractional Shares). The Warrants may be exercised to
purchase all or part of the Warrant Shares represented thereby. In the case of
the purchase of less than all the Warrant Shares purchasable on the exercise of
the Warrants represented by a Warrant Certificate, the Company shall cancel the
Warrant
<PAGE> 2
Certificate represented thereby upon the surrender thereof and shall execute
and deliver a new Warrant Certificate of like tenor for the balance of the
Warrant Shares purchasable thereunder.
4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrants and payment of
the Exercise Price therefor, the issuance of certificates for the Warrant
Shares underlying such Warrants shall be made forthwith (and in any event
within three (3) business days thereafter) without further charge to the Holder
thereof, and such certificates shall (subject to the provisions of Sections 5
and 7 hereof) be issued in the name of, or in such names as may be directed by,
the Holders thereof; provided, however, that the Company shall not be required
to pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any such certificates in a name other than that of the
Holders, and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the Warrant Shares
shall be executed on behalf of the Company by the manual or facsimile signature
of the then present Chairman or Vice Chairman of the Board of Directors or
President or Vice President of the Company under its corporate seal reproduced
thereon, attested to by the manual or facsimile signature of the then present
Secretary or Assistant Secretary or Treasurer or Assistant Treasurer of the
Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
5. RESTRICTION ON TRANSFER OF WARRANTS. The Holder of a Warrant Certificate
(and its Permitted Transferee, as defined below), by its acceptance thereof,
covenants and agrees that the Warrants are being acquired as an investment and
not with a view to the distribution thereof; that the Warrants may be sold,
transferred, assigned, hypothecated or otherwise disposed of, in whole or in
part, to any person (a "Permitted Transferee"), provided such transfer,
assignment, hypothecation or other deposition is made in accordance with the
provisions of the Securities Act of 1933 (the "1933 Act"); and provided,
further, that until __________, 1997 (one year after the Effective Date,
defined below) only officers of the Underwriter, or any selling group member or
its officers or partners, shall be Permitted Transferees.
6. EXERCISE PRICE.
a. INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise provided
in Section 8 hereof, the initial exercise price of each Warrant to purchase
Warrant Shares shall be $____ per Share. The adjusted exercise price shall be
the price which shall result from time to time from any and all adjustments of
the initial exercise price in accordance with the provisions of Section 8
hereof.
b. EXERCISE PRICE. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price, depending upon the
context.
7. REGISTRATION RIGHTS.
a. REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Warrant
certificates shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR
SALE OR SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO (I) AN EFFECTIVE
2
<PAGE> 3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "1933 ACT") OR
(II) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH 1933 ACT
IS AVAILABLE.
b. DEMAND REGISTRATION. On two occasions commencing at any time one
(1) year after the effective date of the Company's Registration Statement
relating to the Public Offering (the "Effective Date") and expiring five (5)
years after the Effective Date, the Holders of the Warrants and the Warrant
Shares representing at least a Majority (as hereinafter defined) of such
securities shall have the right, exercisable by written notice to the Company,
to have the Company prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1, SB-2 (or
other appropriate form, including, without limitation, a post-effective
amendment to the Company's Registration Statement) and such other documents,
including a prospectus, as may be necessary in the opinion of both counsel for
the Company and counsel for the Holders, in order to comply with the provisions
of the 1933 Act, so as to permit a public offering and sale, for a period of
nine (9) months, of the Warrant Shares by such Holders and any other Holders of
the Warrants and/or Warrant Shares who notify the Company within fifteen (15)
business days after receipt of the notice described in the succeeding sentence.
The Company covenants and agrees to give written notice of any registration
request under this Section 7(b) by any Holder(s) to all other registered
Holders of the Warrants and the Warrant Shares within ten (10) days from the
date of the receipt of any such registration request. For purposes of this
Agreement, the term "Majority" in reference to the Holders of the Warrants or
Warrant Shares, shall mean in excess of fifty percent (50%) of the then
outstanding Warrants or Warrant Shares that (i) are not held by the Company, an
affiliate, officer, director, employee or agent thereof or any of their
respective affiliates, members of their family, persons acting as nominees or
in conjunction therewith, or (ii) have not been resold to the public pursuant
to a registration statement filed with the Commission under the 1933 Act. The
Holders of the Warrants may demand registration without exercising the
Warrants, and shall never be required to exercise same. For the purposes of
subsection (i) above, the Underwriter and its officers, directors, employees
and agents shall not be deemed an affiliate, officer, director, employee or
agent of the Company.
c. PIGGYBACK REGISTRATION. If, at any time within seven (7) years
after the Effective Date, the Company should file a registration statement with
the Commission under the 1933 Act (other than in connection with a merger or
pursuant to Form S-8) it will give written notice by registered mail, at least
thirty (30) days prior to the filing of each such registration statement, to
the Underwriter and to all other Holders of the Warrants and/or the Warrant
Shares of its intention to do so. If the Underwriter or other Holders of the
Warrants and/or the Warrant Shares notify the Company within twenty (20) days
after receipt of any such notice of its or their desire to include any Warrant
Shares in such proposed registration statement, the Company shall afford the
Underwriter and such Holders of the Warrants and/or Warrant Shares the
opportunity to have any such Warrant Shares registered under such registration
statement. Notwithstanding the provisions of this Section 7(c), the Company
shall have the right at any time after it shall have given written notice
pursuant to this Section 7(c) (irrespective of whether a written request for
inclusion of any such securities shall have been made) to elect not to file any
such proposed registration statement, or to withdraw the same after the filing
but prior to the effective date thereof.
If the underwriter of an offering to which the above piggyback rights
apply objects to such rights, such objection shall preclude such inclusion.
However, in such event, the Company will, within six (6) months of completion
of such subsequent underwriting, file at its sole expense, a registration
statement
3
<PAGE> 4
relating to such excluded Warrant Shares, which shall be in addition to any
registration statement required to be filed pursuant to Section 7(b), unless
such Holders had refused an opportunity provided with the consent of the
underwriter, to be included in the registration statement on the condition that
they agree not to offer the securities for sale without the prior written
consent of the underwriter for a period not exceeding 60 days from the
effective date of such registration statement.
If the underwriter in such underwritten offering shall advise the
Company that it declines to include a portion or all of the Warrant Shares
requested by the Underwriter and the Holders to be included in the registration
statement, then (A) registration of all of the Warrant Shares shall be excluded
from such registration statement on the condition that all securities to be
registered by other selling security holders, if any, are also excluded and (B)
registration of a portion of such Warrant Shares allocated among the
Underwriter and the Holders and any other selling securityholders in proportion
to the respective numbers of securities to be registered by the Underwriter and
each such Holder and other selling securityholder. In such event the Company
shall give the Underwriter and the Holders prompt notice of the number of
Warrant Shares excluded.
d. COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. In
connection with any registrations under Sections 7(b) and 7(c) hereof, the
Company covenants and agrees as follows:
(1) The Company shall use its best efforts to file a registration
statement within ninety (90) days of receipt of any demand
therefor; provided, however, that the Company shall not be
required to produce audited or unaudited financial statements
for any period prior to the date such financial statements are
required to be filed in a report on Form 10-K or Form 10-Q (or
Form 10-KSB or Form 10-QSB), as the case may be. The Company
shall use its best efforts to have any registration statements
declared effective at the earliest possible time, and shall
furnish each Holder desiring to sell Shares such number of
prospectuses as shall reasonably be requested.
(2) The Company shall pay all costs (excluding fees and expenses
of Holder(s)' counsel and any underwriting discounts or
selling fees, expenses or commissions), fees and expenses in
connection with any registration statement filed pursuant to
Sections 7(b) and 7(c) hereof including, without limitation,
the Company's legal and accounting fees, printing expenses,
blue sky fees and expenses. If the Company shall fail to
comply with the provisions of Section 7(d) (1), the Company
shall, in addition to any other equitable or other relief
available to the Holder(s), be liable for any or all
incidental, special and consequential damages and damages due
to loss of profit sustained by the Holder(s) requesting
registration of their Warrant Shares.
