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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark One)
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number 0-21837
ALL AMERICAN FOOD GROUP, INC.
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(Name of Small Business Issuer in Its Charter)
New Jersey 22-3259558
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 Law Drive, Fairfield, New Jersey 07006
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (201) 244-9336
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, No Par Value
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(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes No X
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Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[ X ]
State issuer's revenues for its most recent fiscal year. $2,240,187.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock on January 31,
1997 was $9,441,198.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of outstanding shares of Common Stock of the registrant as of January
31, 1997 was 3,132,661.
DOCUMENTS INCORPORATED BY REFERENCE
Prospectus included as part of the Registrant's Registration Statement on Form
SB-2 (File No. 333-4490), effective December 11, 1996, incorporated by reference
in Item 13 of Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (Check One):
Yes No X
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TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I 1
ITEM 1. DESCRIPTION OF BUSINESS 1
ITEM 2. DESCRIPTION OF PROPERTY 16
ITEM 3. LEGAL PROCEEDINGS 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
PART II 18
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 20
ITEM 7. FINANCIAL STATEMENTS 22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 22
PART III 23
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT 23
ITEM 10. EXECUTIVE COMPENSATION 25
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 26
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 28
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K 29
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF 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 five 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. Between November 1, 1996 and January 31, 1997,
the Company opened one additional Goldberg's Company-owned store and two
additional stores (consisting of one Goldberg's and one Sammy's) commenced
operations under franchise or license arrangements. As of January 31, 1997,
three additional Goldberg's and two additional Sammy's stores, to be operated
under franchise or license arrangements with the Company, were under development
and expected to open by March 31, 1997.
The Company also distributes and services its bagel bakery equipment
for use by its franchisees. Management believes that the Company is the only
franchiser of bagel stores that provides its equipment to its franchisees.
During the years 1990 through 1996, the Company or its predecessor provided
equipment and other services to over 100 separate stores, including Company
stores, franchises and independent purchasers. The Company historically provided
bagel bakery equipment and other services to independent purchasers as well as
its own franchisees. However, the Company currently is focusing on meeting the
equipment and servicing needs of 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
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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, (ii) upgrading its promotional material and (iii)
utilizing additional sales personnel. 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
stores and expects increased sales from its commissary to new franchise
stores, which are required to purchase bagels or bagel mix from the Company
or its designated supplier. 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."
- Making acquisitions. The Company intends to acquire additional 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. In January 1997, the Company entered into a
letter of intent to acquire up to eight stores in Connecticut, one of which
will be Company-owned and the balance of which are expected to be franchised
units. The stores to be acquired currently operate under the trade name
"Bagel Connection." There can be no assurance that this acquisition will be
consummated. The Company currently has no plans, intentions, commitments,
understandings or arrangements with respect to any other 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
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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 (the "Sammy's
Companies") 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 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.
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 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 franchises" for 1995, 1996 and 1997.
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
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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."
- 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.
- 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.
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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.
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
The Company currently may sell its franchises in 31 states and expects
to receive authorization to sell in an additional 19 states by March 31, 1997.
The Company offers single unit franchises, as well as Development Agreements
which cover a number of stores to be opened in a designated area within a
specified period of time. The Company has entered into a Development Agreement
for portions of the States of North Carolina and South Carolina covering six
retail stores and a Development Agreement for Allentown, Pennsylvania covering
three retail stores. Until recently, the Company offered Market Development
Agreements which, like Development Agreements, cover a number of stores to be
opened in a designated area within a specified period of time. The Company is
party to 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, and a Market Development Agreement covering a portion of the
State of New York covering 37 retail stores. In the future, the Company intends
to pursue
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multi-unit development through Development Agreements rather than Market
Development Agreements. The Company is also party to 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 multi-unit franchises pursuant to Development Agreements, 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 non-refundable 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.
Development Agreements provide for the payment by the Developer of an
initial fee (the "Development Fee"), the amount of which is based upon the
number of stores to be developed pursuant to such Development Agreement. The
Development Fee is non-refundable and is applied pro rata to the franchise fees
paid for each store developed pursuant to the Development Agreement. The
Development Agreement includes a development schedule setting forth the number
of stores to be developed by the Developer in a specified territory during the
term of the Agreement. If the Developer fails to maintain the store development
schedule, the Developer loses the exclusive right to develop the territory. The
Company's material obligations under the Development Agreement are completed
upon the execution of the Development Agreement. The Developer and the Company
enter into individual Single Unit Agreements for each store developed pursuant
to the Development Agreement and have all of the rights and responsibilities
entailed therein.
Market Development Agreements provide for the payment, by the Market
Developer, of a non-refundable 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 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
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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.
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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. To
date, the Company has 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.
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,
beverages 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 directly from the Company or its designated supplier. 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
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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 creditworthiness. 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 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
-10-
<PAGE> 13
$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 January 31, 1997:
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 Goldberg's 2/96
Rockland Plaza Space #25, Nanuet, NY Goldberg's 1/97
</TABLE>
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
1865 Second Avenue, New York, NY Goldberg's 12/96
Scarsdale, NY Sammy's 12/96
Myrtle Beach, SC Goldberg's 2/97
Allentown, PA Goldberg's (3/97)
7111 East 22nd Street, Tucson, AZ Goldberg's (3/97)
Dempster Street, Skokie, IL Sammy's (3/97)
White Plains, NY Sammy's (3/97)
</TABLE>
-11-
<PAGE> 14
TRADEMARKS AND SERVICE MARKS
The Company has filed 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.
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 as of December 1996, Manhattan's retail
system currently consists of approximately 287 stores; Einstein Brothers' retail
system consists of approximately 300 stores; Bruegger's retail system consists
of approximately 450 stores; and Big Apple's retail system consists of
approximately 130 stores.
-12-
<PAGE> 15
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.
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.
-13-
<PAGE> 16
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.
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, various
elements of the transaction were renegotiated by the parties, concluding 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.
Among other things, pursuant to this agreement, Mr. Goldberg converted 65,000
shares of his Series A Preferred Stock to an equal number of shares of the
Company's Common Stock and surrendered for cancellation the remaining 115,000
shares of Series A Preferred Stock previously held by him and the Company paid
Mr. Goldberg the amount of $25,000 and assigned certain claims to, and provided
indemnification for certain claims that may be made against, him and the
Goldberg Companies. In addition, the parties 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 previously in effect between the Company and Mr. Goldberg.
-14-
<PAGE> 17
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.
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.
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
-15-
<PAGE> 18
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.
EMPLOYEES
At October 31, 1996, the Company had 55 employees, consisting of 42
full-time and 13 part-time employees, and at January 31, 1997, the Company's
workforce totalled 58 employees, consisting of 48 full-time and 10 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.
ITEM 2. DESCRIPTION OF PROPERTY
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.
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.
In December 1996, the Company entered into a lease with Santo V. Sorce
Co., LLC, for approximately 20,000 square feet of combined office and
manufacturing space located in South Plainfield, New Jersey. The lease commences
on February 15, 1997 and expires on January 31, 2007. The lease provides for a
renewal option of five years. The annual rent on the property is $9,300.00
through January 31, 2002, increasing to $13,440.00 for the remainder of the
lease term. The Company intends to utilize 5,000 square feet of the facility for
its executive offices and the remainder for bagel production and storage of
bagel equipment intended for resale. The Company anticipates that it will begin
occupying the new facility on April 1, 1997. The Company plans to sublease its
current executive offices in Fairfield, New Jersey and the commissary in Lodi,
New Jersey.
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 Sammy's stores and its commissary.
-16-
<PAGE> 19
See Note 16(b) to the consolidated financial statements of the Company attached
hereto for further information regarding the leases.
<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>
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By solicitation dated November 14, 1996, pursuant to the New Jersey
Business Corporation Act, the Company solicited written consents from certain of
its shareholders to approve a one-for-two reverse stock split of the outstanding
shares of the Company's Common Stock (the "Reverse Stock Split"). The Company
solicited and received written consents approving the Reverse Stock Split from
the holders of 2,319,363 shares of its Common Stock, out of a total of 3,735,200
shares of its Common Stock then outstanding. On November 20, 1996, upon receipt
and tabulation of the requisite number of written consents, the Company notified
all non-consenting shareholders who would have been entitled to vote upon such
action of the approval of the Reverse Stock Split. The Reverse Stock Split was
effective on December 5, 1996.
By solicitation dated November 14, 1996, pursuant to the New Jersey
Business Corporation Act, the Company solicited written consents from certain of
its shareholders to approve the First Amendment and Restatement of All American
Food Group Omnibus Stock Plan (the "Amended Stock Plan"). The Amended Stock Plan
amends and restates the Company's original stock plan to reflect amendments to
Rule 16b-3 of the Securities Exchange Act of 1934, as amended, and to increase
the number of shares reserved for issuance pursuant thereto. The Company
solicited and received written consents approving the Amended Stock Plan from
the holders of 2,248,113 shares of its Common Stock, out of a total of 3,735,200
shares of its Common Stock then outstanding. On November 20, 1996, upon receipt
and tabulation of the requisite number of written consents, the Company notified
all non-consenting shareholders who would have been entitled to vote upon such
action of the approval of the Amended Stock Plan.
-17-
<PAGE> 20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on The Nasdaq SmallCap Market
("Nasdaq") under the symbol "AAFG." Trading of the Company's Common Stock on
Nasdaq commenced on December 12, 1996. During the period from December 12, 1997
to January 31, 1997, the high bid quotation for the Common Stock as reported by
Nasdaq was $5 1/4 and the low bid quotation, as so reported, was $ 3 3/32. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
As of January 31, 1997, there were approximately 406 record holders
of the Company's Common Stock.
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.
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.
-18-
<PAGE> 21
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED NINE MONTHS OCTOBER 31,
JANUARY, 31, ENDED 1995 YEAR ENDED
1995 OCTOBER 31, (AGGREGATED)(1) OCTOBER 31,
(UNAUDITED) 1995 (UNAUDITED) 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Store sales $530,665 $ 1,422,341 $1,953,006 1,401,266
Franchising revenue -- 377,201 377,201 277,854
Equipment and product sales 143,799 550,726 694,525 561,067
--------- ----------- ----------- -----------
674,464 2,350,268 3,024,732 2,240,187
--------- ----------- ----------- -----------
Operating expenses:
Cost of sales--equipment and
product costs and store
operations, exclusive of
depreciation and amortization 535,145 1,739,147 2,274,292 1,572,185
Cost of sales--franchising
activities, exclusive of
depreciation and amortization -- 213,408 213,408 --
Selling, general and
administrative expenses 445,686 1,146,365 1,592,051 2,132,072
Depreciation and amortization 83,217 211,463 294,680 251,741
Settlement Costs--Employment
Contracts 56,784 170,352 227,136 224,341
--------- ----------- ----------- -----------
1,120,832 3,480,735 4,601,567 4,180,339
--------- ----------- ----------- -----------
Operating loss (446,368) (1,130,467) (1,576,835) (1,940,152)
Interest expense 28,988 21,078 50,066 33,440
--------- ----------- ----------- -----------
Net loss ($475,356) $(1,151,545) ($1,626,901) ($1,973,592)
Net loss per share(2) ($0.27) ($0.84) ($1.10) ($1.85)
Weighted average number of common
shares outstanding(2) 1,785,776 1,373,708 1,476,024 1,373,708
Balance Sheet Data:
1/31/95 10/31/95 10/31/96
------- -------- --------
Working capital (Deficit) (539,020) (902,720) (1,039,059)
Total assets 1,743,561 1,338,794 2,188,474
Total liabilities 1,170,207 1,386,967 2,013,250
Redeemable preferred stock -- -- 562,678
Common stock 1,277,000 876,150 3,360,136
Non-redeemable preferred stock 54,000 1,022,580 537,905
Additional paid in capital 365,000 365,000 --
Accumulated deficit (1,122,646) (2,311,903) (4,285,495)
</TABLE>
- ----------
(1) Represents the total of results for the nine-month fiscal period ended
October 31, 1995 and the immediately prior three-month interim period
ended January 31, 1995.
(2) Gives effect to a one-for-two reverse split of the Company's Common
Stock effected on December 5, 1996.
-19-
<PAGE> 22
ITEM 6. 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 document. 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. The Company changed its fiscal
year end to October 31 from January 31 during calendar year 1995. Therefore, for
purposes of the following discussion, the Company's unaudited interim results
for the three months ended January 31, 1995 have been combined with its results
for the nine months ended October 31, 1995, as reflected in its audited
financial statements for the period then ended to reflect results for the
12-month period ended October 31, 1995 ("Fiscal 1995"), which have been compared
to the results for the full fiscal year ended October 31,1996 ("Fiscal 1996").
RESULTS OF OPERATIONS--1996 AND 1995
Sales revenues for Fiscal 1996 were $2,240,187, a decrease of $784,545,
or 26%, from revenues of $3,024,732 in Fiscal 1995. This decrease is
attributable to (i) a decrease in store sales of $551,740, or 28%, to $1,401,266
in Fiscal 1996 from $1,953,006 in Fiscal 1995, as a result of a reduction from
five stores to three stores operated by the Company during the first three
months of Fiscal 1996, and from five stores to four stores during the succeeding
six months of Fiscal 1996, (ii) a decrease in equipment sales of $380,611, or
66%, to $199,398 in Fiscal 1996 from $580,009 in Fiscal 1995, primarily due to
the fact that, during Fiscal 1996, the Company has focused on franchising
activities rather than on sales of equipment to unaffiliated purchasers, and
(iii) a decrease in franchising activities of $99,347, or 26% to $277,854 in
Fiscal 1996 from $377,201 in Fiscal 1995, consisting of a decrease in initial
non-recurring revenue from the sale of Company-owned stores to franchisees of
$247,777, or 100% to $0 in Fiscal 1996 from $247,777 in Fiscal 1995, and
partially offset by an increase in initial non-recurring franchise and market
development fees of $90,054, or 72%, to $215,378 in Fiscal 1996 from $125,324 in
Fiscal 1995 and an increase in ongoing royalties of $58,376, or 1,424%, to
$62,476 in Fiscal 1996 from $4,100 in Fiscal 1995. The decrease in sales
revenues was substantially offset by an increase in commissary and product sales
of $247,153, or 216%, to $361,669 in Fiscal 1996 from $114,516 in Fiscal 1995,
as a consequence of a greater number of franchise stores and a concomitant
increase in demand for product during Fiscal 1996.
