<PAGE>
As filed with the Securities and Exchange Commission on August 25, 1998
Registration No: 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ALL AMERICAN FOOD GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
New Jersey 5461 33-0567363
(State or other jurisdiction (Primary Standard Industrial (IRS employer
of incorporation or organization) Classification Code Number) identification number)
</TABLE>
104 New Era Drive
South Plainfield, New Jersey 07080
(908) 757-3022
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive
offices and principal place of business)
Andrew Thorburn
Chairman and Chief Executive Officer
All American Food Group, Inc.
104 New Era Drive
South Plainfield, New Jersey 07080
(908) 757-3022
(Name, address, including zip code, telephone number, including area code,
of agent for service)
COPY TO:
Hank Gracin, Esq.
Lehman & Eilen
50 Charles Lindbergh Blvd., Suite 505
Uniondale, NY 11553
(516) 222-0888
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(c) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. / /
If this Form is post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Title Of Each Maximum Maximum
Class Of Amount Aggregate Aggregate Amount Of
Securities To To Be Price Per Offering Registration
Be Registered Registered Share(1) Price(1) Fee(5)
- ------------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C>
Common Stock,
no par value (2) 2,564,103 .0625 $160,256.44 $47.28
Common Stock,
no par value (3) 5,208,333 .0625 325,520.81 96.03
Common Stock,
no par value (4) 273,008 .0625 17,063.00 5.03
Total 8,045,444 .0625 $502,840.25 $148.34
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee. The
Proposed Maximum Aggregate Offering Price was calculated pursuant to Rule
457(c) under the Securities Act of 1933, as amended, on the basis of the
closing price reported in the OTC Bulletin Board on July 31,1998.
(2) Issuable upon the conversion of Series G Preferred Stock (the "Series G
Preferred Stock"), which is estimated based on the conversion terms set forth
in the resolution establishing such class and is subject to adjustment and
could be materially more or less than such estimated amount depending upon
factors that cannot be predicted by the Company at this time, including, among
others, the future market price of the Common Stock. This is not intended to
constitute a prediction as to the number of shares of Common Stock into which
the Series G Preferred Stock will be converted.
(3) Issuable upon the conversion of Series H Preferred Stock (the "Series H
Preferred Stock"), which is estimated based on the conversion terms set forth
in the resolution establishing such class and is subject to adjustment and
could be materially more or less than such estimated amount depending upon
factors that cannot be predicted by the Company at this time, including, among
others, the future market price of the Common Stock. This is not intended to
constitute a prediction as to the number of shares of Common Stock into which
the Series H Preferred Stock will be converted.
(4) Issuable upon exercise of warrants evidencing the right to purchase shares
of Common Stock, which is estimated based on the Subscription Agreements
relating to the Series G Preferred and Series H Preferred, with provide for
the issuance of warrants upon conversion of such Preferred Stock, and is
subject to adjustment and could be materially more or less than such estimated
amount depending upon factors that cannot be predicted by the Company at this
time, including, among others, the future market price of the Common Stock.
This is not intended to constitute a prediction as to the number of shares of
Common Stock subject to warrants to be issued upon conversion of said
<PAGE>
Series G Preferred and Series H Preferred.
(5) In accordance with Rule 457(g), the registration fee for these shares is
calculated based upon a price which represents the highest of: (i) the price
at which the warrants may be exercised; (ii) the offering price of securities
of the same class included in the registration statement; or (iii) the price
of securities of the same class, as determined pursuant to Rule 457(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
An Exhibit Index appears on page II-3
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 24, 1998
PROSPECTUS
ALL AMERICAN FOOD GROUP, INC.
8,045,444 SHARES OF COMMON STOCK*
(without par value)
This Prospectus relates to the sale from time to time by certain persons (the
"Selling Stockholders") of 8,045,444 shares (the "Shares") of common stock,
without par value per share (the "Common Stock"), of All American Food Group,
Inc., a New Jersey corporation (the "Company"). See "Selling Stockholders."
The Company is not offering any shares of Common Stock hereunder and will not
receive any of the proceeds from the sale of shares by the Selling
Stockholders. Included in the number of shares offered hereby are an estimated
273,008 shares issuable under warrants which, upon conversion of the Series G
and Series H Preferred Stock, are issuable to the Selling Stockholders (the
"Warrants"). The Company will receive proceeds represented by the exercise
price of the Warrants if exercised by the holders thereof. It is anticipated
that the Selling Stockholders will offer such shares from time to time in the
over-the-counter market at the then prevailing market prices and terms or in
negotiated transactions and without the payment of any underwriting discounts
or commissions, except for usual and customary selling commissions paid to
brokers or dealers. See "Plan of Distribution." The Selling Stockholders also
may sell such shares from time to time pursuant to Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act").
The Common Stock is traded on the OTC Bulletin Board under the symbol "AAFG."
On August 21, 1998, the closing bid price of the Common Stock on the OTC
Bulletin Board was $.0625 per share.