(3) The Company will take all necessary and reasonable action
which may be required to qualify or register the Warrant
Shares included in a registration statement for offering and
sale under the securities or blue sky laws of such states as
reasonably are requested by the Holder(s), provided that the
Company shall not be obligated to execute or file any general
consent to service of process or to qualify as a foreign
corporation to do business under the laws of any such
jurisdiction.
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<PAGE> 5
(4) The Company shall indemnify the Holder(s) of the Warrant
Shares to be sold pursuant to any registration statement and
each person, if any, who controls such Holders within the
meaning of Section 15 of the 1933 Act or Section 20(a) of the
Securities Exchange Act of 1934 (the "Exchange Act"), against
all losses, claims, damages, expenses or liability (including
all expenses reasonably incurred in investigating, preparing
or defending against any claim whatsoever) to which any of
them may become subject under the 1933 Act, the Exchange Act
or otherwise, arising from such registration statement, but
only to the same extent and with the same effect as the
provisions pursuant to which the Company has agreed to
indemnify the Underwriter contained in Section 6 of the
Underwriting Agreement, and the Holder(s) shall indemnify the
Company to the same extent and with the same effect as the
provisions pursuant to which the Underwriter has agreed to
indemnify the Company contained in Section 6 of the
Underwriting Agreement.
(5) The Holder(s) of the Warrant Shares to be sold pursuant to a
registration statement, and their successors and assigns,
shall severally, and not jointly, indemnify the Company, its
officers and directors and each persons, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act
or Section 20(a) of the Exchange Act, against all losses,
claims, damages, expenses or liability (including all expenses
reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which they may become subject
under the 1933 Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or
their successors or assigns, for specific inclusion in such
registration statement to the same extent and with the same
effect as the provisions contained in Section 6 of the
Underwriting Agreement pursuant to which the Underwriter has
agreed to indemnify the Company.
(6) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to
the initial filing of any registration statement or the
effectiveness thereof.
(7) If the manner of distribution proposed by the holders of the
Warrants and the Warrant Shares is an underwriting, the
Company shall furnish to each Holder participating in the
offering and to each underwriter, a signed counterpart,
addressed to such Holder or underwriter of (i) an opinion of
counsel to the Company, dated the effective date of such
registration statement (and if such registration includes an
underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) a "cold
comfort" letter dated the effective date of such registration
statement (and, if such registration includes an underwritten
public offering, a letter dated the date of the closing under
the underwriting agreement) signed by the independent public
accountants who have issued a report on the Company's
financial statements included in such registration statement,
in each case covering substantially the same matters with
respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants'
letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions
of issuer's counsel and in accountants' letter, with respect
to events subsequent to the date of such financial statements,
as are customarily covered in opinions of issuer's counsel and
in accountants' letters delivered to underwriters in
underwritten public offerings of securities.
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<PAGE> 6
(8) The Company shall as soon as practicable after the effective
date of the registration statement, and in any event within
the first full four fiscal quarters following the effective
date, make "generally available to its security holders"
(within the meaning of Rule 158 under the 1933 Act) an
earnings statement (which need not be audited) complying with
Section 11(a) of the 1933 Act.
(9) The Company shall deliver promptly to one designated
representative for each Holder participating in the offering
requesting the correspondence described below and any managing
underwriter, copies of all correspondence between the
Commission and the Company, its counsel or auditors with
respect to the registration statement and permit each Holder
and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or
omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules
of the National Association of Securities Dealers Regulation,
Inc. ("NASDR"). Such investigation shall include access to
books, records and properties and opportunities to discuss the
business of the Company with its officers and independent
auditors, all to such reasonable extent and at such reasonable
times and as often as any such Holder shall reasonably
request.
(10) In connection with an offering for which the Holders have
demand rights, the Company shall enter into an underwriting
agreement with the managing underwriter selected for such
underwriting by Holders holding a Majority of the Shares
requested to be included in such underwriting. In connection
with an offering for which the Holders have piggyback rights,
the Company shall have the sole right to select the managing
underwriter. Such underwriting agreement shall be
satisfactory in form and substance to the Company, a Majority
of such Holders and such managing underwriter, and shall
contain such representations, warranties and covenants by the
Company and such other terms as are customarily contained in
agreements of that type used by the managing underwriter. The
Holders shall be parties to any underwriting agreement
relating to an underwritten sale of their Warrant Shares and
may, at their option, require that any or all the
representations, warranties and covenants of the Company to or
for the benefit of such underwriter shall also be made to and
for the benefit of such Holders. Such Holders shall not be
required to make any representations or warranties to or
agreements with the Company or the underwriter except as they
may relate to such Holders their ownership and their intended
methods of distribution.
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES; REDEMPTION.
a. (i) Except as hereinafter provided, in the event the Company
shall, at any time or from time to time after the date hereof, issue any shares
of Common Stock as a stock dividend to the holders of Common Stock, or
subdivide or combine the outstanding shares of Common Stock into a greater or
lesser number of shares (any such issuance, subdivision or combination being
herein called a "Change of Shares"), then, and thereafter upon each further
Change of Shares, the Exercise Price for the Warrants (whether or not the same
shall be issued and outstanding) in effect immediately prior to such Change of
Shares shall be changed to a price (including any applicable fraction of a cent
to the nearest cent)
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<PAGE> 7
determined by dividing (i) the sum of (a) the total number of shares of Common
Stock outstanding immediately prior to such Change of Shares, multiplied by the
Exercise Price in effect immediately prior to such Change of Shares, and (b)
the consideration, if any, received by the Company upon such issuance,
subdivision or combination by (ii) the total number of shares of Common Stock
outstanding immediately after such Change of Shares; provided, however, that in
no event shall the Exercise Price be adjusted pursuant to this computation to
an amount in excess of the Exercise Price in effect immediately prior to such
computation, except in the case of a combination of outstanding shares of
Common Stock.
For the purposes of any adjustment to be made in accordance with this
Section 8(a) the following provisions shall be applicable:
(1) Shares or equivalents of Common Stock issuable by way of
dividend or other distribution on any stock of the Company
shall be deemed to have been issued immediately after the
opening of business on the day following the record date for
the determination of shareholders entitled to receive such
dividend or other distribution and shall be deemed to have
been issued without consideration.
(2) The reclassification of securities of the Company other than
shares of Common Stock into securities including shares of
Common Stock shall be deemed to involve the issuance of such
shares of Common Stock for a consideration other than cash
immediately prior to the close of business on the date fixed
for the determination of security holders entitled to receive
such shares, and the value of the consideration allocable to
such shares of Common Stock shall be determined in good faith
by the Board of Directors of the Company on the basis of a
record of values of similar property or services.
(3) The number of shares of Common Stock at any one time
outstanding shall be deemed to include the aggregate maximum
number of shares issuable (subject to readjustment upon the
actual issuance thereof) upon the exercise of options, rights
or warrants and upon the conversion or exchange of convertible
or exchangeable securities.
b. Upon each adjustment of the Exercise Price pursuant to this
Section 8, the number of shares of Common Stock purchasable upon the exercise
of each Warrant shall be the number derived by multiplying the number of shares
of Common Stock purchasable immediately prior to such adjustment by the
Exercise Price in effect prior to such adjustment and dividing the product so
obtained by the applicable adjusted Exercise Price.
c. In case of any reclassification or change of outstanding shares of
Common Stock issuable upon exercise of the Warrants (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination), or in case of any consolidation
or merger of the Company with or into another corporation (other than a merger
with a subsidiary in which merger the Company is the continuing corporation and
which does not result in any reclassification or change of the then outstanding
shares of Common Stock or other capital stock issuable upon exercise of the
Warrants (other than a change in par value, or from par value to no par value,
or from no par value to par value or as a result of subdivision or combination)
or in case of any sale or conveyance to another corporation of the property of
the Company as an entirety or substantially as an entirety, then, as a
condition of such reclassification, change, consolidation, merger, sale or
conveyance, the Company, or
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<PAGE> 8
such successor or purchasing corporation, as the case may be, shall make lawful
and adequate provision whereby the registered Holder of each Warrant then
outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Warrant immediately
prior to such reclassification, change, consolidation, merger, sale or
conveyance. Such provisions shall include provision for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in Section 8a. The above provisions of this Section 8b. shall similarly
apply to successive reclassifications and changes of shares of Common Stock and
to successive consolidations, mergers, sales or conveyances.