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 $915,515, or 37%, to $1,572,185 in Fiscal
1996 from $2,487,700 in Fiscal 1995. This decrease is primarily due to a
decrease in the sale of Company-owned stores to franchisees, decreased store
sales and decreased equipment sales. Cost of sales as a percentage of product
sales decreased to 80% in Fiscal 1996 from 86% in Fiscal 1995, reflecting the
net effect of decreases in the sale of Company-owned stores to franchisees and
in equipment sales and an increase attributable to the upgrading of the
Company's Lodi, New Jersey commissary and
-20-
<PAGE> 23
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, costs of sales can be expected to decrease as a
percentage of revenues. To the extent that franchise fees, market development
fees and franchise royalties remain constant, cost of sales can be expected to
remain constant as a percentage of revenues.
Selling, general and administrative expenses increased by $540,021, or
34%, to $2,132,072 in Fiscal 1996 from $1,592,051 in Fiscal 1995. This increase
is primarily due to (i) an increase in salaries and related costs of $334,067,
or 64%, to $856,590 in Fiscal 1996 from $522,523 in Fiscal 1995, (ii) an
increase in selling expense of $64,960, or 19%, to $409,674 in Fiscal 1996 from
$344,714 in Fiscal 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, and (iii) an increase in professional
fees of $39,562, or 43%, to $132,497 in Fiscal 1996 from $92,935 in Fiscal 1995,
primarily associated with general corporate matters.
Depreciation and amortization decreased by $42,940, or 15%, to $251,740
in Fiscal 1996 from $294,680 in Fiscal 1995, primarily as a consequence of the
fact that the Company owned and operated two fewer stores for the first three
months of Fiscal 1996 and one fewer store for the succeeding six months of
Fiscal 1996.
Interest expense decreased by $16,626, or 33%, to $33,440 in Fiscal
1996 from $50,066 in Fiscal 1995, as a consequence of a continued reduction in
the ordinary course of business of the Company's outstanding debt.
The net loss increased by $346,691, or 21%, to $1,973,592 in Fiscal
1996 from $1,626,901 in 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 growth. 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 stores, increased equipment sales to new franchisees, increased sales
in existing Company-owned stores, and sales revenues from newly opened,
Company-owned stores. Management believes tht the anticipated increase in
revenues will enable the Company to meet its overhead by the end of the current
fiscal year. 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 single unit and market
development franchises and to open additional franchise stores, and to ensure
that its existing Company-owned and franchise stores operate profitably.
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 but are expected to reach such levels during the
next year. Cash used by operating activities for
-21-
<PAGE> 24
Fiscal 1996 was $1,727,159. Cash and cash equivalents at October 31, 1996
aggregated $84,302 and the Company had a working capital deficit of $1,039,059.
The aggregate amount of accounts payable and accrued expenses was
$1,822,062 at October 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 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.
In December 1996 and January 1997, the Company completed an initial
public offering of 1,265,000 shares of its Common Stock (including 165,000
shares to cover the underwriters' over-allotments) at a price to the public of
$3.50, yielding net proceeds to the Company of $3,337,000. The Company intends
to apply the net proceeds from the recently completed initial public offering to
redeem Series A and Series B Preferred Stock, open additional Company-owned
flagship stores, expand the Company's equipment inventory, relocate and
consolidate its headquarters and commissary facilities, expand its marketing and
promotional activities, reduce accounts payable and accrued expenses, develop
its franchising system and for working capital and general corporate purposes.
After completion of the initial public offering, the Company had working capital
of approximately $2,100,000. Management anticipates that this working capital,
[credit] and funds expected to be generated from operations will be sufficient
to merit its capital requirements through the end of 1997.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of All American Food Group, Inc.
and its subsidiaries, including the notes thereto and the report of independent
accountants thereon, commence at page F-1 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-22-
<PAGE> 25
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report Of Independent Certified Public Accountants.................................................F-2
Consolidated Balance Sheets as of October 31, 1996 and 1995........................................F-3
Consolidated Statements of Operations for the Year Ended October 31, 1996 and
the Nine Months Ended October 31, 1995...........................................................F-4
Consolidated Statements of Cash Flows for the Year Ended October 31, 1996 and
the Nine Months Ended October 31, 1995...........................................................F-5
Consolidated Statements of Stockholders' (Deficit) for the Year Ended October
31, 1996 and the Nine Months Ended October 31, 1995..............................................F-6
Notes to Consolidated Financial Statements.........................................................F-7
</TABLE>
F-1
<PAGE> 26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
All American Food Group, Inc.
Fairfield, New Jersey
We have audited the accompanying consolidated balance sheets of All American
Food Group, Inc. and Subsidiaries as of October 31, 1996 and 1995, and the
related consolidated statements of operations, cash flows and stockholders'
deficit for the year ended October 31, 1996 and the 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 October 31, 1996 and 1995, and their
consolidated results of operations and cash flows for the year ended October
31, 1996 and the nine month period ended October 31, 1995, in conformity with
generally accepted accounting principles.
DelSanto and DeFreitas
Closter, New Jersey
February 5, 1997
F-2
<PAGE> 27
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
October 31, October 31,
1996 1995
----------------- ----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $84,302 $53,703
Accounts receivable, net of allowances for possible losses of $12,000 and
$15,000 respectively 127,490 107,641
Notes receivable, current portion 97,115 13,505
Inventories 66,580 123,649
Prepaid expenses 407,516 45,251
----------------- ----------------
Total Current Assets 783,003 343,749
Property, Plant and Equipment, at cost less accumulated depreciation and
amortization of $249,533 and $145,589 respectively 920,570 517,902
Intangible Assets, net of accumulated amortization of $418,460 and $270,663
respectively 293,319 407,544
Security Deposits 31,148 30,234
Notes receivable - long term 160,434 39,365
----------------- ----------------
Total Assets $2,188,474 $1,338,794
================= ================
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities:
Notes payable $194,899 $--
Accounts payable and accrued expenses 1,345,372 1,054,721
Capitalized lease obligations--current maturities 75,517 75,653
Loans from stockholders--current maturities 14,727 34,049
Current maturities of long-term debt 1,932 6,041
Deferred franchising revenue, current portion 189,615 76,005
----------------- ----------------
Total Current Liabilities 1,822,062 1,246,469
Capitalized Lease Obligations 25,300 84,502
Loans from stockholders 5,454 15,041
Long-term Debt -- 1,590
Deferred franchising revenue 160,434 39,365
----------------- ----------------
Total Liabilities 2,013,250 1,386,967
----------------- ----------------
Commitments and contingencies
Redeemable preferred stock, no par value, Series A 115,000 shares issued and
outstanding, Series B, 120,000 shares issued and outstanding, Redemption
value of $625,000 562,678 --
----------------- ----------------
Stockholders' (Deficit):
Non-redeemable convertible preferred stock, no par value, Series A, 190,000
shares authorized, 75,000 and 190,000 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 1,369,500 shares issued and outstanding 537,905 1,022,580
respectively
Common Stock, no par value, 10,000,000 shares authorized, 1,867,661 and
945,650 shares issued and outstanding respectively 3,360,136 876,150
Additional paid in capital -- 365,000
Accumulated deficit (4,285,495) (2,311,903)
----------------- ----------------
(387,454) (48,173)
----------------- ----------------
Total Liabilities and Stockholders' (Deficit) $2,188,474 $1,338,794
================= ================
</TABLE>
The Accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-3
<PAGE> 28
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
October 31, October 31,
1996 1995
---------------- ---------------
<S> <C> <C>
Revenues:
Store Sales $1,401,266 $1,422,341
Franchising revenue 277,854 377,201
Equipment and product sales 561,067 550,726
---------------- ---------------
2,240,187 2,350,268
---------------- ---------------
Operating Expenses:
Cost of Sales--equipment and product costs and store operations, exclusive
of depreciation and amortization 1,572,185 1,739,147
Cost of Sales--franchising activities, exclusive of depreciation and
amortization -- 213,408
Selling, general and administrative expenses 2,132,072 1,146,365
Depreciation and amortization 251,741 211,463
Settlement Costs--Employment Contracts 224,341 170,352
---------------- ---------------
4,180,339 3,480,735
---------------- ---------------
Operating loss (1,940,152) (1,130,467)
Interest expense 33,440 21,078
---------------- ---------------
Net loss ($1,973,592) ($1,151,545)
================ ===============
Adjusted net loss for net loss per common share calculation:
Net loss ($1,973,592) ($1,151,545)
Increase in carrying amount of redeemable preferred stock (562,678) --
================ ===============
Net loss attributable to common stock ($2,536,270) ($1,151,545)
================ ===============
Shares outstanding:
Weighted average number of common shares outstanding 943,150 943,150
Additional shares 430,558 430,558
---------------- ---------------
Adjusted shares outstanding 1,373,708 1,373,708
================ ===============
Net loss per common share ($1.85) ($.84)
================ ===============
</TABLE>
The Accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-4
<PAGE> 29
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Nine Months
October 31, Ended
1996 October 31, 1995
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,973,592) ($1,151,545)
------------ ------------
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities
Depreciation and amortization 251,741 211,463
Provision for possible losses on accounts receivable -- (35,000)
Gain on sale of subsidiary and retail store -- (34,369)
Issuance of common stock for services -- 1,750
Decrease (increase) in:
Accounts receivable (19,849) (26,661)
Inventories 57,069 58,715
Prepaid expenses (362,265) (15,251)
Security deposits (914) (16,800)
Increase (decrease) in:
Accounts payable and accrued expenses 290,651 524,937
Deferred franchise fee 30,000 62,500
----------------- -----------------
Total adjustments 246,433 731,284
----------------- -----------------
Net cash (used in) operating activities (1,727,159) (420,261)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (96,612) (43,503)
Acquisition of intangible assets (33,572) --
Proceeds from sale of subsidiary and retail store, net of cash balance of
subsidiary -- 64,953
----------------- -----------------
Net cash (used in) provided by investing activities (130,184) 21,450
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,003,986 --
Proceeds from issuance of preferred stock 200,000 541,480
Redemption of preferred stock (416,997) (100,000)
Proceeds from issuance of notes payable 194,899 --
Proceeds from capitalized lease obligations 10,900 17,843
Payments of capitalized lease obligations (70,238) (52,587)
Proceeds from loans from stockholders -- 33,250
Payments of loans from stockholders (28,909) (38,702)
Proceeds from issuance of long-term debt -- 3,250
Payments of long-term debt (5,699) (7,492)
----------------- -----------------
Net cash provided by financing activities 1,887,942 397,042
----------------- -----------------
Net increase (decrease) in cash 30,599 (1,769)
Cash--beginning of period 53,703 55,472
----------------- -----------------
Cash--end of period $84,302 $53,703
================= =================
</TABLE>
The Accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-5
<PAGE> 30
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
NON-REDEEMABLE
COMMON STOCK PREFERRED STOCK ADDITIONAL
---------------------------------- -------------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------------- --------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 31, 1995 1,355,650 $1,277,000 300,000 $54,000 $365,000
NINE MONTHS ENDED OCTOBER 31, 1995:
Conversion of common stock to preferred
stock (412,500) (402,600) 825,000 402,600 --
Common stock issuance for services 2,500 1,750 -- -- --
Preferred stock issuance -- -- 614,500 565,980 --
Preferred stock redemption -- -- (100,000) -- --
Other -- -- -- -- --
Net Loss -- -- -- -- --
--------------- --------------- ------------- --------------- --------------
BALANCE AT OCTOBER 31, 1995 945,650 876,150 1,639,500 1,022,580 365,000
YEAR ENDED OCTOBER 31, 1996:
Conversion of preferred stock to common
stock 35,000 70,000 (70,000) (70,000) --
Common stock issuance 887,011 2,413,986 -- -- --
Preferred stock issuance -- -- 200,000 200,000 --
Preferred stock redemption -- -- (416,997) (416,997)
Increase in carrying amount of redeemable
preferred stock -- -- (235,000) (197,678) (365,000)
Net Loss -- -- -- -- --
--------------- --------------- ------------- --------------- ---------------
BALANCE AT OCTOBER 31, 1996 1,867,661 $3,360,136 1,117,503 $537,905 $--
=============== =============== ============= =============== ==============
<CAPTION>
RETAINED
(DEFICIT) TOTAL
--------------- ---------------
<S> <C> <C>
BALANCE AT JANUARY 31, 1995 ($1,122,646) $573,354
NINE MONTHS ENDED OCTOBER 31, 1995:
Conversion of common stock to preferred
stock -- 0
Common stock issuance for services -- 1,750
Preferred stock issuance -- 565,980
Preferred stock redemption (100,000) (100,000)
Other 62,288 62,288
Net Loss (1,151,545) (1,151,545)
--------------- ---------------
BALANCE AT OCTOBER 31, 1995 (2,311,903) (48,173)
YEAR ENDED OCTOBER 31, 1996:
Conversion of preferred stock to common
stock -- 0
Common stock issuance -- 2,413,986
Preferred stock issuance -- 200,000
Preferred stock redemption -- (416,997)
Increase in carrying amount of redeemable
preferred stock -- (562,678)
Net Loss (1,973,592) (1,973,592)
--------------- ---------------
BALANCE AT OCTOBER 31, 1996 ($4,285,495) ($387,454)
=============== ===============
</TABLE>
The Accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
F-6
<PAGE> 31
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) 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.
(b) 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.
(c) 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.
(d) CASH AND CASH EQUIVALENTS --
At October 31, 1996 cash represented monies on deposit in financial
institutions.
F-7
<PAGE> 32
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
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 and notes receivable is
minimal, due to the terms under which the Company transacts its business.
(f) FAIR VALUE OF FINANCIAL INSTRUMENTS --
The Company estimates that the fair value of all financial instruments at
October 31, 1996 does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet based
upon currently available information.