*The shares of Common Stock offered hereby include the resale of such presently
indeterminate number of shares of Common-Stock issuable upon conversion of the
Series G and Series H Preferred Stock (the "Preferred Stock"), issued in
separate private placements in March 1998 and May 1998, respectively (the
"Private Placements"), and a presently indeterminate number of shares of Common
Stock issuable upon the exercise of Warrants to be issued to the Selling
Stockholders upon conversion of the Series G and Series H Preferred Stock. The
number of shares of Common Stock indicated to be issuable in connection with
such transactions and offered for resale hereby is an estimate based on the
conversion terms set forth in the resolution establishing such series of
Preferred Stock and the Subscription Agreements relating thereto, and is subject
to adjustment and could be materially more or less than such estimated amount
depending upon factors that cannot be predicted by the Company at this time,
including, among others, the future market price of the Common Stock. If,
however, 10,000 shares of Series G Preferred Stock and 25,000 shares of Series H
Preferred Stock were converted, based on the closing bid price of the Common
Stock as reported on the OTC Bulletin Board on August 21, 1998, and all Warrants
issuable in connection therewith were issued and exercised, the Company would be
obligated to issue a total of 8,045,444 shares of the Common Stock. This
presentation is not intended to constitute a prediction as to the future market
price of the Common Stock or as to the number of shares of Common Stock into
which the Preferred Stock will be converted and related Warrants will be
exercised. See "Risk Factors" on pages 6-11 of this Prospectus.
(cover page continued on next page)
<PAGE>
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND SHOULD NOT BE PURCHASED BY ANYONE WHO CANNOT AFFORD THE LOSS OF HIS
ENTIRE INVESTMENT. SEE "RISK FACTORS" ON PAGES 6-11 OF THIS PROSPECTUS FOR A
DESCRIPTION OF RISK FACTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The Company has agreed to bear all of the expenses (other than selling
commissions and fees and expenses of counsel or other advisors to the Selling
Stockholders) in connection with the registration and sale of the Common Stock
being offered by the Selling Stockholders. See "Selling Stockholders" and
"Plan of Distribution." The Company has also agreed to indemnify the Selling
Stockholders against certain liabilities, including liabilities under the
Securities Act. The total expenses to be paid by the Company for this offering
are estimated at $40,000.
THE DATE OF THIS PROSPECTUS IS _________________, 1998
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain information contained under the captions "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Business" and
elsewhere include "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, and is subject to the safe
harbor created by that act. There are several important factors that could
cause actual results to differ materially from those anticipated by the
forward-looking statements contained in such discussions. Additional
information on the risk factors which could affect the Company's financial
results is included under the caption "Risk Factors" commencing on page 6 of
this Prospectus.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and
financial statements (including the notes thereto) appearing elsewhere in this
Prospectus. Investors should carefully consider the information set forth
under the heading "Risk Factors."
The Company
All American Food Group, Inc. (together with its wholly owned
subsidiaries, the "Company") franchises bagel stores, licenses a gourmet soup
line, operates retail bagel stores and distributes equipment and food products
to its franchisees and licensees. In the bagel segment of its business, the
Company owns and operates seven retail stores and franchises bagel stores
under the name "Goldberg's New York Bagels" and "Goldberg's New York Deli and
Bagels." The Company distributes its proprietary line of gourmet soups in bot
its bagel stores and to unaffiliated licensees under the trademark "Soup
Chef."
The Company franchises its bagel stores under two distinct but
complimentary concepts. Stores operating under the trade name "Goldberg's New
York Bagels" offer bagels and related dairy products in a fully kosher retail
environment and under strict kosher supervision. In addition to bagels, the
menu consists of various spreads, salads, bakery items and beverages,
including coffee and other hot and cold beverages. Some of the kosher stores
operate under the trade name "Sammy's New York Bagels", the original retail
name for the fully kosher stores.
The stores operating under the alternative trade name "Goldberg's New York
Deli and Bagels" or variations thereof, offer a similar menu, but are not
restricted to a kosher diary menu. These stores offer a full line of
delicatessen meats, including turkey, roast beef, ham, salami and similar cold
cuts. Although the Company has sought to maintain the maximum compatibility
between the two store concepts, the bagel and deli stores generally have a
wider choice of food items to offer in each retail category than the fully
kosher stores.
The Company's operations are based on those of a group of bagel shops
operating in New York and New Jersey under variations of the "Goldberg" name
since 1938. In October 1993, the Company acquired two such restaurants (one of
which subsequently was sold), together with exclusive franchise rights to
their recipes, flours, mixes and equipment and the prior owners' related bagel
bakery equipment business. In September 1994, the Company acquired three
Sammy's kosher stores (one of which subsequently was sold) and a commissary.
Since its acquisition of the Goldberg's and Sammy's stores, the Company has
engaged in an extensive process of analyzing, standardizing and documenting
all aspects of its retail bagel operations, preparing franchise materials and
developing its franchise system and program. In addition, it retrofitted one
of the Goldberg's locations to serve as a prototype store for purposes of
marketing franchises and training personnel. As of July 31, 1998, the
Company's retail system consisted of eighteen Goldberg's and nine kosher
stores located in nine states, including seven Goldberg's and one kosher
stores owned and operated by the Company and ten Goldberg's and seven kosher
stores operated under franchise or license arrangements with the Company.