d. Irrespective of any adjustments or changes in the Exercise Price
or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates,
continue to express the Exercise Price per share and the number of shares
purchasable thereunder as the Exercise Price per share and the number of shares
purchasable thereunder were expressed in the Warrant Certificates when the same
were originally issued.
e. After each adjustment of the Exercise Price pursuant to this
Section 8, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Exercise Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant, after such adjustment, and (iii) a
brief statement of the facts accounting for such adjustment. The Company will
promptly cause a brief summary thereof to be sent by first class mail to each
registered Holder at his last address as it shall appear on the registry books
of the Company. No failure to mail such notice nor any defect therein or in
the mailing thereof shall affect the validity thereof except as to the holder
to whom the Company failed to mail such notice, or except as to the holder
whose notice was defective. The affidavit of the Secretary or an Assistant
Secretary of the Company that such notice has been mailed shall, in the absence
of fraud, be prima facie evidence of the facts stated therein.
f. No adjustment of the Exercise Price shall be made as a result of
or in connection with the issuance or sale of shares of Common Stock pursuant
to options, warrants, stock purchase agreements and convertible or exchangeable
securities outstanding or in effect on the date hereof or granted upon the
consummation of and in connection with the first Business Combination (as
defined in the Registration Statement). In addition, registered Holders shall
not be entitled to cash dividends paid by the Company prior to the exercise of
any Warrant or Warrants held by them.
g. DEFINITION OF COMMON STOCK. For the purpose of this Agreement,
the term "Common Stock" shall mean (i) the class of stock designated as Common
Stock in the Certificate of Incorporation of the Company as it may be amended
as of the date hereof, or (ii) any other class of stock resulting from
successive changes or reclassification of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par
value to par value. In the event that the Company shall after the date hereof
issue securities with greater or superior voting rights than those of the
shares of Common Stock outstanding as of the date hereof, the Holder, at its
option, may receive upon exercise of any Warrant either shares of Common Stock
or a like number of such securities with greater or superior voting rights.
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<PAGE> 9
h. RECLASSIFICATION, MERGER OR CONSOLIDATION. The Company will not
merge, reorganize or take any other action which would terminate the Warrants
without first making adequate provision for the Warrants. In case of any
reclassification or change of the outstanding shares of Common Stock (other
than a change in par value to no par value, or from nor par value to par value,
or as a result of a subdivision or combination), or in case of any
consolidation of the Company with, or merger of the Company with, or merger of
the Company into, another corporation (other than a consolidation or merger in
which the Company is the continuing corporation and which does not result in
any reclassification or change of the outstanding Common Stock except a change
as a result of a subdivision or combination of such shares or a change in par
value, as aforesaid), or in the case of a sale or conveyance to another
corporation or other entity of the property of the Company as an entirety, the
Holder of each Warrant then outstanding or to be outstanding shall have the
right thereafter (until the expiration of such Warrant) to purchase, upon
exercise of such Warrant, the kind and number of shares of stock and other
securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance as if the Holder were the owner of
the shares of Common Stock underlying such Warrants immediately prior to any
such events at a price equal to the product of (x) the number of shares
issuable upon exercise of the Warrants and (y) the Exercise Prices in effect
immediately prior to the record date for such reclassification, change,
consolidation, merger, sale or conveyance, as if such Holder has exercised the
Warrants. In the event of a consolidation, merger, sale or conveyance of
property, the corporation formed by such consolidation or merger, or acquiring
such property, shall execute and deliver to the Holders a supplemental warrant
agreement to such effect. Such supplemental warrant agreement shall provide
for adjustments which shall be identical to the adjustment to those provided in
Section 8. The provisions of this Section 8(h) shall similarly apply to
successive consolidations or mergers.
i. NO ADJUSTMENT OF EXERCISE PRICES IN CERTAIN CASES. No adjustment
of the Exercise Prices shall be made:
(1) Upon the issuance or sale of (i) the Warrants or the Warrant
Shares; (ii) the shares of Common Stock pursuant to the Public
Offering; or (iii) the shares of Common Stock issuable upon
the exercise of the options or warrants outstanding or in
effect on the date hereof as described in the prospectus
relating to the Public Offering.
(2) If the amount of said adjustments shall be less than five
($.05) cents per Share, provided, however, that in such case
any adjustment that would otherwise be required then to be
made shall be carried forward and shall be made at the time of
and together with the next subsequent adjustment which,
together with any adjustment so carried forward, shall amount
to at least five ($.05) cents per Share.
j. DIVIDENDS AND OTHER DISTRIBUTIONS. In the event that the Company
shall at any time prior to the exercise of all the Warrants declare a dividend
(other than a dividend consisting solely of shares of Common Stock) or
otherwise distribute to its stockholders any assets, property, rights,
evidences of indebtedness, securities (other than shares of Common Stock),
whether issued by the Company or by another, or any other thing of value, the
Holders of the unexercised Warrants shall thereafter be entitled, in addition
to the shares of Common Stock or other securities and property receivable upon
the exercise thereof, to receive, upon the exercise of such Warrants, the same
property, assets, rights, evidences of indebtedness, securities or any other
thing of value that they would have been entitled to receive at the time of
such dividend or distribution as if the Warrants had been exercised immediately
prior to such
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dividend or distribution. At the time of any such dividend or distribution,
the Company shall make appropriate reserves to ensure the timely performance of
the provisions of this Section 8 (j).
k. SUBSCRIPTION RIGHTS FOR SHARES OF COMMON STOCK OF OTHER
SECURITIES. In the event that the Company or an affiliate of the Company shall
at any time after the date hereof and prior to the exercise of all the Warrants
issue any rights to subscribe for shares of Common Stock or any other
securities of the Company or of such affiliate to all the stockholders of the
Company, the Holders of the unexercised Warrants shall be entitled to receive,
in addition to the Warrant Shares receivable upon the exercise of the Warrants,
such rights at the time such rights are distributed to the other stockholders
of the Company.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each Warrant Certificate
is exchangeable without expense, upon the surrender thereof by the registered
Holder at the principal executive office of the Company, for a new Warrant
Certificate of like tenor and date representing in the aggregate the right to
purchase the same number of Shares in such denominations as shall be designated
by the Holder thereof at the time of such surrender. Upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of any Warrant Certificate, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and reimbursement to the Company of all reasonable expenses incidental thereto,
and upon surrender and cancellation of the Warrants, if mutilated, the Company
will make and deliver a new Warrant Certificate of like tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be required to
issue certificates representing fractions of Shares upon the exercise of the
Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests; provided, however, that if a Holder exercises all
Warrants held of record by such Holder the fractional interests shall be
eliminated by rounding any fraction up to the nearest whole number of Shares.
11. RESERVATION AND LISTING OF SECURITIES. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Warrants, such number of
shares of Common Stock as shall be issuable upon the exercise on conversion
thereof. The Company covenants and agrees that, upon exercise of the Warrants
and payment of the Exercise Price therefor, all the Warrant Shares issuable
upon such exercise shall be duly and validly issued, fully paid, nonassessable
and not subject to the preemptive rights of any stockholder. As long as the
Warrants shall be outstanding, the Company shall use its best efforts to cause
the Common Stock to be listed and quoted (subject to official notice of
issuance) on all securities exchanges on which the Common Stock issued to the
public in connection herewith may then be listed or quoted.
12. NOTICES TO WARRANT HOLDERS. Nothing contained in this Agreement shall be
construed as conferring upon the Holders the right to vote or to consent or to
receive notice as a stockholder in respect of any meetings of stockholders for
the election of directors or any other matter, or as having any rights
whatsoever as a stockholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
a. the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
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b. the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any option,
right or warrant to subscribe therefor; or
c. a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; then, in any one or more of said events, the Company shall give
written notice of such event at least fifteen (15) days prior to the date fixed
as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, or entitled to
vote on such proposed dissolution, liquidation, winding up or sale. Such notice
shall specify such record date or the date of closing the transfer books, as
the case may be. Failure to give such notice or any defect therein shall not
affect the validity of any action taken in connection with the declaration or
payment of any such dividend, or the issuance of any convertible or
exchangeable securities, or subscription rights, options or warrants, or any
proposed dissolution, liquidation, winding up or sale.
13. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
(a) personally delivered, (b) three (3) business days after having been
properly addressed, enclosed in a properly sealed envelope or wrapper and sent
postage-paid by first class mail, (c) transmitted by facsimile transmission, if
acknowledged by such facsimile equipment as received, or (d) one (1) business
day after being sent, at the expense of the sender, by Federal Express(R),
Airborne(R), U.S. Express Mail(R) or similar overnight carrier:
a. If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
b. If to the Company to the address set forth in Section 3 hereof or
to such other address as the Company may designate by notice to the Holders.
14. SUPPLEMENTS AND AMENDMENTS. The Company and the Underwriter may from time
to time supplement or amend this Agreement without the approval of any Holders
of Warrant Certificates (other than the Underwriter) in order to cure any
ambiguity, to correct or supplement any provision contained herein which may be
defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the
Company and the Underwriter may deem necessary or desirable and which the
Company and the Underwriter deem shall not adversely affect the interests of
the Holders of Warrant Certificates.
15. SUCCESSORS. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Underwriter, the
Holders and their respective successors and assigns hereunder.
16. TERMINATION. This Agreement shall terminate at the close of business on
__________, 2006. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on the later of the expiration of any applicable statue of limitations
or ________, 2007.
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17. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and each
Warrant Certificate issued hereunder shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be construed
in accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws, except that matters concerning the
validity of the issuance of securities shall be determined and construed in
accordance with the laws of the State of Florida. The Company, the Underwriter
and the Holders hereby agree that any action, proceeding or claim against it
arising out of, or relating in any way to, this Agreement shall be brought and
enforced in the courts of the State of New York or of the United States of
America for the Southern District of New York, and irrevocably submits to such
jurisdiction, which jurisdiction shall be exclusive. The Company, the
Underwriter and the Holders hereby irrevocably waive any objection to such
exclusive jurisdiction or inconvenient forum. Any such process or summons to
be served upon any of the Company, the Underwriter and the Holders (at the
option of the party bringing such action, proceeding or claim) may be served by
transmitting a copy thereof, by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
13 hereof. Such mailing shall be deemed personal service and shall be legal
and binding upon the party so served in any action, proceeding or claim.
18. ENTIRE AGREEMENT; MODIFICATION. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to
the subject matter hereof. Subject to Section 14, this Agreement may not be
modified or amended except by a writing duly signed by the party against whom
enforcement of the modification or amendment is sought.
19. SEVERABILITY. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
21. CAPTIONS. The caption headings of the Sections of this Agreement are for
convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive
effect.
22. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed
to give to any person or corporation, other than the Company and the
Underwriter and any other registered Holder(s) of the Warrant Certificates or
Warrant Shares, any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole and exclusive benefit of
the Company and the Underwriter and any other Holder(s) of the Warrant
Certificates or Warrant Shares.
23. COUNTERPARTS. This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and such counterparts shall together constitute but one and the same
instrument.
24. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the Company, the Underwriter and their successors and assigns and
the Holders from time to time of the Warrant Certificate(s) or any of them.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
ALL AMERICAN FOOD GROUP, INC.
By:
---------------------------------
Andrew Thorburn, Chairman
and Chief Executive Officer
R.T.G. RICHARDS & COMPANY, INC.
By:
---------------------------------
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EXHIBIT A
ALL AMERICAN FOOD GROUP, INC.
WARRANT CERTIFICATE
THE SECURITIES ISSUABLE UPON EXERCISE OF THE WARRANT REPRESENTED BY THIS
CERTIFICATE MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (I) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933
ACT"), (II) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (III) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE OR
SOLD EXCEPT PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933
ACT, OR (II) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY
SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION
UNDER SUCH 1933 ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANT REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE COMMENCING ________, 1997 THROUGH 5:00 P.M., NEW YORK TIME
________, 2001
NO. WC-1 _________ WARRANTS
This Warrant Certificate certifies that ______________ _______________
or registered assigns, is the registered holder of _________ warrants (the
"Warrants") to purchase initially, at any time from _______, 1997, until 5:00
p.m., New York time on _______, 2001 (the "Expiration Date"), up to ________
fully paid and non-assessable shares (the "Shares"), of Common Stock, no par
value (the "Common Stock"), of All American Food Group, Inc., a New Jersey
corporation (the "Company") at the exercise price of $____ per Share (the
"Exercise Price"), upon the surrender of this Warrant Certificate and payment
of the Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the warrant agreement dated as of _______,
1996 (the "Warrant Agreement") by and between the Company and R.T.G. Richards &
Company, Inc. Payment of the Exercise Price shall be made by certified or
cashier's check or money order payable to the order of the Company.
No Warrant may be exercised after 5:00 P.M, New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by
14
<PAGE> 15
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the
rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued to the transferee(s) in exchange as provided
herein, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the undersigned has executed this certificate this
__th day of _______, 1996.
[SEAL]
ALL AMERICAN FOOD GROUP, INC.
By:
-------------------------------
Andrew Thorburn, Chairman
and Chief Executive Officer
ATTEST:
By:
-----------------------------
15
<PAGE> 16
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED
--------------------------------------------
hereby sells, assigns and transfers unto
--------------------------------------
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ____________________
Attorney, to transfer the within Warrant Certificate on the books of All
American Group, Inc., with full power of substitution.
Dated:
--------------------
Signature
---------------------
(Signature must conform in all
respects to the name of holder
as specified on the face of the
Warrant Certificate.)
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
16
<PAGE> 17
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant Certificate, to purchase:
_______ Shares
and herewith tenders in payment for such securities a certified or cashier's
check or money order payable to the order of All American Food Group, Inc. in
the amount of $_______________, all in accordance with the terms hereof. The
undersigned requests that a certificate for such securities be registered in
the name of _____________________ whose address is ________________________ and
that such Certificate be delivered to _____________________________ whose
address is ______________________________________________________.
Dated:____________________
Signature
-----------------------
(Signature must conform in all
respects to the name of holder
as specified on the face of
the Warrant Certificate.)
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
17
<PAGE> 1
EXHIBIT 5.1
September 18, 1996
All American Food Group, Inc.
9 Law Drive
Fairfield, NJ 07006
Ladies and Gentlemen:
We understand that All American Food Group, Inc. (the "Company") has
filed with the Securities and Exchange Commission a registration statement on
Form SB-2 (Registration No. 333-4490), including prospectuses and all
amendments, exhibits and documents related thereto (collectively, the
"Registration Statement"), under the Securities Act of 1933, as amended,
covering a proposed public offering of up to 690,000 shares of its common stock
(the "Shares"). Our opinion has been requested as to whether the Shares will,
when sold in the manner and under the circumstances described in the
Registration Statement, be legally issued, fully paid and non-assessable.
We formed the Corporation under the name "Jutland Food Group, Inc" in
1993 and since that time have on occasion performed specific functions at its
request, although, we have not functioned as general counsel to the
Corporation.
We have examined the Company's Registration Statement on Form SB-2
(No. 333-4490), and Amendments 3 and 4. We also have examined (i) Restated
Certificate of Incorporation of the Corporation as filed with the Secretary of
State of the State of the State of New Jersey on October 24, 1995; (ii) Minutes
by Unanimous Written Consent of the Directors of the Corporation effective June
6, 1996; and (iii) Minutes by Unanimous Written Consent of the Directors of the
Corporation effective September 17, 1996. In such examinations, we have
assumed the genuineness of all signatures, the legal capacity of all natural
persons, the accuracy, completeness and authenticity of all documents submitted
to us as originals and the conformity with the original documents of all
documents submitted to us as copies.
<PAGE> 2
All American Food Group, Inc.