(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 result from the business combinations
described in Note 1(a) and 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) 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,
F-8
<PAGE> 33
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
(j) FRANCHISE REVENUE RECOGNITION--(CONTINUED)
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. 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, 1996
and 1995, the Company had deferred the recognition of $257,549 and $52,870 of
revenues relating to notes from Market Developers. See notes 3 and 7.
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, 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 year ended October 31, 1996 of $277,854 consists of
initial non-recurring franchise and market development fees of $37,500 and
$177,878, respectively, and ongoing royalties of
F-9
<PAGE> 34
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
(j) FRANCHISE REVENUE RECOGNITION --(CONTINUED)
$62,476. 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 revenue from the
sale of Company-owned stores of $247,777 and ongoing royalties of $4,100.
(k) 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 year ended October 31, 1996 was adjusted by an increase of $562,678
representing the increase in the carrying amount of redeemable preferred stock.
(See Note 12). 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.
(l) LONG-LIVED ASSETS --
The Company 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 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 year ended October 31, 1996 or for
the nine months ended October 31, 1995.
(m) 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.
F-10
<PAGE> 35
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
(n) RECLASSIFICATIONS --
Certain reclassifications have been made in the prior nine month financial
statements to conform with the presentation in the current-year financial
statements.
(o) USE OF ESTIMATES --
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. INVENTORIES:
Inventories at October 31, consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Food and paper products $ 37,774 $ 69,544
Equipment and parts 28,806 54,105
-------------- -------------
Total inventories
$ 66,580 $ 123,649
============== =============
</TABLE>
3. NOTES RECEIVABLE:
Notes receivable at October 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:
F-11
<PAGE> 36
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
3. NOTES RECEIVABLE:--(CONTINUED)
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Notes receivable, paid by the application of 50%
of compensation due to Market Developer $ 48,230 $52,870
Notes receivable, due in quarterly installments of
$20,000 209,319 --
-------- -------
257,549 52,870
Less current portion 97,115 13,505
-------- -------
$160,434 $39,365
======== =======
</TABLE>
4. FIXED ASSETS:
Fixed assets and accumulated depreciation at October 31, consist of the
following:
<TABLE>
<CAPTION>
Estimated
1996 1995 Useful Lives
---- ---- ------------
<S> <C> <C> <C>
Machinery and equipment - retail stores $ 495,182 $333,237 7 years
Office furniture and warehouse equipment 172,200 169,951 7 years
Trucks and delivery vehicle 31,370 26,370 3 to 5 years
Leasehold improvements - retail stores 243,155 133,933 Term of lease
Construction in progress 228,196 --
--------- --------
1,170,103 663,491
Accumulated depreciation (249,533) (145,589)
--------- --------
Fixed assets, net of accumulated depreciation $ 920,570 $517,902
========= ========
</TABLE>
Depreciation expense aggregated $103,944 and $81,214 for the year ended October
31, 1996 and the nine months ended October 31, 1995, respectively. At October
31, 1996 certain debt is collateralized by approximately $270,000 of fixed
assets.
5. INTANGIBLE ASSETS:
Intangible assets and accumulated amortization at October 31, are as following:
F-12
<PAGE> 37
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
5. INTANGIBLE ASSETS:--(CONTINUED)
<TABLE>
<CAPTION>
Estimated
1996 1995 Useful Lives
------------ ---------- ------------
<S> <C> <C> <C>
Kosher certification $ 165,771 $165,771 5 years
Non-compete agreements 216,789 216,789 4 years
Lease acquisition costs 33,572 -- 10 years
Favorable lease agreement 7,891 7,891 3 1/2 years
Customer lists 93,970 93,970 4 years
Proprietary formula 135,513 135,513 5 years
Drawings and blueprints 58,273 58,273 5 years
--------- --------
711,779 678,207
Accumulated amortization (418,460) (270,663)
--------- --------
Intangible assets, net of
accumulated amortization ($293,319) $407,544
========= ========
</TABLE>
Amortization expense aggregated $147,797 and $130,249 for the year ended October
31, 1996 and the nine months ended October 31, 1995, respectively.
6. NOTES PAYABLE:
Notes payable at October 31, 1996 consisted of $147,899 due to an officer and
$46,900 due to three unrelated individuals. The notes are due on demand and bear
interest at rates ranging from 6% to 10%.
7. DEFERRED FRANCHISING REVENUE:
Deferred franchising revenue at October 31, 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 $ 92,500 $ 62,500
Market development fees 257,549 52,870
------- ---------
350,049 115,370
Less current portion 189,615 76,005
------- ---------
Deferred franchising revenue, long-term $160,434 $ 39,365
======== =========
</TABLE>
F-13
<PAGE> 38
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
8. 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 $270,000 of assets capitalized under these leasing
arrangements. Accumulated depreciation recorded on these assets approximated
$86,000 at October 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
November 1996 through May 1999.
The future minimum payments required under the lease arrangements with their
present value at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Present Interest Minimum
Year Ended October 31, Value Expense Payments
---------------------- ----- ------- --------
<S> <C> <C> <C>
1997 $ 75,517 $13,733 $ 89,250
1998 22,781 2,210 24,991
1999 2,519 128 2,647
-------- ------- --------
$100,817 $16,071 $116,888
======== ======= ========
</TABLE>
9. 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 November 1996 through February 1999.
F-14
<PAGE> 39
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
9. LOANS FROM STOCKHOLDERS:--(CONTINUED)
The future minimum payments required under the loans, with their present value
at October 31, 1996, are as follows:
<TABLE>
<CAPTION>
Present Interest Minimum
Year Ended October 31, Value Expense Payments
---------------------- ----- ------- --------
<S> <C> <C> <C>
1997 $14,727 $ 879 $15,606
1998 4,057 180 4,237
1999 1,397 15 1,412
------- -------- -------
$20,181 $ 1,074 $21,255
======= ======== =======
</TABLE>
10. LONG-TERM DEBT:
Long-term debt at October 31, is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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 $1,042 $6,041
Note payable to individual in monthly installments of $153
including interest at the annual rate of 12.5%, payable
through April 1997 890 1,590
------ ------
1,932 7,631
Less current portion 1,932 6,041
------ ------
Long-term debt $ -- $1,590
====== ======
</TABLE>
F-15
<PAGE> 40
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
11. INCOME TAXES:
The Company has adopted SFAS No. 109 and is a C Corporation subject to federal
and state income taxes with a fiscal year ended October 31.
At October 31, the cumulative temporary differences resulted in net deferred
assets or liabilities consisting primarily of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves $ 12,000 $ 15,000
Net operating loss carryforwards 2,400,000 750,000
--------- -------
2,412,000 765,000
Less valuation allowance 2,021,000 99,000
--------- ------
Deferred tax assets, net 391,000 666,000
Deferred tax liabilities:
Difference between assigned values and
the tax bases of assets and liabilities
resulting from the Goldberg and Sammy's
acquisitions 391,000 666,000
------- -------
Net deferred tax assets (liabilities) $ -- $ --
============ ===========
</TABLE>
For income tax reporting, the Company has net operating loss carryforwards
available to reduce future federal and state income taxes of approximately
$2,400,000. These loss carryforwards will expire in the years 2003 and 2011,
respectively, for state and federal tax purposes.
12. REDEEMABLE AND NON-REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company issued 190,000 shares of Series A (180,000 shares issued to Mr.
Goldberg and 10,000 shares to a third party) 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:
F-16
<PAGE> 41
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
12. REDEEMABLE AND NON-REDEEMABLE CONVERTIBLE PREFERRED STOCK:--(CONTINUED)
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.
On August 12, 1996, the Company entered into a Modification and Settlement
Agreement which altered the redemption provision described above. Under the new
terms, 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.
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 30 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 October 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.
F-17
<PAGE> 42
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
12. REDEEMABLE AND NON-REDEEMABLE CONVERTIBLE PREFERRED STOCK:--(CONTINUED)
SERIES B SHARES:--(CONTINUED)
The following presents the carrying amounts of the Series A and Series B
Preferred Stock and the accretion (increase in the carrying amount) for the year
ended October 31, 1996 and the redemption amounts for the preferred shares. At
October 31, 1996, the accretion created a charge to paid in capital of $365,000
and a charge to non-redeemable preferred stock of $197,678.
<TABLE>
<CAPTION>
Carrying Amounts
and
Accretion for the
Year Ended Redemption
Number of Shares October 31, 1996 Amount
---------------- ---------------- ------
<S> <C> <C> <C>
Series A 115,000 $ 24,439 $ 25,000
Series B 120,000 538,239 600,000
------- -------- --------
235,000 $562,678 $625,000
======= ======== ========
</TABLE>
The maturity schedule of the anticipated redemptions is as follows:
<TABLE>
<CAPTION>
Year Ended October 31, Amount
---------------------- ------
<S> <C>
1997 $325,000
1999 300,000
--------
625,000
Less unrecognized accretion 62,322
--------
Carrying amount at October 31, 1996 $562,678
========
</TABLE>
The unrecognized accretion will be recorded over the period to anticipated
redemption using the interest method.
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.
F-18
<PAGE> 43
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
12. REDEEMABLE AND NON-REDEEMABLE CONVERTIBLE PREFERRED STOCK:--(CONTINUED)
SERIES C PREFERRED STOCK:
As discussed in Note 13, 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.
13. RELATED PARTY TRANSACTIONS:
As described above, during the year 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. As of October
31, 1996, the Company had borrowed $147,899 from an officer of the Company. See
Note 6.
14. 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.
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 40,000 $1.00
--------
Options outstanding at October 31, 1995 40,000 $1.00
Granted 80,000 $2.00
--------
Options outstanding at October 31, 1995 120,000 $1.00 to $2.00
========
</TABLE>
F-19
<PAGE> 44
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
15. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
October 31, 1996 October 31, 1995
---------------- ----------------
<S> <C> <C>
Interest paid $ 32,648 $21,078
Income taxes paid -- --
Non-cash investing and financing activities:
Exchange of common stock for capital
assets $410,000 $ --
Sale of market area for note 209,289 52,870
Exchange of accounts receivable for notes payable -- 50,000
Issuance of preferred stock for debt -- 23,500
</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.
(b) LEASES --
The Company rents real and personal property under various non-cancelable leases
expiring at various dates through 2005. 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 $277,000 and $166,000 for the year and nine months
ended October 31, 1996 and 1995, respectively. These amounts include contingent
rental expense of approximately $21,000 and $7,000, respectively.
F-20
<PAGE> 45
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
16. COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
(b) LEASES--(CONTINUED)
Minimum annual rental commitments under leases in effect at October 31, 1996 are
summarized as follows:
<TABLE>
<CAPTION>
Equipment
Year Ended October 31, Real Estate & Other
---------------------- ----------- ---------
<S> <C> <C>
1997 $ 213,000 $18,000
1998 198,000 4,000
1999 197,000 --
2000 165,000 --
2001 155,000 --
Later years 550,000 --
------- -------
Total minimum lease payments $1,478,000 $22,000
========== =======
</TABLE>
(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 $35,000 at October 31, 1996.
The total compensation expense under these agreements for the year ended October
31, 1996, and for the nine months ended October 31, 1995 was $224,341 and
$170,352, respectively, and such amounts have been reflected as Settlement
Costs--Employment Contracts on the accompanying Statement of Operations.
(d) CONTINGENCIES --
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 accompanying financial statements.
17. PRIVATE PLACEMENTS:
During the year ended October 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.
F-21
<PAGE> 46
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1996
18. SUBSEQUENT EVENTS:
REVERSE STOCK SPLIT --
As of December 5, 1996, the Company effected 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
remains convertible on a one-for-one basis and each share of Series C Preferred
Stock is convertible into one-half share of Common Stock. These financial
statements, including the notes thereto, give effect to this reverse stock
split.
INITIAL PUBLIC OFFERING --
On December 17, 1996, the Company completed an initial public offering of
1,100,000 shares of the Company's common stock for a public offering price of
$3.50 per share or an aggregate of $3,850,000. In January of 1997, the Company
sold an additional 165,000 shares on the same terms upon exercise of the
underwriter's overallotment option, for an aggregate of $577,500. Costs
associated with this offering totaled approximately $1,090,000.
The Company also sold to the Underwriter, for nominal consideration, warrants to
purchase 110,000 shares of the Company's common stock. These warrants have not
been exercised and expire in 2001.
LEASE OBLIGATION --
In December 1996, the Company entered into a ten year lease for 20,000 square
feet of combined office and manufacturing space. The Company intends to relocate
its executive office and bagel producing commissary to this new facility on
April 1, 1997.
F-22
<PAGE> 47
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
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 48 Director
Anthony G. Foster 40 Chief Operating Officer
Guy McNeil 40 Vice President, Operations
Key Personnel:
Raymond Johnson 31 District Manager
Larry Wiese 31 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 Underwriting Agreement entered into between the Company
and R.T.G. Richards & Co., Inc. ("Richards"), on December 11, 1996, Richards has
the right to appoint one member of the Company's Board of Directors. To date,
Richards has not exercised this right.
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 Chairman, President and Chief Executive Officer of
Jutland Enterprises, Inc., Somerset, New Jersey, founder of the Company and the
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 has been in the food industry since 1985 and
prior to that time was Chief
-23-
<PAGE> 48
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 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 was 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.
-24-
<PAGE> 49
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.
ITEM 10. 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.
<TABLE>
<CAPTION>
FISCAL ANNUAL
NAME AND PRINCIPAL POSITION PERIOD(1) SALARY OTHER(2)
--------------------------- --------- ------ --------
<S> <C> <C> <C>
Andrew Thorburn, Chief Executive Officer 1996 $100,663 --
1995 39,000 --
1994 26,000 --
Chris Decker, Chief Financial and Administrative 1996 $102,500 --
Officer
1995 46,000 --
1994 -- --
Anthony Foster, Chief Operating Officer 1996 $101,763 $17,881 (3)
1995 -- --
1994 -- --
</TABLE>
- ----------
(1) The Company's 1996 fiscal period was from November 1, 1995 to October 31,
1996, its 1995 fiscal period was from February 1, 1995 to October 31, 1995
and its 1994 fiscal period was from February 1, 1994 through January 31,
1995.