The Company also distributes and services its bagel bakery equipment for
use by its franchisees. The Company's equipment utilizes the old-fashioned
method of boiling, then baking bagels with revolving tray ovens. Management
believes that the Company is the only franchisor of bagel stores that provides
bagel equipment directly to its franchisees.
In October 1997, the Company acquired certain recipes and expertise
associated wit the production of a line of gourmet soups previously sold under
the retail name "The Soupman." The Company also retained Faud el Hashmi, the
founder and executive chef of "The Soupman" concept under a long term
consulting agreement. The Company has spent significant resources in a the
development of a business plan for he manufacture, distribution and retail
licensing of a gourmet soup line, including several retail tests in various
store locations. Based on these results, the Company has now completed
agreements for the production and manufacture of its proprietary soups by
third party food vendors, and developed prototype kiosks and counter-top units
for use in the retail sale of the gourmet soups.
3
<PAGE>
In addition to adding the gourmet soup line to its own and franchised
bagel stores, the Company has now launched a licensing program for the sale of
"SoupChef(TM)" licenses to the food service industry. Based on its test
results and the preliminary response to its licensing efforts, the Company
expects that the "SoupChef" line of gourmet soups will be able to produce
significant revenue to the Company beginning in its 1999 fiscal year.
The Company intends to expand its retail operations primarily through
franchising, and to a lesser extent, through acquisitions in key markets.
Management believes that food service franchising in general, and the
franchising of bagel and gourmet soup 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 nearly doubled from 1993 to 1996. Management believes that this
increased demand for bagels arises primarily from increased consumer demand
for healthier, low-fat food products and that the versatility, convenience and
relatively low price of bagels add to their appeal.
Management believes that the Company has a unique combination of
characteristics that will help it to build a successful nationwide chain of
franchised and licensed restaurants under both of its concepts. The Company's
key competitive strengths include the following:
- Quality Products. Management believes that the key to the Company's
success lies with the quality of its products. Therefore, all of the
Company's bagels are prepared in the old-fashioned style, using the
Company's proprietary bagel mix and dough conditioner, by first boiling
and then baking the dough using the Company's bagel kettle and bagel oven.
The Company believes that this process and the use of its proprietary
ingredients and its equipment ensure the consistent preparation of premium
quality bagels with a shine, crust, texture and overall flavor that
distinguish its products from those of its competitors.
- Experience. The Company's bagel products and operating systems are
based on those developed by the Goldberg family during the 58 years of
operation of its family-owned bagel shops. The Company's products and
operating systems are the product of this half-century of experience.
- Complementary Concepts. Management believes that the Company's
franchise program is unique in offering two complementary bagel concepts.
Management also believes that the availability of these two concepts
uniquely positions the Company to benefit from economies of scale in
purchasing, while permitting it to penetrate distinct segments of the
bagel market.
- Kosher Concept and Production Facilities. Management believes that
Sammy's is the only franchised food chain subject to national kosher
certification currently available in the United States. In addition to the
market for kosher products by consumers requiring kosher food by reason of
dietary restrictions in connection with their religious faith, management
believes that a market for kosher products also exists among consumers who
are not subject to such restrictions, but who view kosher certification as
a sign of high quality, authenticity and careful preparation.
- Equipment Business. Management believes that the Company is unique
in designing, manufacturing and distributing its bagel bakery equipment
and providing consulting services in connection with the sale and
installation of such equipment. Management believes that this capability
provides the Company with a distinct advantage in equipping and advising
its franchise outlets and in ensuring the quality of its products.
- Gourmet Soup. Management believes that there is ample evidence in
the general media, the food industry press and in its own trials to
indicate that the sale of gourmet soups is one of the most rapidly growing
segments of the food business. The Company's own line of soups, along with
its distinct method of marketing the soups through in store kiosks,
represents an outstanding additional business opportunity to the Company,
both as an added item to the menu of its bagel stores and as a stand-alone
licensing venture.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered.............. 8,045,444 shares (based upon the
7,772,436 shares issuable upon the
conversion of Series G and Series H
Preferred Stock, based on the Market
Price (as defined in the Preferred
Stock) of $.06 per share on August
21, 1998) and 273,008 shares
issuable upon exercise of the
warrants
Common Stock Outstanding
Prior to Offering................. 13,439,787 shares
Common Stock to be Outstanding
Immediately After Offering........ 13,439,787 shares based on all
shares offered under this Prospectus
Use of Proceeds................... None of the proceeds of the sale of
the Common Stock registered
hereunder will accrue to the
Company. See "Use of Proceeds."
Risk Factors...................... The Securities offered hereby
involve a high degree of risk.
Investors should purchase the
securities offered hereby only
if they can afford the loss of
their entire investment.