September 18, 1996,
Page 2
Based upon our examination of the foregoing and the laws of the State
of New Jersey as presently in effect, we are of the opinion that, upon issuance
and delivery in the manner and under the circumstances described in the
Registration Statement, appropriate certificates evidencing the Shares being
properly executed and delivered, and upon receipt of the price per Share
determined in the manner contemplated by the Registration Statement, the Shares
will be validly issued, fully paid and non-assessable.
We are members of the Bar of the State of New Jersey and the foregoing
opinion is limited to the laws of that State.
The statements made and opinions rendered herein are limited to the
matters stated herein and are based upon and limited by the law as in effect as
of the date hereof and our knowledge of the facts relevant to such opinions on
such date. We assume no obligation to update the opinions set forth herein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the reference to Dwyer & Canellis,
P.A., under the caption "Legal Matters" in the prospectus that forms a part
thereof.
Very truly yours,
DWYER & CANELLIS, P.A.
By: /s/ George W. Canellis
------------------------
George W. Canellis
<PAGE> 1
EXHIBIT 10.4
FIRST AMENDMENTENT OF
ALL AMERICAN FOOD GROUP, INC.
OMNIBUS STOCK PLAN
1. AMENDMENT AND RESTATEMENT, PURPOSE AND TYPES OF AWARDS
On June 6, 1996 the Board of Directors of All American Food Group,
Inc. adopted the ALL AMERICAN FOOD GROUP, INC. OMNIBUS STOCK PLAN (the "Plan").
Pursuant to resolutions duly adopted by the Board of Directors and in
accordance with Section 10 of the Plan, the Plan has been fully amended and
restated and is embodied in this document.
The purpose of the Plan is to promote the long-term growth and
profitability of All American Food Group, Inc. (the "Corporation") by (i)
providing key people with incentives to improve stockholder value and to
contribute to the growth and financial success of the Corporation, and (ii)
enabling the Corporation to attract, retain and reward the best available
persons for positions of substantial responsibility.
The Plan permits the granting of stock options, including nonqualified
stock options and incentive stock options qualifying under Section 422 of the
Code, in any combination (collectively, "Options").
2. DEFINITIONS
Under this Plan, except where the context otherwise indicates, the
following definitions apply:
(a) "Board" shall mean the Board of Directors of the Corporation.
(b) "Change in Control" shall mean (i) any sale, exchange or other
disposition of substantially all of the Corporation's assets; or (ii) any
merger, share exchange, consolidation or other reorganization or business
combination in which the Corporation is not the surviving or continuing
corporation, or in which the Corporation's stockholders become entitled to
receive cash, securities of the Corporation other than voting common stock, or
securities of another issuer.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended, and any regulations issued thereunder.
(d) "Committee" shall mean the Board or committee of Board members
appointed pursuant to Section 3 of the Plan to administer the Plan.
(e) "Common Stock" shall mean shares of the Corporation's common
stock, no par value.
(f) "Fair Market Value" of a share of the Corporation's Common
Stock for any purpose on a particular date shall be determined in a manner such
as the Committee shall in good faith determine to be appropriate; provided,
however, that if the Common Stock is publicly traded, then Fair Market Value
shall mean the last reported sale price per share of Common Stock, regular way,
or, in case no such sale takes place on such day, the average of the closing
<PAGE> 2
bid and asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on a national securities exchange or included for quotation
on a system established by the National Association of Securities Dealers, Inc.
("Nasdaq System"), or if the Common Stock is not so listed or admitted to
trading or included for quotation, the last quoted price, or if the Common
Stock is not so quoted, the average of the high bid and low asked prices,
regular way, in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotation System or, if such
system is no longer in use, the principal other automated quotations system
that may then be in use or, if the Common Stock is not quoted by any such
organization, the average of the closing bid and asked prices, regular way, as
furnished by a professional market maker making a market in the Common Stock as
selected in good faith by the Committee or by such other source or sources as
shall be selected in good faith by the Committee; and, provided further, that
in the case of incentive stock options, the determination of Fair Market Value
shall be made by the Committee in good faith in conformance with the Treasury
Regulations under Section 422 of the Code. If, as the case may be, the
relevant date is not a trading day, the determination shall be made as of the
next preceding trading day. As used herein, the term "trading day" shall mean
a day on which public trading of securities occurs and is reported in the
principal consolidated reporting system referred to above, or if the Common
Stock is not listed or admitted to trading on a national securities exchange or
included for quotation on the Nasdaq System, any day other than a Saturday, a
Sunday or a day in which banking institutions in the State of New York are
closed.
(g) "Grant Agreement" shall mean a written agreement between the
Corporation and a grantee memorializing the terms and conditions of an Option
granted pursuant to the Plan.
(h) "Grant Date" shall mean the date on which the Committee
formally acts to grant an Option to a grantee or such other date as the
Committee shall so designate at the time of taking such formal action.
(i) "Parent" shall mean a corporation, whether now or hereafter
existing, within the meaning of the definition of "parent corporation" provided
in Section 424(e) of the Code, or any successor thereto of similar import.
(j) "Rule 16b-3" shall mean Rule 16b-3 as in effect under the
Exchange Act on the effective date of the Plan, or any successor provision
prescribing conditions necessary to exempt the issuance of securities under the
Plan (and further transactions in such securities) from Section 16(b) of the
Exchange Act.
(k) "Subsidiary" and "subsidiaries" shall mean only a corporation
or corporations, whether now or hereafter existing, within the meaning of the
definition of "subsidiary corporation" provided in Section 424(f) of the Code,
or any successor thereto of similar import.
3. ADMINISTRATION
(a) Procedure. The Plan shall be administered by the Board. In
the alternative, the Board may appoint a Committee consisting of not less than
two (2) members of the Board to administer the Plan on behalf of the Board,
subject to such terms and conditions as the Board may prescribe. Once
appointed, the Committee shall continue to serve until otherwise directed by
the Board. From time to time, the Board may increase the size of the Committee
and appoint
-2-
<PAGE> 3
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies, however caused, and
remove all members of the Committee and, thereafter, directly administer the
Plan. In the event that the Board is the administrator of the Plan in lieu of
a Committee, the term "Committee" as used herein shall be deemed to mean the
Board.
Members of the Board or Committee who are either eligible for
Options or have been granted Options may vote on any matters affecting the
administration of the Plan or the grant of Options pursuant to the Plan, except
that no such member shall act upon the granting of an Option to himself or
herself, but any such member may be counted in determining the existence of a
quorum at any meeting of the Board or the Committee during which action is
taken with respect to the granting of an Option to him or her.
The Committee shall meet at such times and places and upon
such notice as it may determine. A majority of the Committee shall constitute
a quorum. Any acts by the Committee may be taken at any meeting at which a
quorum is present and shall be by majority vote of those members entitled to
vote. Additionally, any acts reduced to writing or approved in writing by all
of the members of the Committee shall be valid acts of the Committee.
(b) Procedure After Registration of Common Stock. Notwithstanding
the provisions of subsection (a) above, in the event that the Common Stock or
any other capital stock of the Corporation becomes registered under Section 12
of the Exchange Act, the members of the Committee shall be both "non-employee
directors" within the meaning of Rule 16b-3, and "outside directors" within the
meaning of Section 162(m) of the Code. Upon and after the point in time that
the Common Stock or any other capital stock of the Corporation becomes
registered under Section 12 of the Exchange Act, the Board shall take all
action necessary to cause the Plan to be administered in accordance with the
then effective provisions of Rule 16b-3, provided that any amendment to the
Plan required for compliance with such provisions shall be made in accordance
with Section 10 of the Plan.
(c) Powers of the Committee. The Committee shall have all the
powers vested in it by the terms of the Plan, such powers to include authority,
in its sole and absolute discretion, to grant Options under the Plan, prescribe
Grant Agreements evidencing such Options and establish programs for granting
Options. The Committee shall have full power and authority to take all other
actions necessary to carry out the purpose and intent of the Plan, including,
but not limited to, the authority to:
(i) determine the eligible persons to whom, and the time or
times at which Options shall be granted,
(ii) determine the types of Options to be granted,
(iii) determine the number of shares to be covered by each
Option,
(iv) impose such terms, limitations, restrictions and
conditions upon any such Option as the Committee shall deem
appropriate,
(v) modify, extend or renew outstanding Options, accept the
surrender of outstanding Options and substitute new Options, provided
that no such action
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<PAGE> 4
shall be taken with respect to any outstanding Option which would
adversely affect the grantee without the grantee's consent, and
(vi) accelerate or otherwise change the time in which an
Option may be exercised, in whole or in part, including, but not
limited to, any restriction or condition with respect to the vesting
or exercisability of an Option following termination of any grantee's
employment.