-25-
<PAGE> 50
(2) Excludes perquisites and other personal benefits otherwise categorized as
salary which in the aggregate as for each of the named persons did not
exceed 10% of the total annual salary for each person.
(3) Consists solely of temporary housing allowance payments.
Pursuant to the terms of the Underwriting Agreement between the Company
and the underwriters in its initial public offering, the Company has agreed
that, during the period ending December 31, 1997, it will not, without the
underwriters' consent, increase the compensation paid or payable, or grant stock
options to any executive office of the Company except pursuant to the Company's
Omnibus Stock Option Plan.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT
The Company became subject to the requirements of the Securities Act of
1934 upon the effectiveness of its Registration Statement on Form 8-A on
December 12, 1996. Inasmuch as this occurred subsequent to the close of the
Company's fiscal year on October 31, 1996, the Company's executive officers and
directors were not required to file reports of beneficial ownership and changes
in beneficial ownership of the Company's Common Stock during the fiscal year
ended October 31, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of January 31, 1997, 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.
-26-
<PAGE> 51
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL OF BENEFICIAL
STOCKHOLDER OWNERSHIP(1) PERCENTAGE OF CLASS
-------------------------------- --------------- -------------------
<S> <C> <C>
Andrew Thorburn 440,101 13.76%
9 Law Drive
Fairfield, NJ 07006
Chris R. Decker 150,211(2) 4.56%
9 Law Drive
Fairfield, NJ 07006
John Chitvanni 40,233(3) 1.24%
135 Beechtree Lane
Roswell, GA 30075
Anthony G. Foster 30,000(4) 0.94%
9 Law Drive
Fairfield, NJ 07006
Guy McNeil 8,000(5) *
9 Law Drive
Fairfield, NJ 07006
All officers and directors as a group
(5 persons) 668,545(6) 19.89%
</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) Consists of 100,211 shares of Common Stock and currently exercisable
options (expiring January 1, 2001) to purchase 50,000 shares of Common
Stock ranging from $2.00 to $3.13 per share.
(3) Consists of 233 shares of Common Stock and currently exercisable options
(expiring from November 1, 2000 to January 1, 2001) to purchase 35,000
shares of Common Stock at a per share price ranging from $2.00 to $3.13
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 have been
registered pursuant to the Company's Registration Statement in connection
with its initial public offering (the "Registration Statement") and are
subject to the Chitvannis' agreement to refrain from selling, transferring,
assigning, pledging or hypothecating in any way such shares until the later
of June 9, 1997, 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 until December 17, 1998, without the
underwriters' consent, unless the transferee, assignee or purchaser agrees
to be bound by the same transfer restriction.
-27-
<PAGE> 52
(4) Consists of 5,000 shares of Common Stock and currently exerciseable options
(expiring January 1, 2001) to purchase 25,000 shares of Common Stock at
$3.13 per share. 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 have been registered pursuant to the
Registration Statement and are subject to the holders' agreement to refrain
from selling, transferring, assigning, pledging or hypothecating in any way
such shares until the later of June 9, 1997, 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 until December 17, 1998, without the underwriters'
consent, unless the transferee, assignee or purchaser agrees to be bound by
the same transfer restriction.
(5) Consists of 5,000 shares of Common Stock and currently exerciseable options
(expiring January 31, 2001) to purchase 3,000 shares of Common Stock at a
per share price of $3.13. The 5,000 shares of Common Stock have been
registered pursuant to the Registration Statement, subject to Mr. McNeil's
agreement to refrain from selling, transferring, assigning, pledging or
hypothecating in any way such shares until the later of June 9, 1997, or
365 days following their initial purchase from the Company and to refrain
from transferring, assigning or selling such shares until December 17,
1998, without the underwriters' consent, unless the transferee, assignee or
purchaser agrees to be bound by the same transfer restriction.
(6) Includes all shares reflected above as beneficially owned by Messrs.
Thorburn, Decker, Chitvanni, Foster and McNeil.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 Computerware, Inc. ("Blue Chip") which, at that time, owned approximately
44% of the Company's outstanding Common Stock. Shortly thereafter, Mr. Thorburn
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.
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.
-28-
<PAGE> 53
Shortly after the Company's incorporation in 1993, Jutland Enterprises,
Inc., a Delaware corporation and the founder of the Company, 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 394,054 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. By letter dated
December 5, 1996, counsel to a judgment creditor of Enterprises with a claim in
the amount of approximately $400,000, representing a substantial majority of the
dollar value of residual claims known to management of Enterprises, informed
counsel to the Company that such creditor may attempt to assert liability
against the Company to satisfy such creditor's claim against Enterprises. In the
event that the creditor were to make a formal claim against the Company,
management believes such claim would be without merit and would contest
liability vigorously.
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.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) The exhibits required to be filed by this report are listed in
the Exhibit Index which commences on page 32 hereof.
(b) Reports on Form 8-K:
The Company has filed no reports on Form 8-K.
-29-
<PAGE> 54
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALL AMERICAN FOOD GROUP, INC.
Dated: February 12,1997 /s/Andrew Thorburn
-------------------------------------
Andrew Thorburn
Chairman of the Board of Directors,
President and Chief Executive Officer
In accordance with the requirements of the Exchange Act, this report is signed
below by the following persons on behalf of the Registrant in the capacities and
on the dates indicated.
Name and Capacity Date
----------------- ----
/s/Andrew Thorburn February 12, 1997
- ------------------------------------------
Name: Andrew Thorburn
Title: Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
/s/Chris Decker February 12, 1997
- ------------------------------------------
Name: Chris Decker
Title: Director, Executive Vice President
and Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/John Chitvanni February 12, 1997
- ------------------------------------------
Name: John Chitvanni
Title: Director
-30-
<PAGE> 55
EXHIBIT INDEX
Exhibit
Number Document
------ --------
3.1 Second Restated Certificate of Incorporation of the
Company (incorporated herein by reference to Exhibit 3.3
of the Company's Registration Statement on Form SB-2
(File No. 333-4490), as amended (the "Registration
Statement")).
3.2 Certificate of Designations for Series A, B & C Preferred
Stock (incorporated herein by reference to Exhibit 3.2 of
the Registration Statement).
3.3 Second Amended and Restated By-Laws of the Company.
4.1 Form of Specimen of Common Stock Certificate (incorporated
herein by reference to Exhibit 4.1 of the Registration
Statement).
4.2 Form of Specimen of Preferred Stock Certificate
(incorporated herein by reference to Exhibit 4.1 of the
Registration Statement).
4.3 Form of Underwriter's Warrant Agreement (incorporated
herein by reference to Exhibit 4.2 of the Registration
Statement).
10.1 Form of Goldberg's Franchise Agreement (incorporated
herein by reference to Exhibit 10.1 of the Registration
Statement).
10.2 Form of Sammy's Franchise Agreement (incorporated herein
by reference to Exhibit 10.2 of the Registration
Statement).
10.3 Agreement dated January 12, 1993 with Kof-K Kosher
Supervision (incorporated herein by reference to Exhibit
10.3 of the Registration Statement).
10.4 All American Food Group, Inc. Amended and Restated Omnibus
Stock Plan (incorporated herein by reference to Exhibit
10.4 of the Registration Statement).
10.5 Market Development Agreement covering the State of Arizona
(incorporated herein by reference to Exhibit 10.5 of the
Registration Statement).
10.6 Market Development Agreement covering the State of Ohio
(incorporated herein by reference to Exhibit 10.6 of the
Registration Statement).
10.7 Market Development Agreement, as amended, covering
portions of the State of New York (incorporated herein by
reference to Exhibit 10.7 of the Registration Statement).
10.8 Form of Market Development Agreement (incorporated herein
by reference to Exhibit 10.8 of the Registration
Statement).
10.9 Modification and Settlement Agreement between the Company
and Howard Goldberg (incorporated herein by reference to
Exhibit 10.9 of the Registration Statement).
10.10 Form of Development Agreement
10.11 Abstract of lease entered into by the Company in December
1996
-31-
<PAGE> 56
10.12 Letter of Intent dated January 23, 1997, between the
Company and the Bagel Connection, Inc.
11 Earnings per Share Calculation.
21.1 Subsidiaries of the Company (incorporated herein by
reference to Exhibit 21.1 of the Registration Statement).
27.1 Financial Data Schedule
27.2 Financial Data Schedule
-32-
<PAGE> 1
EXHIBIT 3.3
SECOND AMENDED AND RESTATED BY-LAWS OF
ALL AMERICAN FOOD GROUP, INC., AS AMENDED
AS IN EFFECT AS OF NOVEMBER 12, 1996
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
ARTICLE I - SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. Regularly Scheduled Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
B. Delayed Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.3. Place of Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.4. Notice of Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.5. Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.6. Organization of Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.7. Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.8. Shareholder List. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.9. Inspectors of Elections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II - BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.1. General Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.2. Number; Tenure and Qualifications. . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.3. Regular Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.4. Special Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.5. Place of Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.6. Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.7. Quorum; Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.8. Participation by Conference Telephone. . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.9. Adjournments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
Section 2.10. Action Without a Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.11. Committees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.12. Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.13. Resignation; Removal; Suspension . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.14. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.1. Enumeration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.2. Election; Tenure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.3. Powers and Duties of Chairman of the Board. . . . . . . . . . . . . . . . . . . . 7
Section 3.4. Powers and Duties of President. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.5. Powers and Duties of Vice-Presidents. . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.6. Powers and Duties of Secretary. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.7. Powers and Duties of Treasurer. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.8. Delegation of Duties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3.9. Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3.10. Resignation; Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3.11. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE IV - INDEMNIFICATION; INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.1 Action by Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.2. Actions by or in the Right of the Corporation. . . . . . . . . . . . . . . . . . . 10
Section 4.3. Successful Defense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 4.4. Specific Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 4.5. Advancement of Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
- ii -
<PAGE> 4
<TABLE>
<S> <C>
Section 4.6. Right of Indemnity not Exclusive. . . . . . . . . . . . . . . . . . . . . . . . 11
Section 4.7. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 4.8. Invalidity of any Provision of this Article. . . . . . . . . . . . . . . . . . . 12
ARTICLE V - CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.1. Share Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.2. Shareholder Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 5.3. Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.4. Transfer Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.5. Record Dates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.6. Lost Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE VI - OFFICES AND RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 6.1. Registered Office and Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 6.2. Principal Office. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 6.3. Additional Offices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 6.4. Books and Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE VII - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.1. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.2. Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.3. Corporate Seal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.4. Execution of Written Instruments. . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.5. Signing of Checks, Notes, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.6. Voting Upon Stocks Held by the Corporation . . . . . . . . . . . . . . . . . . . 15
Section 7.7. Loans to Directors, Officers and Employees. . . . . . . . . . . . . . . . . . . 15
</TABLE>
- iii -
<PAGE> 5
<TABLE>
<S> <C>
Section 7.8. Reliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.9. Force and Effect of By-Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VIII - AMENDMENT OF BY-LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE IX - EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
- iv -
<PAGE> 6
FORM OF
SECOND AMENDED AND RESTATED BY-LAWS OF
ALL AMERICAN FOOD GROUP, INC.
ARTICLE I
SHAREHOLDERS
SECTION 1.1. ANNUAL MEETING.
A. REGULARLY SCHEDULED ANNUAL MEETING. The annual meeting of the
shareholders of the Corporation shall be held each year on such date and at
such time as may be designated by resolution of the Board of Directors or, in
the absence of such designation, at ten o'clock in the morning on the third
Tuesday of May of each year, if not a legal holiday, and if a legal holiday
then on the next succeeding day not a legal holiday.
B. DELAYED ANNUAL MEETING. If, for any reason, the annual meeting
of the shareholders of the Corporation shall not be held on the day designated
pursuant to Paragraph A of this Section 1.1, or on any subsequent day to which
it shall have been duly adjourned, such meeting shall be called and held as a
special meeting, and the same proceedings may be had and the same business may
be transacted at such special meeting as may be had and transacted at any
annual meeting.
SECTION 1.2. SPECIAL MEETINGS. Except as otherwise provided by
applicable law, special meetings of the shareholders of the Corporation may be
called by resolution of the Board of Directors and by the President and shall
be called by any officer of the Corporation upon written request of
shareholders holding, in the aggregate, not less than ten percent (10%) of the
shares of Common Stock outstanding and entitled to vote at such meeting; such
request to be in writing, to be made either in person or by registered mail
addressed to the executive offices of the Corporation and to state the purpose
or purposes of the proposed special meeting.
SECTION 1.3. PLACE OF MEETINGS. Meetings of the shareholders of the
Corporation shall be held at the principal offices of the Corporation or at
such other place or places, either within or without the State of New Jersey,
as may be designated by resolution of the Board of Directors from time to
time.
<PAGE> 7
SECTION 1.4. NOTICE OF MEETINGS. Written or printed notice, stating
the place, day, hour and, in general terms, the purpose or purposes for which
the meeting is called, shall be prepared and delivered not less than ten (10)
nor more than sixty (60) days prior to the date of each meeting of the
shareholders of the Corporation, either personally or by mail to each
shareholder of record entitled to vote at such meeting and to each other
person, if any, entitled to notice thereof. If mailed, notice shall be
deemed to delivered when deposited in the United States mail with postage
thereon prepaid, addressed to the shareholder at his or her address as it
appears on the stock transfer books of the Corporation or at such other
address as shall be furnished in writing by a shareholder to the Corporation
for such purpose.
Any meeting of the shareholders (whether annual or special) may be held
without notice if all shareholders entitled to vote thereat are present in
person or by proxy and no shareholder protests the lack of notice prior to the
conclusion of the meeting, or if all such shareholders waive notice of such
meeting, either in person or by proxy, in writing, either before or after the
meeting.