OTC Bulletin Board................ "AAFG"
</TABLE>
The Company was incorporated under the laws of the State of New Jersey on
September 27, 1993, under the name "Jutland Food Group, Inc." for the purpose
of establishing a chain of franchised bagel restaurants using the recipes,
procedures, experience and expertise of an existing, well-seasoned bagel
restaurant and bakery operation. The Company changed its name to "All American
Food Group, Inc." on October 24, 1995. Its executive offices are located at
104 New Era Drive, South Plainfield, New Jersey 07080 and its telephone number
is (908) 757-3022.
CURRENT FINANCING
In March, 1998, pursuant to a private placement, the Company sold to two
investors 10,000 shares of Series G Preferred Stock. In May, 1998, pursuant to
a second private placement, the Company sold to two other investors 25,000
shares of Series H Preferred Stock. The holders of the Series G and Series H
Preferred Stock may convert their Preferred Stock into Common Stock (the
"Conversion Shares"), and the Company has the right, under certain
circumstances, to require such conversion In connection with such private
placements, the Company issued warrants to purchase up to 273,008 shares of
its Common Stock and agreed to issue additional warrants, as and when the
Preferred Stock is connected to Common Stock (herein, the "Warrant Shares").
The Conversion Shares and Warrant Shares constitute the Selling Stockholders'
Common Stock being offered and sold by the Selling Stockholders pursuant to this
Prospectus. See "Description of Securities," "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Selling Stockholders and Plan of Distribution."
SUMMARY OF FINANCIAL DATA
The summary financial data set forth below are derived from the
Consolidated Financial Statements of the Company and its subsidiaries
appearing elsewhere in this Prospectus. The Consolidated Financial Statements
of the Company as of, and for the six months ended, April 30, 1998 and 1997,
are unaudited.
5
<PAGE>
The summary financial data should be read in conjunction with, and are
qualified in their entirety by reference to, the Consolidated Financial
Statements of the Company and the Notes thereto, and "Management's Discussion
and Analysis or Plan of Operation," included elsewhere in this Prospectus. The
financial data set forth below gives effect to a one-for-two reverse split of
the Company's Common Stock effected as of December 5, 1996 and a ten-for one
reverse split of the Company's Common Stock effected as of February 25, 1998.
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Year Six Months Ended April 30,
Ended Ended (Unaudited)
October 31, October 31, --------------------------
1996 1997 1998 1997
----------- ----------- ----- ----
<S> <C> <C> <C> <C>
Revenues........................ $2,240,187 2,809,885 1,069,376 720,179
Net Loss........................ $(1,973,592) (5,698,591) (1,865,405) 1,368,953
Net Loss per share.............. $(1.12) ($1.58) ($1.26) ($4.90)
Weighted average number of
common shares
outstanding................ 1,373,708 3,634,442 1,495,373 285,863
<CAPTION>
Balance Sheet Data (unaudited):
April 30, 1998
--------------
<S> <C>
Current assets................... $1,608,979
Current liabilities.............. $2,395,821
Working capital (deficit)........ ($786,842)
Total assets..................... $5,244,343
Total long term debt............. $191,072
Deferred franchising revenue..... -0-
Redeemable preferred stock....... $280,630
Common stock..................... $12,455,397
Non-redeemable preferred stock... 1,404,874
Accumulated deficit.............. $11,849,419
</TABLE>
RISK FACTORS
The securities offered hereby are highly speculative and involve a high
degree of risk and substantial dilution. An investment in these securities
should be made only by investors who can afford the loss of their entire
investment. In addition to the factors set forth elsewhere in this Prospectus,
prospective investors should give careful consideration to the following risk
factors in evaluating the Company and its business before purchasing the
securities offered hereby.
Limited Operating History; Operating Losses
The Company has been in existence for approximately four years and eight
of the twenty-seven stores currently in operation by the Company or under
franchise or license arrangements have been in operation for less than 12
months. Further, the Company incurred net losses of $1,973,527 and $
for the fiscal years ended
6
<PAGE>
October 31, 1996 and 1997, respectively, and, as of April 30, 1998, had an
accumulated deficit since inception of approximately $11,849,419. Such
operating losses and deficits reflect the cost of developmental and other
start-up activities including, in particular, the acquisition of the
Company's initial retail stores and equipment business and the development
of its franchise program. The Company expects to continue to incur
significant but decreasing losses in the future as it implements its
expansion program.
The Company's operations are subject to numerous risks associated with
establishing any new business, including unforeseen expenses, delays and
complications, as well as specific risks of the food service and
franchising industries. There can be no assurance that the Company will
achieve or sustain profitable operations or that it will be able to remain
in business. In particular, there can be no assurance that the
Company-owned and operated stores will operate profitably, that the
Company will succeed in opening additional stores successfully, that
stores currently operating under franchise or license arrangements will
operate successfully or that the Company will be successful in selling
additional franchises.