The Committee shall have full power and authority to administer and interpret
the Plan and to adopt such rules, regulations, agreements, guidelines and
instruments for the administration of the Plan and for the conduct of its
business as the Committee deems necessary or advisable and to interpret same,
all within the Committee's sole and absolute discretion.
(d) Limited Liability. To the maximum extent permitted by law, no
member of the Committee shall be liable for any action taken or decision made
in good faith relating to the Plan or any Option thereunder.
(e) Indemnification. To the maximum extent permitted by law, the
members of the Committee shall be indemnified by the Corporation in respect of
all their activities under the Plan.
(f) Effect of Committee's Decision. All actions taken and
decisions and determinations made by the Committee on all matters relating to
the Plan pursuant to the powers vested in it hereunder shall be in the
Committee's sole and absolute discretion and shall be conclusive and binding on
all parties concerned, including the Corporation, its stockholders, any
participants in the Plan and any other employee of the Corporation, and their
respective successors in interest.
4. SHARES AVAILABLE FOR THE PLAN; MAXIMUM AWARDS
Subject to adjustments as provided in Section 9 of the Plan, the
shares of stock that may be delivered or purchased under the Plan, including
with respect to incentive stock options intended to qualify under Section 422
of the Code, shall not exceed an aggregate of 350,000 shares of Common Stock of
the Corporation. The Corporation shall reserve said number of shares for
Options to be awarded under the Plan, subject to adjustments as provided in
Section 9 of the Plan. If any Option, or portion of an Option, under the Plan
expires or terminates unexercised, becomes unexercisable or is forfeited or
otherwise terminated, surrendered or canceled as to any shares, the shares
subject to such Option shall thereafter be available for further Options under
the Plan.
The maximum number of shares of Common Stock subject to Options of any
combination that may be granted during any 12 consecutive month period to any
one individual shall be limited to 120,000 shares. To the extent required by
Section 162(m) of the Code, if an option is terminated, surrendered or
canceled, the shares of Common Stock subject to such option shall continue to
be counted against the maximum number of shares for which options may be
granted for any one calendar year to any one individual.
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<PAGE> 5
5. PARTICIPATION
Participation in the Plan shall be open to all employees, officers and
directors of the Corporation, or of any Parent or Subsidiary of the
Corporation, as may be selected by the Committee from time to time.
Notwithstanding the foregoing, participation in the Plan with respect to awards
of incentive stock options shall be limited to employees of the Corporation or
of any Parent or Subsidiary of the Corporation. To the extent necessary to
comply with Rule 16b-3 or to constitute an "outside director" within the
meaning of Section 162(m) of the Code, and only in the event that Rule 16b-3 or
Section 162(m) of the Code is applicable to the Plan or an Option awarded
thereunder, Committee members shall not be eligible to participate in the Plan
while members of the Committee.
Options may be granted to such eligible persons and for or with
respect to such number of shares of Common Stock as the Committee shall
determine, subject to the limitations in Section 4 of the Plan. A grant of any
type of Option made in any one year to an eligible person shall neither
guarantee nor preclude a further grant of that or any other type of Option to
such person in that year or subsequent years.
6. STOCK OPTIONS
Subject to the other applicable provisions of the Plan, the Committee
may from time to time grant to eligible participants nonqualified stock options
or incentive stock options as that term is defined in Section 422 of the Code.
The Options granted shall be subject to the following terms and conditions.
(a) Grant of Option. The grant of an Option shall be evidenced by
a Grant Agreement, executed by the Corporation and the grantee, stating the
number of shares of Common Stock subject to the Option evidenced thereby and
the terms and conditions of such Option, in such form as the Committee may from
time to time determine.
(b) Price. The price per share payable upon the exercise of each
Option ("exercise price") shall be determined by the Committee; provided,
however, that in the case of incentive stock options, the exercise price shall
not be less than 100% of the Fair Market Value of the shares on the date the
Option is granted.
(c) Payment. Options may be exercised in whole or in part by
payment of the exercise price of the shares to be acquired in accordance with
the provisions of the Grant Agreement, and/or such rules and regulations as the
Committee may have prescribed, and/or such determinations, orders, or decisions
as the Committee may have made. Payment of the exercise price shall be made in
cash (or cash equivalents acceptable to the Committee) or by such other means
as the Committee may prescribe. The Corporation may make or guarantee loans to
grantees to assist grantees in exercising Options.
If the Common Stock is registered under Section 12(b) or 12(g) of the
Exchange Act, the Committee, subject to such limitations as it may determine,
may authorize payment of the exercise price, in whole or in part, by delivery
of a properly executed exercise notice, together with irrevocable instructions,
to: (i) a brokerage firm designated by the Corporation to deliver promptly to
the Corporation the aggregate amount of sale or loan proceeds to pay the
exercise price and any withholding tax obligations that may arise in connection
with the exercise, and
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<PAGE> 6
(ii) the Corporation to deliver the certificates for such purchased shares
directly to such brokerage firm.
(d) Terms of Options. The term during which each Option may be
exercised shall be determined by the Committee. In no event shall an Option be
exercisable less than six months nor more than ten years from the date it is
granted. Prior to the exercise of the Option and delivery of the shares
certificates represented thereby, the grantee shall have none of the rights of
a stockholder with respect to any shares represented by an outstanding Option.
(e) Restrictions on Incentive Stock Options. The aggregate Fair
Market Value (determined as of the Grant Date) of shares of Common Stock with
respect to which all incentive stock options first become exercisable by any
grantee in any calendar year under this or any other plan of the Corporation
and its Parent and Subsidiary corporations may not exceed $100,000 or such
other amount as may be permitted from time to time under Section 422 of the
Code. To the extent that such aggregate Fair Market Value shall exceed
$100,000, or other applicable amount, such Options (taking Options into account
in the order in which they were granted) shall be treated as nonqualified stock
options. In such case, the Corporation may designate the shares of Common
Stock that are to be treated as stock acquired pursuant to the exercise of an
incentive stock option by issuing a separate certificate for such shares and
identifying the certificate as incentive stock option shares in the stock
transfer records of the Corporation.
The exercise price of any incentive stock option granted to a grantee
who owns (within the meaning of Section 422(b)(6) of the Code, after the
application of the attribution rules in Section 424(d) of the Code) more than
10% of the total combined voting power of all classes of shares of the
Corporation or its Parent or Subsidiary corporations (within the meaning of
Sections 422 and 424 of the Code) shall be not less than 110% of the Fair
Market Value of the Common Stock on the grant date and the term of such Option
shall not exceed five years.
Incentive stock options shall only be issued to employees of the
Corporation or of a Parent or Subsidiary of the Corporation.
(f) Other Terms and Conditions. Options may contain such other
provisions, not inconsistent with the provisions of the Plan, as the Committee
shall determine appropriate from time to time. No Option shall be an incentive
stock option unless so designated by the Committee at the time of grant or in
the Grant Agreement evidencing such Option.
7. WITHHOLDING OF TAXES
The Corporation may require, as a condition to any exercise of an
Option under the Plan or a Grant Agreement (hereinafter referred to as a
"taxable event"), that the grantee pay to the Corporation, in cash, any
federal, state or local taxes of any kind required by law to be withheld with
respect to any taxable event under the Plan. The Corporation, to the extent
permitted or required by law, shall have the right to deduct from any payment
of any kind (including salary or bonus) otherwise due to a grantee any federal,
state or local taxes of any kind required by law to be withheld with respect to
any taxable event under the Plan, or to retain or sell without notice a
sufficient number of the shares to be issued to such grantee to cover any such
taxes.