SECTION 1.5. QUORUM. Except as otherwise provided by applicable law
or the Certificate of Incorporation of the Corporation as the same may be in
effect from time to time (the "Charter"), the presence, in person or by proxy,
of the holders of shares entitled to cast a majority of the votes at any
meeting of the shareholders of the Corporation shall constitute a quorum at
such meeting. If there shall not be represented, in person or by proxy, the
holders of sufficient shares to constitute a quorum in accordance with the
preceding sentence, the holders of a majority of the shares so present may
adjourn the meeting, from time to time, without notice other than by
announcement at the meeting, until holders of the number of shares necessary
to constitute a quorum shall be present. At any such adjourned meeting at
which a quorum shall be present, any business may be transacted which might
have been transacted at the meeting as originally called.
SECTION 1.6. ORGANIZATION OF MEETINGS. Each meeting of the
shareholders shall be presided over by the President, or inthe absence of the
President, by an acting chairman designated in advance by the Board of
Directors or, in the absence of such designation, by a chairman to be chosen
at such meeting. The Secretary of the Corporation, or in his or her absence,
an Assistant Secretary, if there be one, or in the absence of an Assistant
Secretary, an acting secretary chosen at the meeting, shall act as secretary
for such meeting.
SECTION 1.7. VOTING. Except as otherwise provided by applicable law
or the Charter, at each meeting of the shareholders, every holder of record of
shares of stock entitled to vote thereat shall be entitled to one (1) vote for
each share of such stock standing in his or her name on the records of the
Corporation on each matter submitted to a vote of the shareholders at such
meeting. Except as otherwise provided by applicable law or the Charter,
elections of directors shall be determined by a plurality of the votes
- 2 -
<PAGE> 8
cast and all other actions shall be determined by a majority of the votes
cast. At any meeting of shareholders, a shareholder entitled to vote may do
so in person or by proxy. Each proxy shall either be in writing and executed
by the shareholder granting such proxy or by such shareholder's duly
authorized attorney-in-fact, or given by telegram, facsimile, cable or other
means of electronic communication which results in a writing, and delivered to
the Inspectors of Elections at the meeting.
SECTION 1.8. SHAREHOLDER LIST. In advance of each meeting of the
shareholders of the Corporation, the officer or agent having charge of the
Corporation's stock transfer books shall prepare a full, true and complete
list, in alphabetical order (which may be within each class, series or group
of shareholders maintained by the Corporation for ease of reference), of all
shareholders entitled to vote at each meeting, with the address of each such
shareholder and the number of shares registered in his or her name; which list
shall be produced or available by means of a visual display at the place and
during the whole time of the meeting and may be inspected for reasonable
periods by any shareholder who is present at such meeting.
SECTION 1.9. INSPECTORS OF ELECTIONS. In advance of any meeting of the
shareholders, the Board of Directors may appoint one or more Inspectors of
Elections to act at the meeting or any adjournment thereof. In the event that
any person appointed to act as an Inspector of Elections shall fail to appear
or to act, the vacancy may be filled by appointment made by the Board of
Directors in advance of the meeting or at the meeting by the chairman of the
meeting. If Inspectors of Elections are not so appointed by the Board of
Directors or shall fail to qualify, the chairman of the meeting may, and on the
request of any shareholder shall, appoint one or more Inspectors of Elections.
Each Inspector of Elections, before entering upon the discharge of his or her
duties, shall take and sign an oath to faithfully execute the duties of
Inspector of Elections with strict impartiality and according to the best of
his or her abilities. If appointed, Inspectors of Elections shall determine
the number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum and the validity and
effect of proxies, and shall receive votes or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count
and tabulate all votes or consents, determine the result, and do such acts as
are proper to conduct the election or vote with fairness to all shareholders.
On request of the chairman of the meeting or any shareholder entitled to vote
thereat, the Inspectors of Elections shall make a report, in writing, of any
challenge, question or matter determined by them, which report shall be prima
facie evidence of the facts therein stated and shall be filed with the minutes
of the meeting to which it related. If there are three or more Inspectors of
Elections, the act of a majority shall govern.
- 3 -
<PAGE> 9
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1. GENERAL POWERS. The business and the property of the
Corporation shall be managed by, or under the direction of, the Board of
Directors. In addition to the powers and authority expressly conferred by
these By-Laws, the Board of Directors may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by applicable
law, the Charter or these By-Laws required to be exercised or done by the
shareholders.
SECTION 2.2. NUMBER; TENURE AND QUALIFICATIONS. The number of
directors constituting the Board of Directors shall be fixed from time to time
pursuant to a resolution of the Board of Directors, but shall be no fewer than
three (3) nor more than fifteen (15). Each director shall be elected annually
at the annual meeting of the shareholders and shall hold office until the next
succeeding annual meeting of the shareholders, and until his or her successor
shall have been elected and qualified, or until his or her earlier death,
resignation or removal. Directors need not been citizens of the United States,
residents of the State of New Jersey or shareholders of the Corporation.
SECTION 2.3. REGULAR MEETINGS. A regular meeting of the Board of
Directors to elect officers and consider such other business as may properly
come before such meeting shall be held without notice other than this Section
2.3 immediately following, and at the same place as, the annual meeting of the
shareholders. The Board of Directors, by resolution, may provide for
additional regular meetings, which may be held without notice other than such
resolution.
SECTION 2.4. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by or at the request of the President or at the
request of a majority of the directors then in office. Notice of each such
special meeting shall be given to each director at his business or residence
in writing or by telegram, facsimile or telephonic communication. If mailed,
such notice shall be deemed adequately delivered if deposited in the United
States mail so addressed, with postage thereon prepaid, at least five (5)
calendar days in advance of the date of such meeting. If by telegram, such
notice shall be deemed adequately delivered if the telegram is delivered to
the telegraph company at least two (2) calendar days in advance of the date of
such meeting. If by telephone or facsimile, such notice shall be deemed
adequately delivered if given at least twenty-four (24) hours in advance of
the time of such meeting.
SECTION 2.5. PLACE OF MEETINGS. Meetings of the Board of Directors
shall be held at such place, either within or without the State of New Jersey,
as may be designated by resolution of the Board of Directors from time to
time, or as may be specified in the notice or waiver of notice thereof. In
the absence of such designation or specification,
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meetings of the Board of Directors shall be held at the principal offices of
the Corporation.
SECTION 2.6. NOTICE. Neither the business to be transacted at, nor
the purpose of, any meeting of the Board of Directors need be specified in the
notice or waiver of notice thereof. Any meeting may be held without notice if
all directors are present and no director protests the lack of notice prior to
the conclusion of the meeting, or if all directors waive notice of such
meeting, either in person or by proxy, in writing, either before or after the
meeting.
SECTION 2.7. QUORUM; VOTING. A majority of the members of the Board
of Directors then holding office shall constitute a quorum for the transaction
of business; provided, however that a quorum shall at no time be constituted
by less than one-third (1/3) of the number of directors constituting the whole
Board of Directors. If there shall not be present a sufficient number of
directors to constitute a quorum in accordance with the preceding sentence, a
majority of the directors present may adjourn the meeting, from time to time,
until a quorum shall be present. Except as otherwise provided by applicable
law or the Charter, each director shall have one (1) vote at meetings of the
Board of Directors and of any committee thereof of which he or she is a
member. Except as otherwise provided by applicable law or the Charter, any
action approved by a majority of the directors present at a meeting of the
Board of Directors or a committee thereof at which a quorum is present shall
be the act of the Board or such committee.
SECTION 2.8. PARTICIPATION BY CONFERENCE TELEPHONE. Where
appropriate communication facilities are reasonably available, any or all
directors shall have the right to participate in all or any part of any
meeting of the Board of Directors by means of conference telephone or any
other means of communication by which all persons participating in the meeting
are able to hear each other and participating in a meeting pursuant to this
Section 2.8 shall constitute presence in person at such meeting.
SECTION 2.9. ADJOURNMENTS. Any meeting of the Board of Directors or
any committee thereof may be adjourned prior to the completion of business
thereat. Notice of an adjourned meeting need not be given if the time and
place are fixed at the meeting adjourning and if the period of adjournment
does not exceed ten (10) calendar days in any one adjournment. If a quorum is
present at such subsequent meeting, any business may be transacted thereat
that could have been transacted at the meeting which was adjourned.
SECTION 2.10. ACTION WITHOUT A MEETING. Any action required or
permitted to be taken at a meeting of the Board of Directors or any committee
thereof may be taken without a meeting if, prior to or subsequent to such
action, each member of the Board of Directors or the committee, as the case
may be, shall consent in writing to such action. Such written consent or
consents shall be filed with the minutes of the proceedings of the Board of
Directors or the committee, as the case may be.
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SECTION 2.11. COMMITTEES. The Board of Directors, in its discretion,
by resolution passed by a majority of the directors constituting the whole
Board, may designate from among its members an executive committee and one or
more other committees, each of which shall have one or more members. The
Board of Directors may designate one or more directors as alternate members of
any such committee, who may replace any absent or disqualified member at any
meeting thereof. To the extent provided in the designating resolution, each
committee shall have and may exercise all of the authority of the Board of
Directors. Unless the Board of Directors shall otherwise provide, the
presence of a majority of the members of any committee shall constitute a
quorum for the purpose of transacting business thereat, the act of a majority
of the members of such committee present shall be the act of the committee,
and such majority may fix the time and place of the meetings of the committee.
Actions taken at any meeting of a committee of the Board of Directors shall be
reported to the Board of Directors at its next succeeding meeting, except that
if such Board meeting is held within two (2) calendar days following the
meeting of a committee, such report may be made at the second meeting of the
Board of Directors succeeding such committee meeting.
SECTION 2.12. COMPENSATION. The Board of Directors may determine,
from time to time, the amount of compensation which shall be paid to its
members. The Board of Directors also may allow a fixed sum and expenses for
attendance at each regular or special meeting of the Board or Directors or any
committee thereof and may provide for and pay to directors rendering services
to the Corporation not ordinarily rendered by directors, such special
compensation as the Board shall determine to be appropriate to the value of
such services.
SECTION 2.13. RESIGNATION; REMOVAL; SUSPENSION. Any director may
resign at any time by giving written notice to the Board of Directors or the
Secretary of the Corporation. Such resignation shall be effective upon
receipt thereof by the Board of Directors or the Secretary or at such
subsequent time as shall be specified in the notice of resignation. Any one or
more of the directors of the Corporation may be removed, with or without
cause, at any time by the affirmative vote of the majority of the votes cast
by holders of shares entitled to vote for the election. A majority of the
directors constituting the whole Board of Directors may remove or more of the
directors for cause and may suspend one or more of the directors pending a
final determination that cause for removal exists.
SECTION 2.14. VACANCIES. If any vacancy shall occur in the Board of
Directors, by reason of death, resignation, increase in the authorized number
of directors or otherwise, such vacancy shall be filled by a majority of the
directors then in office, though less than a quorum (except as otherwise
provided by applicable law), and the successor director so chosen shall hold
office for the unexpired term in respect of which
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such vacancy occurred, and his or her successor is elected and qualified, or
until his or her earlier death, resignation or removal.
ARTICLE III
OFFICERS
SECTION 3.1. ENUMERATION. The officers of the Corporation shall be a
President, one or more Vice-Presidents, a Secretary and a Treasurer. The
Board of Directors, from time to time, may elect a Chairman of the Board,
additional Vice-Presidents, Assistant Secretaries, Assistant Treasurers and
such other officers and agents as it shall deem appropriate and may define the
powers and duties of any such officers. Any number of offices may be held by
the same person; provided, however, that no officer shall execute,
acknowledge, or verify any instrument in more than one capacity of such
instrument is required by law or by these By-Laws to be executed, acknowledged
or verified by two or more officers. Each officer chosen in the manner
prescribed hereby shall have such powers and duties as generally pertain to
his or her office or offices, subject to the specific provisions of this
Article III. Each such officer also shall have such powers and duties as the
Board of Directors may, from time to time, confer.
SECTION 3.2. ELECTION; TENURE. The officers of the Corporation shall
be elected annually by the Board of Directors at the first meeting thereof
after the annual election of directors by the shareholders of the Corporation.
If the election of officers shall not be held at such meeting, such election
shall be held as soon thereafter as is convenient. Each officer shall hold
office until his or her successor shall have been elected and qualified, or
until his or her earlier death, resignation or removal.
SECTION 3.3. POWERS AND DUTIES OF PRESIDENT. The Chairman of the
Board, if there be one, shall have such duties, power and authority as may be
assigned thereto by resolution of the Board of Directors.
SECTION 3.4. POWERS AND DUTIES OF PRESIDENT. The President shall be
the chief executive officer of the Corporation. The President shall preside at
all meetings of the shareholders and of the Board of Directors. The President
shall exercise the powers and perform the duties usual to a chief executive
officer and, subject to the control of the Board of Directors, shall have
general management and control of the affairs and business of the Corporation.
The President may appoint and discharge employees and agents of the Corporation
(other than those elected by the Board of Directors) and fix their compensation
and he shall see that all orders and resolutions of the Board of Directors are
carried into effect. He shall have the authority to sign and execute bonds,
mortgages and other contracts, agreements, obligations and instruments of the
Corporation in the name thereof and, with the Secretary or the Treasurer or an
Assistant Secretary or an Assistant Treasurer, may sign all certificates of the
shares of the stock of the Corporation. The
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President shall from time to time make such reports of the affairs of the
Corporation as the Board of Directors may require. The President shall do and
perform such other duties as from time to time may be assigned by the Board of
Directors.
SECTION 3.5. POWERS AND DUTIES OF VICE-PRESIDENTS. Each
Vice-President, if there be more than one in the order of their seniority,
shall, in the absence or disability of the President, possess and exercise all
of the powers and may perform all of the duties of the President.
Vice-Presidents shall have the authority to sign and execute bonds, mortgages
and other contracts, agreements, obligations and instruments of the
Corporation in the name thereof and, with the Treasurer, the Secretary or an
Assistant Treasurer or an Assistant Secretary may sign all certificates of the
shares of the stock of the Corporation. Vice-Presidents shall do and perform
such other duties as from time to time may be assigned by the Board of
Directors or the President.