Need for Additional Working Capital
The Company anticipates that it will require additional capital resources
to satisfy its capital requirements for the next 12 months. The Company's
capital requirements depend upon many factors, including the Company's
ability to market its franchises and operate its own stores successfully,
as well as market developments and cash flow from operations. To the
extent that the Company's capital resources and cash generated from
operations are insufficient to fund the Company's activities, the Company
will be required to raise additional funds through bank borrowings or
equity or debt financings. There can be no assurance that additional
financing, if required, will be available at all or in amounts or on terms
acceptable to the Company. In addition, any equity financing could result
in dilution to the Company's existing shareholders. Failure to obtain
additional working capital in a timely manner or on acceptable terms would
have a material adverse effect on the Company, its operations, financial
results and prospects.
Volatility of Stock Price
The trading price for the Common Stock has been highly volatile and could
continue to be subject to significant fluctuations in response to
variations in the Company's quarterly operating results, general
conditions in the food service industry or the general economy, and other
factors. In addition, the stock market is subject to price and volume
fluctuations affecting the market price for public companies generally, or
within broad industry groups, which fluctuations may be unrelated to the
operating results or other circumstances of a particular company. Such
fluctuations may adversely affect the liquidity of the Common Stock, as
well as the price that holders may achieve for their shares upon any
future sale.
Adverse Effects of Nasdaq Delisting
On July 16, 1998, the Company's Common Stock was delisted from The Nasdaq
SmallCap Market due to the Company's inability to satisfy the continued
listing standards of The Nasdaq SmallCap Market. Such delisting of the
Common Stock is likely to adversely affect the price of the Common Stock
and the ability of holders to sell their shares, as well as the Company's
ability to raise additional capital to fund its operations. In addition,
in order to be relisted on Nasdaq, the Company will be required to comply
with the initial listing requirements, which are substantially more
onerous than the maintenance standards.
So long as the share price for the Company's Common Stock remains below
$5.00 per share, unless the Company satisfies certain asset or revenue
tests (at least $5,000,000 in net tangible assets if in business less than
three years, at least $2,000,000 in net tangible assets if in business at
least three years, or average revenues of at least $6,000,000 for the last
three years), the Common Stock is subject to the so-called "penny stock"
rules promulgated by the Securities and Exchange Commission (the
"Commission"). Under the penny stock rules, a broker or dealer selling
penny stock to anyone other than an established customer or "accredited
investor"
7
<PAGE>
(generally, an individual with net worth in excess of $1,000,000 or annual
income exceeding $200,000, or $300,000 together with his or her spouse)
must make a special suitability determination for the purchaser and must
receive the purchaser's written consent to the transaction prior to sale,
unless the broker or dealer or the transaction otherwise is exempt. In
addition, the penny stock rules require the broker or dealer to deliver,
prior to any transaction, a disclosure schedule prepared by the Commission
relating to the penny stock market, unless the broker or dealer or the
transaction otherwise is exempt. A broker or dealer also is required to
disclose commissions payable thereto and to the registered representative
and current quotations for the securities. In addition, a broker or dealer
is required to send monthly statements disclosing recent price information
with respect to the penny stock held in a customer's account and
information with respect to the limited market in penny stocks. These
additional sales practice and disclosure requirements are likely to
adversely effect the level of trading activity in the secondary market and
could impede the sale of the Company's Common Stock in that market, with a
concomitant adverse effect on the price of the Common Stock in the
secondary market.
No Dividends
The Company has not paid any cash or other dividends on its Common Stock
since its inception and does not anticipate paying any such dividends in
the foreseeable future. It is anticipated that earnings, if any, will be
used in the Company's operations and to finance the expansion of its
business.
Seasonal and Quarterly Fluctuations
The Company's interim results of operations may be affected by the timing
of the sale of franchises and the opening of new stores, receipt of
franchise and market area developer fees and seasonal factors, such as
weather conditions, in the areas where stores are located. In addition,
the Company's results may be affected by the timing of expenses associated
with its expansion.
Dependence on Franchisees
The Company will realize a substantial portion of its revenues from
initial franchise fees, ongoing royalty payments from its franchisees and
the sale of foodstuffs and equipment to its franchisees. The Company is
therefore substantially dependent upon its ability to attract, retain and
contract with suitable franchisees, and the ability of these franchisees
to open and operate their stores successfully. Should the Company
experience difficulty in attracting suitable franchisees, or should the
Company's franchisees encounter business or operational difficulties, the
Company's revenues will be adversely affected. Such a reduction in
revenues may also have an adverse effect on the Company's ability to sell
new franchises and on its financial results and prospects. Consequently,
the Company's financial prospects are directly related to the success of
its franchisees, over which the Company has no direct control. There can
be no assurance that either the Company or its franchisees will be able to
develop new franchises, or operate the Company's bagel stores,
successfully.
Expansion
The opening and success of the Company's bagel stores will depend on
various factors, including the availability of suitable sites; the ability
of franchisees to negotiate acceptable lease terms for new locations, to
obtain construction and any other necessary permits in a timely manner,
and to meet construction and opening schedules; the Company's ability to
manage its anticipated expansion and to hire and train personnel; and
general and local economic and business conditions. The foregoing factors
are not within the control of the Company.