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<PAGE> 7
8. TRANSFERABILITY
To the extent required to comply with Rule 16b-3, and in any event in
the case of an incentive stock option, no Option granted under the Plan shall
be transferable by a grantee otherwise than by will or the laws of descent and
distribution. Unless otherwise determined by the Committee in accord with the
provisions of the immediately preceding sentence, an Option may be exercised
during the lifetime of the grantee, only by the grantee or, during the period
the grantee is under a legal disability, by the grantee's guardian or legal
representative.
9. ADJUSTMENTS; BUSINESS COMBINATIONS
In the event of a reclassification, recapitalization, stock split,
stock dividend, combination of shares, or other similar event, the maximum
number and kind of shares reserved for issuance or with respect to which
Options may be granted under the Plan as provided in Section 4 shall be
adjusted to reflect such event, and the Committee shall make such adjustments
as it deems appropriate and equitable in the number, kind and price of shares
covered by outstanding Options made under the Plan, and in any other matters
which relate to Options and which are affected by the changes in the Common
Stock referred to above.
In the event of any proposed Change in Control, the Committee shall
take such action as it deems appropriate to effectuate the purposes of this
Plan and to protect the grantees of Options, which action may include, but
without limitation, any one or more of the following: (i) acceleration or
change of the exercise dates of any Option; (ii) arrangements with grantees for
the payment of appropriate consideration to them for the cancellation and
surrender of any Option; and (iii) in any case where equity securities other
than Common Stock of the Corporation are proposed to be delivered in exchange
for or with respect to Common Stock of the Corporation, arrangements providing
that any Option shall become one or more Options with respect to such other
equity securities.
In the event the Corporation dissolves and liquidates (other than
pursuant to a plan of merger or reorganization), then notwithstanding any
restrictions on exercise set forth in this Plan or any Grant Agreement (i) each
grantee shall have the right to exercise his Option at any time up to ten (10)
days prior to the effective date of such liquidation and dissolution; and (ii)
the Committee may make arrangements with the grantees for the payment of
appropriate consideration to them for the cancellation and surrender of any
Option that is so canceled or surrendered at any time up to ten (10) days prior
to the effective date of such liquidation and dissolution. The Committee may
establish a different period (and different conditions) for such exercise,
cancellation, or surrender to avoid subjecting the grantee to liability under
Section 16(b) of the Exchange Act. Any Option not so exercised, canceled, or
surrendered shall terminate on the last day for exercise prior to such
effective date.
10. TERMINATION AND MODIFICATION OF THE PLAN
The Board, without further approval of the stockholders, may modify or
terminate the Plan or any portion thereof at any time, except that no
modification shall become effective without prior approval of the stockholders
of the Corporation if stockholder approval is necessary to comply with any tax
or regulatory requirement or rule of any exchange or Nasdaq System upon which
the Common Stock is listed or quoted; including for this purpose stockholder
approval that is required for continued compliance with Rule 16b-3 or
stockholder approval that is required to enable the Committee to grant
incentive stock options pursuant to the Plan.
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<PAGE> 8
The Committee shall be authorized to make minor or administrative
modifications to the Plan as well as modifications to the Plan that may be
dictated by requirements of federal or state laws applicable to the Corporation
or that may be authorized or made desirable by such laws. The Committee may
amend or modify the grant of any outstanding Option in any manner to the extent
that the Committee would have had the authority to make such Option as so
modified or amended. No modification may be made that would materially
adversely affect any Option previously made under the Plan without the approval
of the grantee.
11. NON-GUARANTEE OF EMPLOYMENT
Nothing in the Plan or in any Grant Agreement thereunder shall confer
any right on an employee to continue in the employ of the Corporation or shall
interfere in any way with the right of the Corporation to terminate an employee
at any time.
12. TERMINATION OF EMPLOYMENT
For purposes of maintaining a grantee's continuous status as an
employee and accrual of rights under any Options, transfer of an employee among
the Corporation and the Corporation's Parent or Subsidiaries shall not be
considered a termination of employment. Nor shall it be considered a
termination of employment for such purposes if an employee is placed on
military or sick leave or such other leave of absence which is considered as
continuing intact the employment relationship; in such a case, the employment
relationship shall be continued until the date when an employee's right to
reemployment shall no longer be guaranteed either by law or contract.
13. WRITTEN AGREEMENT
Each Grant Agreement entered into between the Corporation and a
grantee with respect to an Option granted under the Plan shall incorporate the
terms of this Plan and shall contain such provisions, consistent with the
provisions of the Plan, as may be established by the Committee.
14. NON-UNIFORM DETERMINATIONS
The Committee's determinations under the Plan (including without
limitation determinations of the persons to receive Options, the form, amount
and timing of such Options, the terms and provisions of such Options and the
agreements evidencing same) need not be uniform and may be made by it
selectively among persons who receive, or are eligible to receive, Options
under the Plan, whether or not such persons are similarly situated.
15. LIMITATION ON BENEFITS
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3. To the extent any provision of the Plan or action by
the Committee fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
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<PAGE> 9
16. LISTING AND REGISTRATION
If the Corporation determines that the listing, registration or
qualification upon any securities exchange or upon any Nasdaq System or under
any law, of shares subject to any Option is necessary or desirable as a
condition of, or in connection with, the granting of same or the issue or
purchase of shares thereunder, no such Option may be exercised in whole or in
part and no restrictions on such Option shall lapse, unless such listing,
registration or qualification is effected free of any conditions not acceptable
to the Corporation.
17. COMPLIANCE WITH SECURITIES LAWS
The Corporation may require that a grantee, as a condition to exercise
of an Option, and as a condition to the delivery of any share certificate,
provide to the Corporation, at the time of each such exercise and each such
delivery, a written representation that the shares of Common Stock being
acquired shall be acquired by the grantee solely for investment and will not be
sold or transferred without registration or the availability of an exemption
from registration under the Securities Act and applicable state securities
laws. The Corporation may also require that a grantee submit other written
representations which will permit the Corporation to comply with federal and
applicable state securities laws in connection with the issuance of the Common
Stock, including representations as to the knowledge and experience in
financial and business matters of the grantee and the grantee's ability to bear
the economic risk of the grantee's investment. The Corporation may require
that the grantee obtain a "purchaser representative" as that term is defined in
applicable federal and state securities laws. The stock certificates for any
shares of Common Stock issued pursuant to this Plan may bear a legend
restricting transferability of the shares of Common Stock unless such shares
are registered or an exemption from registration is available under the
Securities Act and applicable state securities laws. The Corporation may
notify its transfer agent to stop any transfer of shares of Common Stock not
made in compliance with these restrictions. Common Stock shall not be issued
with respect to an Option granted under the Plan unless the exercise of such
Option and the issuance and delivery of share certificates for such Common
Stock pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act, the Exchange Act, the rules
and regulations promulgated thereunder, and the requirements of any national
securities exchange or Nasdaq System upon which the Common Stock may then be
listed or quoted, and shall be further subject to the approval of counsel for
the Corporation with respect to such compliance to the extent such approval is
sought by the Committee.
18. GOVERNING LAW
The validity, construction and effect of the Plan, of Grant Agreements
entered into pursuant to the Plan, and of any rules, regulations,
determinations or decisions made by the Board or Committee relating to the Plan
or such Grant Agreements, and the rights of any and all persons having or
claiming to have any interest therein or thereunder, shall be determined
exclusively in accordance with applicable federal laws and the laws of the
State of New Jersey, without regard to its conflict of laws rules and
principles.
19. PLAN SUBJECT TO CHARTER AND BY-LAWS
This Plan is subject to the Charter and By-Laws of the Corporation, as
they may be amended from time to time.
-9-
<PAGE> 10
20. EFFECTIVE DATE; TERMINATION DATE
The Plan is effective as of June 6, 1996, the date on which the Plan
was adopted by the Board, subject to approval of the stockholders within twelve
months of such date. Unless previously terminated, the Plan shall terminate on
the close of business on June 6, 2006, ten years from the effective date.