SECTION 3.6. POWERS AND DUTIES OF SECRETARY. The Secretary shall
attend all meetings of the Board of Directors and the shareholders and shall
record all notes and minutes of the proceedings thereat in a book belonging to
the Corporation kept for that purpose. The Secretary shall give or cause to
be given all notices of the Corporation including, without limitation, all
required notices of meetings of the shareholders and the Board of Directors.
The Secretary may sign, with the President, in the name of the Corporation all
instruments authorized by the Board of Directors, and when so ordered by the
Board of Directors shall affix the seal of the Corporation and, shall attest
thereto by his or her signature. The Secretary shall have charge of the stock
records and all other books, records and papers of the Corporation (other than
financial books, records and papers) and shall see that all books, reports,
statements, certificates and other documents and records required by law are
properly kept and filed. The Secretary in general shall perform all of the
duties and possess such other powers as are incident to that office, subject
to the control of the Board of Directors, and shall do and perform such other
duties as from time to time may be assigned by the Board of Directors or the
President.
SECTION 3.7. POWERS AND DUTIES OF TREASURER. The Treasurer shall have
custody of the funds and securities of the Corporation and shall keep or cause
to be kept full and accurate accounts of receipts and disbursements in books
belonging to the Corporation. The Treasurer shall deposit all monies and
other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. The
Treasurer shall disburse the funds of the Corporation as may be ordered by the
Board of Directors, taking proper vouchers for such disbursements, and shall
render to the President and the Board of Directors, whenever requested, an
account of all of his or her transactions as Treasurer and of the financial
condition of the Corporation. The Treasurer in general shall perform such
other duties and possess such other powers as are incident to that office,
subject to the control of the Board of Directors, and shall do and perform
such other duties as from time to time may be assigned by the Board of
Directors or the President.
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SECTION 3.8. DELEGATION OF DUTIES. In case of the absence or
disability of any officer of the Corporation, or for any other reason that
the Board of Directors may deem sufficient, the Board may delegate all or any
portion of the powers or duties of any such officer to any other officer or to
any director.
SECTION 3.9. COMPENSATION. The Board of Directors shall fix the
salary of the President and the Chairman of the Board, if there be one, or may
delegate the authority to do so to a committee of the Board of Directors. The
salaries of other officers, agents and employees of the Corporation may be
fixed by the Board of Directors, by a committee of the Board, or by an officer
or officers to whom such authority has been delegated by the Board of
Directors or a committee thereof.
SECTION 3.10. RESIGNATION; REMOVAL. Any officer may resign at any
time by giving written notice to the Board of Directors or the Secretary of
the Corporation. Such resignation shall be effective upon receipt thereof by
the Board of Directors or the Secretary or at such subsequent time as shall be
specified in the notice of resignation. Any officer may be removed, with or
without cause, at any time, by the Board of Directors. Election as an officer
shall not of itself create any contract rights and the removal of an officer
shall be without prejudice to his or her contract rights, if any.
SECTION 3.11. VACANCIES. If the office of any officer or agent
becomes vacant by reason of death, resignation, removal from office, or
otherwise, the Board of Directors may choose a successor, who shall hold
office for the unexpired term in respect of which such vacancy occurred. The
Board of Directors may leave unfilled for such period as it may fix by
resolution any office except those of President, Treasurer and Secretary.
ARTICLE IV
INDEMNIFICATION; INSURANCE
SECTION 4.1 ACTION BY OTHERS. The Corporation (1) shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he or she is, was or
agrees to become a director, officer or trustee of the Corporation or of any
constituent corporation absorbed by the Corporation in a consolidation or
merger or is or was serving or has agreed to serve as a director, officer,
trustee employee or agent of any other enterprise (including, without
limitation, any employee benefit plan), serving as such at the request of the
Corporation or such constituent corporation or the legal representative of
any of the foregoing person and (2) except as otherwise required by Section
4.3 hereof, may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or
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completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation)
by reason of the fact that he or she is, was or has agreed to become an
employee or agent of the Corporation or of any such constituent corporation or
the legal representative of any of the foregoing persons, against expenses,
costs, disbursements (including attorneys' fees), judgments, fines and amounts
actually and reasonably incurred by him or her in good faith and in connection
with such action, suit or proceeding if he or she acted in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation, and with respect to any criminal action or proceeding, he or she
had no reasonable cause to believe that his or her conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person seeking indemnification did not
meet the applicable standard of conduct.
SECTION 4.2. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation (1) shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by or in the right of the Corporation to procure a judgment
in its favor by reason of the fact that he or she is, was or has agreed to
become a director, officer or trustee of the Corporation or of any constituent
corporation absorbed by the Corporation in a consolidation or merger or is or
was serving or has agreed to serve as a director, officer, employee or agent of
any other enterprise (including, without limitation, any employee benefit
plan), serving as such at the request of the Corporation or such constituent
corporation or the legal representative of any of the foregoing and (2) except
as otherwise required by Section 4.3 hereof, may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation)
by reason of the fact that he or she was or has agreed to become an employee or
agent of the Corporation or of any such constituent corporation or the legal
representative of any of the foregoing, against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection with the
defense or settlement of such action or suit if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Corporation; except that no indemnification shall be made
in respect of any claim, issue or matter as to which the person seeking
indemnification shall have been adjudged to be liable to the Corporation in the
performance of his or her duty to the Corporation unless, and only to the
extent that, the New Jersey Superior Court or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the New Jersey Superior Court or such other court shall deem proper.
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SECTION 4.3. SUCCESSFUL DEFENSE. To the extent that a person who may
or must be indemnified by the Corporation pursuant to Section 4.1 and Section
4.2 hereof has been successful on the merits or otherwise in defense of any
action, suit proceeding referred to in such Section 4.1 or Section 4.2, or in
defense of any claim, issue, or matter therein, he or she shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection therewith.
SECTION 4.4. SPECIFIC AUTHORIZATION. Any indemnification under
Section 4.1 or Section 4.2 hereof (unless ordered by a court) shall be made by
the Corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, trustee, employee, agent, or
the legal representative thereof, is proper in the circumstances because he or
she has met the applicable standard of conduct set forth in such Sections 4.1
and 4.2. Such determination shall be made (1) by the Board of Directors or a
committee thereof, acting by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or even if such a quorum of disinterested
directors is obtainable, if such quorum or committee by majority vote so
directs, by independent legal counsel in a written opinion, with such counsel
to be designated by the Board of Directors, or (3) by the shareholders.
Notwithstanding the foregoing, following any "change in control" of the
Corporation of the type required to be reported pursuant to Item 1 of Form 8-K
under the Securities Exchange Act of 1934, as amended, or any successor
provision thereto, any determination required hereby shall be made by
independent legal counsel selected by the person seeking indemnification and
reasonably acceptable to the Board of Directors, which legal counsel shall be
retained at the expense of the Corporation for the purpose of making such
determination.
SECTION 4.5. ADVANCEMENT OF EXPENSES. Expenses incurred by any person
whom the Corporation is required to indemnify pursuant to this Article shall,
and by any person whom the Corporation is permitted to indemnify pursuant to
this Article may, be paid by the Corporation in advance of the final
disposition of the action, suit or proceeding as to which indemnification is
sought, as authorized in the specific case, in the same manner as a
determination that indemnification is proper under Section 4.4 hereof, upon
receipt of an undertaking by or on behalf of the person seeking advancement of
expenses, or the legal representative thereof, to repay such amount unless it
shall ultimately be determined that he or she is entitled to be indemnified by
the Corporation pursuant to this Article.
SECTION 4.6. RIGHT OF INDEMNITY NOT EXCLUSIVE. The right to
indemnification and advancement of expenses provided by this Article shall not
exclude any other rights which any person seeking indemnification may have or
may hereafter acquire pursuant to any statute, any provision of the Charter,
or any by-law, agreement, vote of shareholders or otherwise, and shall
continue as to a person who has ceased to be a director, officer, trustee,
employee, agent or other person, or the legal representative of any such
person,
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whom the Corporation is required or permitted to indemnify pursuant to this
Article, and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
SECTION 4.7. INSURANCE. The Corporation may purchase and maintain
insurance, at its expense and on its behalf and on behalf of any person whom
the Corporation is required or permitted to indemnify pursuant to this Article
against any expenses incurred in any proceeding and any liabilities asserted
against him or her by reason of his or her having a status or serving, having
serviced, or having agreed to serve in a capacity giving rise to such expenses
or liability, whether or not the Corporation would have the power to indemnify
him or her against such expenses and liabilities under the provisions of this
Article, applicable law, or otherwise.
SECTION 4.8. INVALIDITY OF ANY PROVISION OF THIS ARTICLE. The
invalidity or unenforceability of any provision of this Article IV shall not
affect the validity or enforceability of the remaining provisions of this
Article.
ARTICLE V
CAPITAL STOCK
SECTION 5.1. SHARE CERTIFICATES. Each holder of shares of the capital
stock of the Corporation shall be entitled to a certificate or certificates,
in a form (which may include cards punched, magnetically coded or otherwise
treated so as to facilitate machine or automatic processing) approved by the
Board of Directors, which shall represent and certify the number, class and
series of shares owned by him or her in the Corporation. Certificates shall
be consecutively numbered. Each certificate shall be signed by the Chairman
of the Board of Directors, if there be one, the President or a Vice-President,
and also by the Secretary or Treasurer or any Assistant Secretary or Assistant
Treasurer (any of which signature may be facsimile) and may be sealed with the
seal of the Corporation or a facsimile thereof. No certificate shall be valid
unless it is signed in the manner prescribed by the preceding sentence. In
case any officer, transfer agent or registrar who has signed, or whose
facsimile signature has been placed on, a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued,
it may be issued by the Corporation with the same effect as if he or she were
such officer, transfer agent or registrar at the date of issue.
SECTION 5.2. SHAREHOLDER RECORDS. The name of the person owning the
shares represented by each stock certificate issued by the Corporation,
together with the number, class and series of shares represented thereby and
the date of issue, shall be entered on the Corporation's books. The
Corporation shall be entitled to treat the holder of record of shares on its
books as the holder in fact and shall not be required to recognize any
equitable or other claim to or interest in the shares.
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SECTION 5.3. TRANSFER OF SHARES. Shares of the capital stock of the
Corporation shall be transferred only on the books of the Corporation by the
holder thereof in person, or by such holder's attorney, upon surrender of
certificates for a like number of shares, duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer and such
proof of the authenticity of the signature thereon as the Corporation or its
agents may reasonably require. Upon presentation of adequate evidence of the
validity of the transfer pursuant to this Section 5.3, the surrendered
certificates shall be canceled, new certificates shall be issued to the person
entitled thereto, and the transaction recorded on the books of the
Corporation. The Board of Directors shall have power and authority to make all
such rules and regulations as it may deem expedient concerning the issue,
transfer and registration of certificates for shares of the capital stock of
the Corporation.
SECTION 5.4. TRANSFER AGENT. The Board of Directors may appoint a
transfer agent and a registrar of transfers, and may require that all stock
certificates bear the signature (which may be a facsimile) of such transfer
agent and such registrar of transfers.
SECTION 5.5. RECORD DATES. The Board of Directors may fix, in
advance, a date as the record date for determining the Corporation's
shareholders entitled to notice of and to vote at a meeting of the
shareholders, or to receive the payment of any dividend or the distribution or
allotment of any rights, or to exercise any rights in respect of any change,
conversion or exchange of capital stock, or in order to make a determination
of shareholders for any other proper purpose. The record date may not be more
than sixty (60) days and, in the case of a meeting of the shareholders, not
less than ten (10) days, prior to the date on which the event or action
requiring the determination of shareholders is to occur or be taken.
SECTION 5.6. LOST CERTIFICATES. In the event that any certificate
representing shares of capital stock of the Corporation is lost, stolen,
destroyed or mutilated, the Board of Directors may authorize the issuance of a
new certificate of like tenor for the same number of shares in replacement
thereof. The Board, in its discretion, may, as a condition precedent to
issuance of such a new certificate, require the owner of the certificate being
replaced, or the legal representative thereof, to make an affidavit or
affirmation setting forth such facts as to the events necessitating the
issuance of a new certificate as the Board deems necessary and to give the
Corporation a bond in such reasonable amount as the Board may determine to
indemnify the Corporation against any claim against the Corporation on the
certificate being replaced.
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ARTICLE VI
OFFICES AND RECORDS
SECTION 6.1. REGISTERED OFFICE AND AGENT. At the time of adoption of
these By-Laws, the address of the Corporation's registered office in the State
of New Jersey is 150 Elm Street, Westfield, New Jersey 07090 and the name of
the registered agent at such address is Dwyer & Canellis, P.A. The
Corporation may change its registered office or its registered agent or both
from time to time by resolution of the Board of Directors.
SECTION 6.2. PRINCIPAL OFFICE. At the time of adoption of these
By-Laws, the address of the principal office of the Corporation is 9 Law
Drive, Fairfield, New Jersey 07006. The Corporation may change its principal
office from time to time by resolution of the Board of Directors.
SECTION 6.3. ADDITIONAL OFFICES. The Corporation may have such other
offices, either within or without the State of New Jersey, as the Board of
Directors may from time to time designate or as the business of the
Corporation may from time to time require.
SECTION 6.4. BOOKS AND RECORDS. The books and records of the
Corporation may be kept outside of the State of New Jersey at such place or
places as the Board of Directors may from time to time designate; provided,
however, that the Corporation shall keep at its principal office, its
registered office or the office of its transfer agent, a record or records
containing the names and addresses of all shareholders, the number, class and
series of shares held by each and the date when they respectively became the
owners of record thereof.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. FISCAL YEAR. Unless otherwise determined by resolution
of the Board of Directors, the Corporation's fiscal year shall commence on the
first (1st) day of November of each calendar year and end on the thirty-first
(31st) day of October of each next succeeding calendar year.
SECTION 7.2. DIVIDENDS. The Board of Directors may, from time to
time, declare, and the Corporation may pay, dividends on the outstanding
shares of the Corporation's capital stock entitled to receive such dividends
in accordance with the terms thereof, in the manner and upon the terms and
conditions determined by the Board of Directors.