The Company's proposed expansion also will require the implementation of
enhanced operational and financial systems and will require additional
management, operational and financial resources. Failure to implement
these systems and add these resources could have a material adverse effect
on the Company's operations, financial results and prospects. There can be
no assurance that the Company will be able to manage its
8
<PAGE>
expanding operations effectively or that it will be able to maintain or
accelerate its growth. In addition, there can be no assurance of the
viability of the Company's concepts in new geographic regions or
particular local markets.
Competition; Ease of Entry into Business
The food service industry, in general, and the fast-food and take-out
sectors in particular, are intensely competitive. The Company competes,
and can be anticipated to compete, against well established food service
companies with substantially greater product and name recognition and with
substantially greater financial, marketing and distribution capabilities
than the Company's, as well as against a large number of local food
establishments that offer similar or competitive products. In addition,
management believes that the start-up costs associated with opening a
retail food establishment offering similar products on a stand-alone basis
are comparable to the start-up costs of the Company's bagel stores and,
accordingly, such start-up costs are not an impediment to entry into the
retail bagel business. Further, as the demand for bagels increases and
consumers become more familiar with the product, they also may be expected
to become increasingly discriminating in selecting bagels based on quality
and value. There can be no assurance that the Company can compete
successfully in this complex and changing market.
Food Service Industry
Food service businesses often are affected by changes in consumer and
competitive conditions, including changes in consumer tastes; national,
regional, and local economic conditions and demographic trends; traffic
patterns, and the type, number, and location of competing businesses.
Adverse publicity resulting from food quality, illness, injury, or other
health concerns or operating issues stemming from one store or a limited
number of stores also may adversely affect multi-unit chains such as the
Company. In addition, factors such as inflation, increased food, labor,
and employee benefit costs, regional weather conditions and the
unavailability of experienced management and hourly employees also may
adversely affect the food service industry in general, and the Company's
operations, financial results and prospects in particular.
Government Regulation
The Company's franchise operations are subject to regulation by the
Federal Trade Commission (the "FTC") in compliance with the Uniform
Franchise Act which requires, among other things, that the Company prepare
and update a comprehensive disclosure document in connection with the sale
and operation of its franchises. The Company and its franchisees also must
comply with state franchising laws and a wide range of other state and
local rules and regulations applicable to their businesses. Compliance
with this broad federal, state and local regulatory network is essential
and costly, and the failure to comply could have a material adverse effect
on the Company and its franchisees. Violations of franchising laws and/or
state laws and regulations governing substantive aspects of doing business
in a particular state could subject the Company and its affiliates to
rescission offers, monetary damages, penalties, imprisonment and/or
injunctive proceedings. In addition, under court decisions in certain
states, absolute vicarious liability may be imposed upon franchisers based
upon claims made against franchisees. The Company currently does not carry
insurance against such claims, although it intends to obtain such coverage
in the future. However, there can be no assurance that the Company will be
able to obtain such coverage or that such coverage will be sufficient to
cover potential claims against the Company.
This Prospectus does not constitute, and shall not be construed as, an
offer to sell a Goldberg's or Sammy's franchise. Such offers may be made
only by an Offering Circular in compliance with applicable state law and
the Federal Trade Commission Disclosure Rule. The description of the
franchises set forth in this Prospectus is not intended to be a complete
description of a Goldberg's or Sammy's franchise business.
9
<PAGE>
Lack of Trademark and Patent Protection
In relation to its bagel business, the Company has no registered trademark
or service mark protection under federal trademark law. While management
believes that, in the food service industry, trademarks, service marks and
the "look" ("trade dress"), of a retail chain can be adequately protected
by common law, there can be no assurance that the absence of protected,
registered marks will not have an adverse effect on the Company's
competitive position, business or prospects. Further, although the Company
modifies and installs certain bagel bakery equipment in a proprietary
manner, the Company does not believe these refinements are patentable.
Therefore, there can be no assurance as to whether, to what extent, or for
what period of time the Company may enjoy a competitive advantage based on
the availability of its equipment. In addition, it is the Company's
practice to protect its proprietary dough conditioner, bagel mix and bagel
dough by relying on trade secret laws and confidentiality agreements.
There can be no assurance that the confidentiality of its trade secrets
will be maintained or that others will not independently develop or obtain
access to the same, comparable or improved recipes and formulas. The
Company has filed for federal trademark protection for its "SoupChef" name
and logo.
Dependence on Key Personnel
The Company is substantially dependent upon the personal efforts and
abilities of its senior management. The loss of any of the Company's
senior management personnel could adversely affect the Company until such
time, if any, as a suitable replacement is found. The Company's ability to
develop and market its products and to achieve and maintain its
competitive position depends, in large part, on its ability to attract and
retain qualified personnel. Competition for such personnel is intense and
there can be no assurance that the Company will be able to attract and
retain such personnel.