Subject to other applicable provisions of the Plan, all Options granted under
the Plan prior to termination of the Plan shall remain in effect until such
Options have been satisfied or terminated in accordance with the Plan and the
terms of such Options.
-10-
<PAGE> 1
EXHIBIT 11
ALL AMERICAN FOOD GROUP, INC. (FORMERLY JUTLAND FOOD GROUP, INC.) AND
SUBSIDIARIES SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Nine Months Ended July 31, Year Ended
------------------------------- January 31,
1996 1995 1996
---- ---- ----
<S> <C> <C> <C>
PRIMARY
-------
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . ($1,204,571) ($1,201,282) ($1,537,250)
Less- increase in carrying amount of redeemable
preferred stock . . . . . . . . . . . . . . . . . . . . . . (714,426) -- --
--------------------------------------------------------
($1,918,997) ($1,201,282) ($1,537,250)
========================================================
Weighted average number of common shares outstanding . . . . . 943,150 1,082,015 943,150
Add - common shares (determined using the "treasury
stock" (method) representing additional shares(1)
as if those shares were outstanding for all periods) . . . . 430,558 430,558 430,558
--------------------------------------------------------
Weighted average number of shares used in calculation of primary
loss per share . . . . . . . . . . . . . . . . . . . . . . . . 1,373,708 1,512,573 1,373,708
========================================================
Primary net loss per common share . . . . . . . . . . . . . . . ($1.40) ($0.79) ($1.12)
========================================================
FULLY DILUTED
-------------
Net loss for primary loss per common share
and for fully diluted per share amounts . . . . . . . . . . . . ($1,918,997) ($1,201,282) ($1,537,250)
========================================================
Weighted average number of shares used in calculating
primary loss per share . . . . . . . . . . . . . . . . . . . . 1,373,708 1,512,573 1,373,708
Add incremental shares representing:
Shares issuable upon conversion of convertible
preferred stock . . . . . . . . . . . . . . . . . . . . . . 712,500 579,213 713,459
Shares issuable upon exercise of stock options . . . . . . . . 15,000 9,945 15,000
--------------------------------------------------------
Weighted average number of shares used in calculation
of fully diluted loss per share . . . . . . . . . . . . . . . . 2,101,208 2,101,731 2,107,167
========================================================
Fully diluted net loss per common share . . . . . . . . . . . . ($0.91) ($0.57) ($0.73)
========================================================
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
October 31, January 31,
1995 1995
---- ----
<S> <C> <C>
PRIMARY
-------
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . ($1,151,545) ($1,062,621)
Less- increase in carrying amount of redeemable
preferred stock . . . . . . . . . . . . . . . . . . . . . . -- --
------------------------------------
($1,151,545) ($1,062,621)
====================================
Weighted average number of common shares outstanding . . . . . 943,150 983,084
Add - common shares (determined using the "treasury
stock" (method) representing additional shares(1)
as if those shares were outstanding for all periods) . . . . 430,558 430,558
------------------------------------
Weighted average number of shares used in calculation of primary
loss per share . . . . . . . . . . . . . . . . . . . . . . . . 1,373,708 1,413,642
====================================
Primary net loss per common share . . . . . . . . . . . . . . . ($0.84) ($0.75)
====================================
FULLY DILUTED
-------------
Net loss for primary loss per common share
and for fully diluted per share amounts . . . . . . . . . . . . ($1,151,545) ($1,062,621)
====================================
Weighted average number of shares used in calculating
primary loss per share . . . . . . . . . . . . . . . . . . . . 1,373,708 1,413,642
Add incremental shares representing:
Shares issuable upon conversion of convertible
preferred stock . . . . . . . . . . . . . . . . . . . . . . 713,782 100,000
Shares issuable upon exercise of stock options . . . . . . . . 15,000 --
------------------------------------
Weighted average number of shares used in calculation
of fully diluted loss per share . . . . . . . . . . . . . . . . 2,102,490 1,513,642
====================================
Fully diluted net loss per common share . . . . . . . . . . . . ($0.55) ($0.70)
====================================
</TABLE>
(1) Additional shares represent the number of shares and options
issued within the twelve months prior to the Company filing a
registration statement on May 3, 1996 for an initial public offering
(IPO) that were issued for consideration per share or at an exercise
price per share less than the anticipated IPO price of $3.50 per
share.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 185,585
<SECURITIES> 0
<RECEIVABLES> 353,889
<ALLOWANCES> 15,000
<INVENTORY> 138,228
<CURRENT-ASSETS> 719,807
<PP&E> 1,155,179
<DEPRECIATION> 227,745
<TOTAL-ASSETS> 2,155,255
<CURRENT-LIABILITIES> 993,614
<BONDS> 0
714,426
386,157
<COMMON> 3,360,136
<OTHER-SE> (3,516,474)
<TOTAL-LIABILITY-AND-EQUITY> 2,155,255
<SALES> 1,475,318
<TOTAL-REVENUES> 1,712,541
<CGS> 1,094,082
<TOTAL-COSTS> 2,889,679
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,433
<INCOME-PRETAX> (1,204,571)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,204,571)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,204,571)
<EPS-PRIMARY> (1.40)
<EPS-DILUTED> (.91)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> JUL-31-1995
<CASH> 40,675
<SECURITIES> 0
<RECEIVABLES> 92,536
<ALLOWANCES> 15,000
<INVENTORY> 144,174
<CURRENT-ASSETS> 257,958
<PP&E> 889,845
<DEPRECIATION> 190,935
<TOTAL-ASSETS> 1,497,827
<CURRENT-LIABILITIES> 1,230,394
<BONDS> 0
0
751,580
<COMMON> 874,400
<OTHER-SE> (1,908,572)
<TOTAL-LIABILITY-AND-EQUITY> 1,497,827
<SALES> 1,933,666
<TOTAL-REVENUES> 2,026,836
<CGS> 1,624,230
<TOTAL-COSTS> 3,192,737
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (20,000)
<INTEREST-EXPENSE> 55,381
<INCOME-PRETAX> (1,201,282)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,201,282)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,201,282)
<EPS-PRIMARY> (.79)
<EPS-DILUTED> (.57)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> FEB-01-1995
<PERIOD-END> OCT-31-1995
<CASH> 53,703
<SECURITIES> 0
<RECEIVABLES> 175,511
<ALLOWANCES> 15,000
<INVENTORY> 123,649
<CURRENT-ASSETS> 343,749
<PP&E> 663,491
<DEPRECIATION> 145,589
<TOTAL-ASSETS> 1,338,794
<CURRENT-LIABILITIES> 1,246,469
<BONDS> 0
0
1,022,580
<COMMON> 876,150
<OTHER-SE> (1,946,903)
<TOTAL-LIABILITY-AND-EQUITY> 1,338,794
<SALES> 1,973,067
<TOTAL-REVENUES> 2,350,268
<CGS> 1,739,147
<TOTAL-COSTS> 3,515,735
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (35,000)
<INTEREST-EXPENSE> 21,078
<INCOME-PRETAX> (1,151,545)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,151,545)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,151,545)
<EPS-PRIMARY> (.84)
<EPS-DILUTED> (.55)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> FEB-01-1994
<PERIOD-END> JAN-31-1995
<CASH> 55,472
<SECURITIES> 0
<RECEIVABLES> 144,980
<ALLOWANCES> 50,000
<INVENTORY> 182,364
<CURRENT-ASSETS> 363,816
<PP&E> 846,488
<DEPRECIATION> 134,802
<TOTAL-ASSETS> 1,743,561
<CURRENT-LIABILITIES> 902,836
<BONDS> 0
0
54,000
<COMMON> 1,277,000
<OTHER-SE> 757,646
<TOTAL-LIABILITY-AND-EQUITY> 1,743,561
<SALES> 1,982,978
<TOTAL-REVENUES> 1,982,978
<CGS> 1,602,538
<TOTAL-COSTS> 3,631,098
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 20,000
<INTEREST-EXPENSE> 38,651
<INCOME-PRETAX> (1,706,771)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,706,771)
<DISCONTINUED> 0
<EXTRAORDINARY> 644,150
<CHANGES> 0
<NET-INCOME> (1,062,621)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.70)
</TABLE>