SECTION 7.3. CORPORATE SEAL. The seal of the Corporation shall have
inscribed thereon the name of the Corporation and the year and state of its
incorporation and may be altered from time to time at the direction of the
Board of Directors. The seal may be
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used by causing it, or a facsimile thereof, to be impressed, affixed or
otherwise reproduced.
SECTION 7.4. EXECUTION OF WRITTEN INSTRUMENTS. Contracts, deeds,
documents and other written instruments shall be executed by the Chairman of
the Board, if there be one, the President or any Vice-President and
countersigned or attested by the Secretary or the Treasurer or any Assistant
Secretary or Assistant Treasurer, unless the Board of Directors, in a
particular situation, shall designate another procedure for their execution.
SECTION 7.5. SIGNING OF CHECKS, NOTES, ETC. Checks, drafts, notes and
demands for money shall be signed, subject to any conditions or limitations
imposed by the Board of Directors, and bills receivable, drafts and other
evidences of indebtedness to the Corporation shall be endorsed for the purpose
of discount or collection, by the Chairman of the Board if there be one, the
President, any Vice-President, the Secretary, the Treasurer or any Assistant
Secretary or Assistant Treasurer, or by such other person as the Board of
Directors may from time to time designate.
SECTION 7.6. VOTING UPON STOCKS HELD BY THE CORPORATION. Unless
otherwise specifically ordered by the Board of Directors, the President shall
have full power and authority, on behalf of the Corporation, to attend, to act
and to vote at any meeting of the security holders of any other corporation,
partnership or other enterprise the securities of which are owned or
controlled by this Corporation and, at any such meeting, such officer shall
possess and may exercise any and all the rights and powers incident to the
ownership of such securities, and which the Corporation might possess and
exercise if present. The Board of Directors by resolution, from time to time
may confer like powers upon any other person or persons.
SECTION 7.7. LOANS TO DIRECTORS, OFFICERS AND EMPLOYEES. The
Corporation may lend money to, or guarantee any obligation of, or otherwise
assist, any director, officer or employee of the Corporation or any subsidiary
thereof whenever, in the judgment of the Board of Directors, such loan,
guarantee or assistance reasonably may be expected to benefit the Corporation.
Any such loan, guarantee or assistance may be made with or without interest,
and may be unsecured or secured in such manner as the Board of Directors shall
approve, including, without limitation, a pledge of shares of the Corporation,
and may be made upon such other terms and subject to such other conditions as
the Board of Directors may determine.
SECTION 7.8. RELIANCE. Each director, in the performance of his or
her duties as a member of the Board of Directors or any committee thereof,
shall not be liable with regard to any act or failure to act in reliance in
good faith upon (i) the opinion of counsel for the Corporation; (ii) written
reports setting forth financial data concerning the Corporation and prepared
by an independent public accountant or certified public accountant or a firm
of such accountants; (iii) the financial statements, books of account
- 15 -
<PAGE> 21
or reports of the Corporation represented to him or her to be correct by the
President, the officer of the Corporation having charge of its books of
account, or the person presiding at a meeting of the Board of Directors; or
(iv) written reports of committees of the Board of Directors.
SECTION 7.9. FORCE AND EFFECT OF BY-LAWS. These By-Laws are subject
to the provisions of the New Jersey Business Corporation Act (the "Act") and
the Charter, as each of them may be amended from time to time. If any
provision of these By-Laws is inconsistent with any provision of Act or the
Charter as in effect from time to time, the provision of the Act or the
Charter shall govern, to the extent of such inconsistency.
ARTICLE VIII
AMENDMENT OF BY-LAWS
These By-Laws may be amended, added to, rescinded or repealed, in whole
or in part, at any meeting of the Board of Directors or of the shareholders,
provided that notice of the proposed action in respect of these By-Laws shall
be stated in the notice of such meeting of the Board of Directors or the
shareholders, as the case may be, or the waiver of notice thereof, unless all
of the directors or the holders of record of all of the shares of stock of the
Corporation issued and outstanding and entitled to vote are present at such
meeting of the Board of Directors or the shareholders, as the case may be.
ARTICLE IX
EFFECTIVE DATE
These By-Laws shall take effect as of the date of effectiveness of the
Second Restated Certificate of Incorporation of the Corporation, (the
"Effective Date"), the date of approval hereof by the Board of Directors. As
of the Effective Date, these By-Laws shall replace and supersede for all
purposes, all existing and prior by-laws of the Corporation, which shall be
repealed as of the Effective Date.
- 16 -
<PAGE> 1
EXHIBIT 10.10
DEVELOPMENT AGREEMENT
This is a Development Agreement ("Agreement") made in Fairfield, New Jersey,
by and between ALL AMERICAN FOOD GROUP, a New Jersey corporation with its
principal office at 9 Law Drive, Fairfield, New Jersey 07006 ("All
American"), and, an individual with his principal residence located at
("Developer").
WHEREAS, All American is a franchisor of Goldberg's New York Bagel Shops,
which serve bagels, deli products, and other food items; and,
WHEREAS, Developer desires the exclusive rights to develop Goldberg's New York
Bagel Shops within the geographic area specified in this Development Agreement
for the limited term of this Agreement; and,
WHEREAS, All American is willing to grant such rights in accordance with the
terms and conditions of this Agreement;
NOW THEREFORE, it is mutually agreed as follows:
1. GRANT. All American hereby grants to Developer during the term of this
Development Agreement and subject to the conditions hereof the exclusive right
to develop Goldberg's New York Bagel Shops in the limited geographical area
identified and set forth in Exhibit A hereto, exclusive of any Protected Area
located therein as defined in any Franchise Agreements currently issued to
other parties; this geographical area shall be referred to as the "Territory".
The operation of the restaurants developed pursuant to this Agreement will be
governed by individual Franchise Agreements issued by All American in
accordance with Section 10 below. So long as Developer is in compliance with
the terms and conditions of this Agreement, All American will not franchise to
others to operate, nor will itself operate, any new or additional Goldberg's
New York Bagel Shops in the Territory during the term of this Agreement.
2. TERM. Unless earlier terminated pursuant to Section 12, this
Development Agreement shall expire 36 months from the date of execution of
this Agreement by All American or upon the execution by All American of the
Franchise Agreement for the last of the shops specified in Exhibit B (the
"Development Schedule"), whichever first occurs.
3. DEVELOPMENT FEE. Upon execution of this Development Agreement,
Developer shall pay to All American a fee of $ (the "Development Fee"). This
Development Fee shall be fully earned by All American in consideration of its
execution of this Agreement and shall be non-refundable. However, All
American shall credit $10,000 of the Development Fee toward payment of the
Franchise Fee for each of the first Franchise Agreements issued to Developer
pursuant to this Development Agreement, provided that the applicable shops are
constructed and opened in accordance with the Development Schedule.
4. DEVELOPMENT SCHEDULE. Developer shall open and continuously operate
properly franchised Goldberg's Bagel Shops in accordance with the Development
Schedule set forth in Exhibit B. In the event that Developer opens and
continuously operates a greater number of Goldberg's Bagels Shops than
required during any interim period of the Development Schedule, the
requirements of the succeeding period(s) shall be deemed satisfied to the
extent of such excess number of shops, up to the total number of shops
specified in the Development Schedule.
5. LOCATION OF SHOPS. Developer is responsible for locating proposed sites
within the Territory for each of the shops contemplated in the Development
Schedule; during the
<PAGE> 2
term of this Agreement, Developer shall use its best efforts to locate
suitable sites. All American may in its discretion offer counseling and
advice in site selection. In no event, however, shall All American be
obligated to loan money, guarantee leases, provide financing or otherwise
become directly involved and/or obligated to Developer or to any third party
in respect of such site selection or development; these activities and
undertakings shall be the exclusive responsibility of Developer, financially
and otherwise.
6. SITE ACCEPTANCE. Upon selection by Developer of a proposed site for a
shop, Developer promptly shall submit to All American such specific site data
and demographic and other information concerning the site as may be reasonably
required by All American, utilizing such forms as may be required by All
American. All American shall either accept or reject such site in accordance
with All American's then-current site selection policies and procedures. To
be effective, any acceptance must be in writing. Developer understands and
acknowledges that All American may reject any proposed site, in which event
Developer will not proceed at the rejected site, but will seek to locate an
acceptable site. The acquisition in any manner of any proposed site prior to
acceptance by All American shall be at the sole risk and responsibility of
Developer and shall not obligate All American in any way to accept same.
7. DISCLAIMER. In executing this Development Agreement, accepting a
proposed site, giving approvals or advice or providing services or assistance
in connection with this Development Agreement All American does not guarantee
the suitability of an accepted site or the success of any Goldberg's New York
Bagel Shop established at such site. All American expressly disclaims any
warranties, express or implied, with respect to the suitability of any site or
the success of any shop. Developer understands and acknowledges that the
suitability of a site and the success of any shop depend on many factors
outside the control of either All American or Developer (such as interest
rates, unemployment rates, demographic trends and the general economic
climate), but principally depend on Developer's efforts in the operation of
the shop.
8. LOCATION REQUIREMENTS. As a condition for accepting a proposed
site, All American may require Developer to negotiate a lease or sales
contract that includes certain terms regarding duration or other specified
matters. Developer understands and acknowledges that a site acceptance may be
conditioned on such matters and that if Developer does not wish to, or cannot,
satisfy the pertinent conditions within a reasonable time, the site will be
deemed rejected.
9. CONSTRUCTION. Upon receiving acceptance for a proposed site, Developer
shall proceed promptly to secure control of the accepted site and to obtain
necessary zoning and building approvals and permits. All American will
provide layouts for the All American-approved location, including
specifications for fixtures, furnishings, signs, and equipment. Developer
must hire an architect and general contractor to adapt these generic layouts
to the accepted site and must submit proposed final working plans to All
American for approval within the time limits set by All American. Developer
shall not proceed with construction or remodeling until Developer has received
All American's written approval of the final working plans. Developer shall
ensure that the building is constructed or remodeled in accordance with the
final working plans and specifications designated and approved by All
American. Developer will allow All American to make periodic inspections and
will provide such periodic progress reports as may be requested by All
American.
10. FRANCHISE AGREEMENT. No Goldberg's New York Bagel Shop may be opened
or operated by Developer under any circumstances until the required Franchise
Fee has been paid and the Franchise Agreement for such location has been
executed by All American. The Franchise Fee shall be twenty-five thousand
dollars ($25,000) for Developer's first Franchise Agreement, and seventeen
thousand and five hundred dollars ($17,500) for each subsequent Franchise
Agreement. The Franchise Fee for each Franchise Agreement must be paid at
least thirty (30) days prior to scheduled execution of the Agreement. All
Franchise Agreements issued pursuant to this Development Agreement will
contain generally the same terms and conditions as are being offered to other
franchisees similarly situated at time of issuance, including without
-2-
<PAGE> 3
limitation those terms and conditions pertaining to royalties and other fees
and duration of the Agreement. Developer shall comply with All American's
then-current franchising policies and procedures for issuance of the Franchise
Agreements. All American shall be under no obligation to execute and issue a
Franchise Agreement if Developer is in breach or default of any other Franchise
Agreement between All American and Developer, or if Developer is not eligible
for expansion pursuant to All American's then-current criteria for expansion.
In addition, All American shall be under no obligation to execute and issue a
Franchise Agreement unless Developer has complied in a timely manner with all
terms and conditions of this Development Agreement and has satisfied all
requirements set forth herein (including construction and training
requirements) with respect to the pertinent accepted site. If and when a
Franchise Agreement is executed with All American, it shall govern the
relations between the parties with respect to the pertinent restaurant.
11. NO RIGHT TO OPERATE OR USE TRADEMARKS. Developer acknowledges that until
a Franchise Agreement has been issued for a specified site Developer shall not
have or be entitled to exercise any of the rights, powers and privileges
granted by the Franchise Agreement, including without limitation the right to
use All American's trademarks, service marks and trade names; that the
execution of this Development Agreement shall not be deemed to grant any such
rights, powers or privileges to Developer; and that Developer may not under
any circumstances commence operation of any Goldberg's New York Bagel Shops
prior to execution by All American of a Franchise Agreement for the pertinent
location.
12. TERMINATION. This Agreement shall terminate immediately and without
notice to either party upon:
(a) the death of Developer, if Developer is an individual; or,
(b) the commencement of any proceedings by or against Developer under
the Bankruptcy Act, under any Chapter thereof or amendment thereto,
or under any other insolvency act, whether federal or state; the
appointment of any trustee or receiver for the business or property
of Developer; or any assignment by Developer for the benefit of
creditors.
All American shall have the right at its election to terminate this
Agreement immediately upon notice to Developer, upon the occurrence of any of
the following:
(a) failure to comply with the Development Schedule;
(b) the attempted assignment of this Agreement without the prior written
approval of All American;
(c) if Developer is a corporation or a partnership, the transfer of any
of the capital stock or partnership interest of such corporation or
partnership during the term of this Agreement without the prior
written approval of All American;
(d) the discovery by All American of any material misrepresentation in
any information or documents submitted to All American by or on
behalf of Developer;
(e) any violation by Developer of any of the provisions of this
Agreement; or,
(f) the termination by All American of any Franchise Agreement or other
agreement between All American and Developer or Developer's failure
to
-3-
<PAGE> 4
cure a default under any other agreement between All American and
Developer within the time specified by All American.
For purposes of Sections 10 and 12 herein, any Franchise Agreement issued
to Developer, any affiliated company of Developer or any corporation,
partnership or joint venture (or their affiliates) in which Developer or any
stockholder, partner, or joint venture of Developer, direct or indirect, has
any interest of ownership or participation, regardless of location, shall be
deemed an Agreement between All American and Developer.
13. EFFECT OF EXPIRATION OR TERMINATION. Upon expiration or
completion of the Development Agreement, or upon termination for any reason,
the rights granted to Developer pursuant to Section 1 of this Development
Agreement shall be extinguished immediately. Unless the parties have executed
a new Development Agreement, All American thereafter shall have the right to
operate or permit others to operate Goldberg's New York Bagel Shops within the
Territory, except as limited by the Protected Area provisions of any
then-effective Franchise Agreements.