Effect of Preferred Stock Conversion and Exercise of Warrants
Upon conversion of the Preferred Stock and exercise of the Warrants there
will be not less than 9,111,562 shares of Common Stock outstanding,
consisting of 5,394,343 shares currently outstanding and a minimum of
3,717,219 shares (and potentially substantially more depending upon the
Market Price at the time of conversion) issuable upon conversion of the
Preferred Stock and exercise of the Warrants available for offer by the
Selling Stockholders, which shares will be tradable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), as long as the Prospectus covering such sales remains
current and effective. No prediction can be made as to the effect, if any,
that future sales of shares of Common Stock, whether offered by the
Selling Stockholders or others, will have on the market price of the
shares of Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock, or the perception that these sales could occur,
could adversely affect prevailing market prices for the Common Stock and
could impair the ability of the Company to raise additional capital
through the sale of its equity securities or through debt financing.
Limitations on Directors' and Officers' Liability
As permitted pursuant to the corporate law of the State of New Jersey, the
Company's state of incorporation, the Company's Amended and Restated
Certificate of Incorporation (the "Charter") and Amended and Restated
By-Laws (the "By-Laws") require that the Company indemnify its directors
and officers against certain liabilities incurred in their service in such
capacities. In addition, the Charter provides that the personal liability
of directors and officers of the Company to the Company and its
shareholders shall be limited under certain circumstances.
Potential Adverse Effect of Certain Anti-Takeover Provisions
The corporate law of the State of New Jersey, the Company's state of
incorporation, and the Company's Charter,
10
<PAGE>
contain provisions that may discourage proposals or bids to acquire the
Company. Such provisions authorize the issuance of a maximum of 4,000,000
shares of Preferred Stock (of which 863,336 shares were outstanding as of
August 21, 1998) on terms which may be fixed by the Company's Board of
Directors without shareholder action. The terms of any series of Preferred
Stock, which July include priority claims to assets and dividends, and
special voting rights, could adversely affect the rights of holders of the
Common Stock. The issuance of Preferred Stock could make the takeover of
the Company or the removal of management of the Company more difficult,
discourage hostile bids for control of the Company in which shareholders
may receive premiums for their shares of Common Stock, or otherwise dilute
the rights of holders, and the market price of the Common Stock.
Shares Eligible for Future Sale; Issuance of Additional Shares
Future sales of shares of Common Stock by the Company and its stockholders
could adversely affect the prevailing market price of the Common Stock.
All of the outstanding shares of the Company's Common Stock are freely
tradeable or eligible to have the restrictive legend removed pursuant to
Rule 144(k) promulgated under the Securities Act. Sales of substantial
amounts of Common Stock in the public market, or the perception that such
sales may occur, could have a material adverse effect on the market price
of the Common Stock. Pursuant to its Certificate of Incorporation, the
Company has the authority to issue additional shares of Common Stock and
Preferred Stock. The issuance of such shares could result in the dilution
of the voting power of Common Stock purchased in this Offering.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company traded on Nasdaq SmallCap Market under the
symbol "AAFG" from December 1996 to July 16, 1998.
The following table sets forth the range of high and low close prices for
the Company's Common Stock for each quarterly period indicated, as reported by
brokers and dealers making a market in the capital stock. Such quotations
reflect inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions:
COMMON STOCK
QUARTER ENDED HIGH LOW
- ------------- ---- ---
June 30, 1998 $1.1875 $0.25
March 30, 1998 .56 .1250
December 31, 1997 2.08 .3750
September 31, 1997 3.00 1.75
REGISTRATION RIGHTS
In connection with the Company's private placement of 10,000 shares of
Series G Preferred Stock on March 25, 1998 and 25,000 shares of Series H
Preferred Stock on May 5, 1998, the Company agreed to use its best efforts to
cause this registration statement to become effective and to keep the
registration statement effective for two years or until the Preferred Stock
holders may sell all registerable securities under Rule 144 or until they no
longer owns any registerable securities, whichever occurs first. The Company
will bear the reasonable expenses of the registration and qualification of the
shares under the Securities Act and state securities laws other than any
underwriting discounts and commissions respectively.
11
<PAGE>
If the Registration Statement is not effective ninety (90) days after the
respective subscription dates for the Series G and H Preferred (i.e. June 25,
1998 and August 5, 1998) (the "Initial Date"), the Company may be required to
make payments to the holders in such amounts and at such times as determined
pursuant to their respective Subscription Agreements, which states that the
amount to be paid by the Company to the holders shall be determined as of each
Computation Date, and such amount shall be equal to three percent (3%) of the
purchase price paid by the holder for the Preferred Stock for each thirty day
period (or prorated portion thereof) until the Registration Statement is
declared effective by the SEC.
In connection with the Company's private placement of the Preferred Stock,
the Company also issued to the holders Warrants to purchase 273,008 shares of
Common Stock exercisable for a period of five (5) years. The Company is
required to include in this a Registration Statement the number of shares of
Common Stock issuable upon the exercise of the above Warrants.
USE OF PROCEEDS FROM SALE OF DEBENTURES
None of the proceeds from the sale of the Common Stock registered
hereunder will accrue to the Company.
Through private placement, the Company has obtained $250,000 of financing
in the form of 10,000 shares of Series G Preferred Stock and 25,000 shares of
Series H Preferred Stock.
The Company has applied the net proceeds of the Preferred Stock for
working capital purposes.