14. CONFIDENTIALITY. At all times during the term of this Agreement,
and after the termination of this Agreement for any reason, Developer (and if
a corporation or partnership, its shareholders, directors, and officers or
partners, as individuals) shall not divulge, disclose or communicate, directly
or indirectly, to any other person or entity any confidential or proprietary
information or knowledge obtained from All American.
15. ASSIGNMENT. This Agreement shall inure to the benefit of and be
binding upon All American, its successors and assigns. However, neither this
Agreement nor any of Developer's rights hereunder shall be assignable or
transferable by Developer, directly or indirectly, by operation of law or
otherwise, without prior written approval from All American.
16. NEW DEVELOPMENT AGREEMENT. If Developer wishes to negotiate a new
Development Agreement with All American with respect to further development of
Goldberg's New York Bagel Shops in the Territory, Developer must so advise All
American in writing sixty (60) days before the expiration date of this
Development Agreement or sixty (60) days before the anticipated date of
execution of the Franchise Agreement for the final location under the
Development Schedule in Exhibit B, whichever is earlier. Subject to receipt
of such notice and so long as this Development Agreement is in effect and
Developer is not and has not been in default under this Development Agreement
or any Franchise Agreement or other agreement with All American, All American
will then negotiate in good faith with Developer with respect to a new
development agreement during the remainder of the term of this Development
Agreement.
17. GOVERNING LAW. This Agreement shall be governed, construed and
interpreted in accordance with the laws of the State of New Jersey. In the
event of any dispute concerning the parties' rights or obligations under this
Agreement, Developer agrees to file any suit against All American only in the
federal or state court having jurisdiction where All American's principal
office is then located.
18. DEVELOPER'S ACKNOWLEDGMENTS. Developer understands and acknowledges
that there are significant risks in any business venture and that the primary
factor in Developer's success or failure under this Agreement will be
Developer's own efforts. In addition, Developer acknowledges that All
American and its representatives have made no representations to Developer
other than or inconsistent with the matters set forth in the Franchise
Offering Circular provided to Developer and that Developer has undertaken this
venture solely in reliance upon the matters set forth in the Franchise
Offering Circular and Developer's own independent investigation of the merits
of this venture.
19. ENTIRE AGREEMENT. This Development Agreement contains the entire
agreement between the parties and shall not be modified except by a written
document executed by both parties.
-4-
<PAGE> 5
WITNESS: DEVELOPER:
BY:
- -------------------- ----------------------------
DATE:
--------------------------
WITNESS: ALL AMERICAN FOOD GROUP:
BY:
- -------------------- ----------------------------
TITLE:
-------------------------
DATE:
--------------------------
-5-
<PAGE> 6
EXHIBIT A
TERRITORY
The counties of in the state of .
ACKNOWLEDGED AND APPROVED
(Developer)
---------------
(All American)
---------------
-6-
<PAGE> 7
\EXHIBIT B
DEVELOPMENT SCHEDULE
1. One franchised, open and operating Goldberg's New York Bagel Shop on or
before in the Territory;
2. One additional franchised, open and operating Goldberg's New York Bagel
Shop on or before for a cumulative total of two (2) shops in the
Territory;
3. One additional franchised, open and operating Goldberg's New York Bagel
Shop on or before for a cumulative total of three (3) shops in the
Territory;
4. One additional franchised, open and operating Goldberg's New York Bagel
Shop on or before for a cumulative total of four (4) shops in the
Territory;
5. One additional franchised, open and operating Goldberg's New York Bagel
Shop on or before for a cumulative total of five (5) shops in the
Territory; and,
6. One additional franchised, open and operating Goldberg's New York Bagel
Shop on or before for a cumulative total of six (6) shops in the
Territory.
ACKNOWLEDGED AND APPROVED
(Developer)
---------------
(All American)
---------------
-7-
<PAGE> 1
EXHIBIT 10.11
ALL AMERICAN FOOD GROUP, INC.
LEASE ABSTRACT
LANDLORD: Santo V. Sorce Co., LLC
414 East Essex Street
Hackensack, NJ 07601
TENANT: The Company
PROPERTY: 104 New Era Drive
South Plainfield, NJ 07080
SQUARE FOOTAGE: 22,324 square feet of space until January 31, 2002 (the
"Initial Space"); 29,324 square feet of space (the entire
premises) from February 1, 2002 until the Expiration Date
(the "Additional Space").
COMMENCEMENT
DATE: February 15, 1997
EXPIRATION DATE: January 31, 1997
OPTION: One five year option to renew on the same terms and conditions
as current lease (the "Renewal Term").
RENT: $9,301.67 per month from April 1, 1997 until January 31, 2002;
$13,440.17 per month for the remainder of the lease (no rent is due
for the period from February 15, 1997 to March 31, 1997).
ADDITIONAL SPACE: Prior to February 1, 2002, Landlord may lease all or part
of the Additional Space to a third party and Tenant may increase the Initial
Space with the addition of any part of the Additional Space not then occupied
or under lease to be occupied by a third party.
TAXES/INSURANCE/ OTHER CHARGES: Tenant shall pay: its pro rata share of all
real estate, ad valorem or other property taxes assessed against the premises
for land, building, fixtures or improvements; common area maintenance charges;
property insurance, comprehensive general liability insurance and rent
insurance.
<PAGE> 2
ASSIGNMENT: The lease is assignable only with the written permission of the
Landlord and is not assignable during the Renewal Term.
DEFAULT: Events of default include:
1. all or any part of the premises become vacant due to Tenant's
removal, ejectment or eviction from, or abandonment of the
premises;
2. Tenant does not make payment of rent or other charges when due
and such default continues for fifteen (15) days after written
notice from Landlord;
3. Tenant fails to perform any of its other obligations under the
lease;
4. Tenant fails to comply with any federal, state or local
statutes, rules, ordinances, orders, regulations and
requirements; or
5. Tenant files for bankruptcy.
<PAGE> 1
EXHIBIT 10.12
AGREEMENT
1. Parties to the Agreement
The parties to this Agreement (the "Agreement") are "The Bagel Connection,
Inc.", "Bagel Franchises Systems, Inc.", Gary Lengel and Jack Lengel, all
located at 1408 Whalley Ave. New Haven, CT., ("Sellers"), and All American
Food Group, Inc. located at 9 Law Dr. Fairfield, NJ., ("Buyer").
2. Purpose of the Agreement
The purpose of this Agreement is to outline the terms under which Sellers will
sell to buyer certain tangible and intangible assets under the terms and for
the consideration described below. The parties agree that this transaction
will be subject to a closing, within 60 days of the execution of this
Agreement, and that other than as expressly provided for in this Agreement,
the terms and conditions contained herein are fully valid and binding on the
parties. The structure of the Agreement, as to a stock sale or a sale of
assets, will be determined by Buyer prior to closing.
3. Assets to be Sold
Sellers are selling to Buyer the following assets:
A. An operating retail bagel store, located at 1408 Whalley Ave.,
New Haven, CT, including all the tangible land intangible assets of said
store. The parties acknowledge that this location includes bagel production
equipment and an executive office, all the furniture and fixtures of which is
expressly included in this store.
B. The tangible and intangible assets of the franchise system
trading as "The Bagel Connection," including any trademarks or other
commercial symbols, executed and currently valid franchise agreements,
recipes, good will, and all other assets related to the franchise.
The parties expressly acknowledge that at this time there are valid franchise
agreements in effect for retail locations in Farmington, Derby, and Shelton,
CT, and an executed agreement with Helena LeTouruauno and Grace Sola as
franchisees, for a franchised store to be located in Wallingford, CT, that is
not yet operational, and that these agreements will be assigned to Buyer at
the closing of this transaction.
<PAGE> 2
4. Other Stores
The parties further acknowledge that there are additional Franchise Agreements
covering retail locations in Stratford, Bridgeport, and Milford, CT, and that
as of the date of this Agreement, these franchises are not operated in
accordance with valid franchise agreements, that there is filed and pending
litigation with respect to the stores in Milford, Bridgeport, and Stratford,
and that the Sellers can make no representation as to the future status of
these stores within the "The Bagel Connection" franchise system.
Further acknowledged that there is currently in operation in Monroe, CT, an
additional retail store operating under the name "The Bagel Connection," and
owned by the franchisee of the Bridgeport store, for which no franchise
agreement has been executed.
The parties agree that All American shall have the right and opportunity to
approach the franchisees described in 4 above, and shall have the right to
resolve those conflicts as they, in their sole discretion see fit, except that
to the extent that such resolution may compromise any accounts receivable of
Seller, Buyer shall require Seller's approval for such compromise. Sellers
agree to fully cooperate with Buyers in Buyer's efforts to resolve such
conflicts.
Buyer expressly agrees that any contact, direct or indirect, with any store or
franchisee currently affiliated with or using the name "Bagel Connection,"
shall not occur without the express written consent of Seller.
It is expressly understood by sellers, that in the event Buyer is unable to
resolve the conflicts described in 4 above to his sole satisfaction, Buyer
shall have the right to cancel this Agreement, in which case neither party
shall have any continuing obligation to the other.
5. Consideration
In full payment for the assets purchased hereby, Buyer shall:
a) assume all existing bank debt of Seller, in the approximately
amount of $310,000, which debts are currently being amortized at approximately
$5,000 per month. Buyer agrees to be fully responsible for the future payment
of such debts, and shall make its best efforts to remove Sellers from such
debt; however, Sellers acknowledge that the holders of such debt may not
release Sellers from such debts, and Sellers agree that such failure to obtain
releases shall not be grounds for the cancellation or alteration of this
agreement.
b) assume all accounts payable owed by Sellers to vendors as of
the date of this Agreement, in the approximate amount of $50,000.
-2-
<PAGE> 3
In the event Buyer is able to improve the terms of either a) or b) above, it
its agreed that Buyer shall retain the benefit of such improvement, and such
shall in no way alter any other provisions of this Agreement.
c) issue 25,000 shares of its common stock to Seller. Seller
acknowledges that such stock is restricted under Rule 144 of the Securities
and Exchange Commission, which restricts the ability of Seller to sell said
stock in the open market.
The above items shall constitute full payment for the assets sold by seller,
and there shall be no adjustment in the consideration resulting from the
success or failure of Buyer to resolve the conflicts of the franchisees
discussed in paragraph 4 above.
6. Legal Bills
Each party shall be responsible for their own legal bills in this transaction,
except that, at closing, Buyer shall reimburse Seller up to $5,000 for
Seller's legal bills in connection with the closing of this transaction.
7. Consulting Fees
Upon the closing of the transaction described herein, Buyer agrees to employ
each of the Sellers as consultants to Buyer, for a period of not less than 60
days. Each of the Sellers shall receive a consulting fee of $3,000 a month
during this period, and to assist Buyer, in a manner to be determined by
Buyer, in the integration of the acquired assets into Buyer's business.
8. Accounts Receivable
The parties acknowledge that there may be substantial accounts receivable due
Sellers at the time of closing, including amounts due Sellers from the
franchisees described in paragraph 4 above. Any such amounts shall be split
equally between the parties at closing, and neither side shall have the right
to compromise these amounts without the agreement of the other.
9. Deposit
Upon the execution of this Agreement, Buyer shall provide Seller with a $1,000
deposit, which deposit, at closing, shall be applied against Buyer's
obligation as described in paragraph 6 above.
10. Contingencies
The parties acknowledge that the closing of this transaction is expressly
dependent upon: a) the due diligence of Buyer with respect to all of the
written and verbal
-3-
<PAGE> 4
representations of Buyer; b) the determination by Buyer that the conflicts
with certain existing franchisees have been resolved in a matter satisfactory
to Buyer, in the sole discretion of Buyer and Buyer's attorney.
11. Subsequent Agreement
After the completion of the Buyer's due diligence, the parties will enter into
a more detailed agreement setting froth all terms and conditions of the
transaction.
Signed this _____ day of January, 1997.
By Sellers:
- -------------------------------- ---------------------------------
Gary Lengel, Witness
- -------------------------------- ---------------------------------
Jack Lengel, Witness
- -------------------------------- ---------------------------------
Bagel Connection, Inc. Witness
- -------------------------------- ---------------------------------
Bagel Franchise Systems Inc. Witness
By Buyer:
- -------------------------------- ---------------------------------
All American Food Group, Inc. Witness
Andrew Thorburn, CEO
-4-
<PAGE> 1
EXHIBIT 11
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
October 31, October 31,
PRIMARY 1996 1995
------- -------------- ---------------
<S> <C> <C>
Net Loss ($1,973,592) ($1,151,545)
Loss--increase in carrying amount of redeemable preferred
stock 562,678 --
--------------- ---------------
($2,536,270) ($1,151,545)
=============== ===============
Weighted average number of common shares outstanding 943,150 943,150
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
--------------- ---------------
Weighted average number of shares used in calculation of
primary loss per share 1,373,708 1,373,708
=============== ===============
Primary net loss per common share ($1.85) ($0.84)
=============== ===============
FULLY DILUTED
-------------
Net loss for primary loss per common share and for fully
diluted per share amounts ($2,536,270) ($1,151,545)
=============== ===============
Weighted average number of shares used in calculating
primary loss per share 1,373,708 1,373,708
Add incremental shares representing:
Shares issuable upon conversion of convertible preferred
stock 712,500 713,782
Shares issuable upon exercise of stock options 15,000 15,000
--------------- ---------------
Weighted average number of shares used in calculation of
fully diluted loss per share 2,101,208 2,102,490
=============== ===============
Fully diluted net loss per common share ($1.21) ($0.55)
=============== ===============
</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 IPO price of $3.50 per share.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 84,302
<SECURITIES> 0
<RECEIVABLES> 397,039
<ALLOWANCES> 12,000
<INVENTORY> 66,580
<CURRENT-ASSETS> 783,003
<PP&E> 1,170,103
<DEPRECIATION> 249,533
<TOTAL-ASSETS> 2,188,474
<CURRENT-LIABILITIES> 1,822,062
<BONDS> 0
562,678
537,905
<COMMON> 3,360,136
<OTHER-SE> 4,285,495
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