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
The Selling Stockholders whose Conversion Shares and 273,008 of Warrant
Shares are being registered hereby is Paril Holding, Dayan International
Corp., Augtost Anstalt Schaan and Balmore Funds, S.A. Paril Holding is a
foreign entity with a principal place of business located at Martastrasse 137,
Postfach 8040, Zurich Switzerland. Dayan International Corp. is a foreign
entity with a principal place of business located at 28 Cranwich Road, London
N165JX England. Austost Anstalt Schaan is a foreign entity with a principal
place of business located at 7440 Fuerstentum, Lichenstein, Landstrasse 163.
Balmore Funds, S.A. is a foreign entity with a principal place of business
located at P.O. Box 4603, Zurich, Switzerland. None of the above investors has
a domestic agent for service of process. These investors have no other
affiliation with the Company or its officers, directors, promoters or
principal shareholders.
It may be difficult for United States investors to effect service within
the United States upon the Selling Stockholders or its officers and directors
or to realize in the United States upon judgments rendered against the Selling
Stockholders or their officers and directors by courts of the United States
predicated upon civil liabilities under the Securities Act of 1933
("Securities Act") or state securities laws.
The Company has agreed to register the public offering of the Selling
Stockholders' shares of Common Stock under the Securities Act and to pay all
expenses in connection therewith other than brokerage commissions and
discounts in connection with the sale of the Conversion Shares. The aggregate
number of Conversion Shares that may be offered and sold pursuant to this
Prospectus by the Selling Shareholders will be determined by how many shares
are issued upon conversion of the Series G and Series H Preferred Stock, which
will be determined by the conversion price applicable to the Conversion
Shares. See "Description of Securities." The conversion price for the Series G
Preferred Stock will be the lesser of the 65% of the average of the closing
bid prices of the Common Stock for the five consecutive trading days preceding
the conversion date or 75% of the average of the closing bid prices of the
Common Stock for the five consecutive trading days preceding March 25, 1998
(or $.40). The conversion price for the Series H Preferred Stock will be the
lesser of 80% of the average of the closing bid prices of the Common Stock for
the five consecutive trading dates preceding the conversion date or 80% of the
average of the closing bid prices of the Common Stock for the five consecutive
trading days preceding May 5,1998 (or $.81). Assuming that the five day
average closing bid price for the Common Stock was $.06 (which is the price
calculated as of August 21, 1998) and that all of the Series
12
<PAGE>
G and Series H Preferred Stock was converted at their respective 65% and 80%
discount to such average closing bid price, the aggregate number of Conversion
Shares issued would be 7,772,436 (excluding any Conversion Shares issued with
respect to accrued interest on the Debentures at the time of conversion), and if
all the Shares are sold, the Selling Stockholders would have no beneficial
interest in the Common Stock of the Company, assuming that the Selling
Stockholders did not acquire a beneficial interest in the Common Stock of the
Company otherwise than through the conversion of the Preferred Stock, including,
without, limitation, through the exercise of its Warrants.
This Prospectus also relates to the resale of 273,008 Warrant Shares by
the Selling Stockholders which may be acquired upon the exercise of the
Warrants respectively held by them.
The Selling Stockholders' Shares may be offered and sold from time to time
as market conditions permit, provided that a registration statement covering
such Shares is effective at the time of such offer and/or sale. Under Section
10(a)(3) of the Securities Act of 1933, as amended, when a prospectus is used
more than nine months after the effective date of the registration statement,
the information contained therein must be as of a date not more than 16 months
prior to such use.
The Selling Stockholders' Shares may be offered and sold in the
over-the-counter market, or otherwise, at prices and terms then prevailing or
at prices related to the then-current market price, or in negotiated
transactions. The Selling Stockholders' Shares may be sold by one or more of
the following methods, without limitation: (i) a block trade in which a broker
or dealer so engaged will attempt to sell the share as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
(ii) purchases by a broker or dealer as principal and resale by such broker or
dealer for its accounts pursuant to this Prospectus; (iii) ordinary brokerage
transactions and transactions in which the broker solicits purchases; and (iv)
transactions between sellers and purchasers without a broker or dealer. In
effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate. Such brokers or dealers
may receive commissions or discounts from Selling Stockholders in amounts to
be negotiated. Such brokers and dealers and any other participating brokers
and dealers may be deemed to be "underwriters" within the meaning of the
Securities Act, in connection with such sales.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
April 30, 1998, as adjusted to reflect the sale of the Series G and Series H
Preferred Stock and as further adjusted to reflect the conversion of all of
the Series G and Series H Preferred Stock assuming that the Conversion Price
of the Series G Preferred Stock was $.048 and the Conversion Price of the
Series H Preferred Stock was $.039 on the date of the conversion, which is
equivalent to 65% and 80%, respectively, of the closing price for the five
days ended August 21, 1998. This table should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Proforma Assuming
April 30, 1998 Proforma Assuming Conversion of
(unaudited) Sale of Preferred Stock Preferred Stock
----------- ----------------------- ----------------
<S> <C> <C> <C>
Series H Preferred Stock................ -0- 250,000 -0-
Current liabilities (including current
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C>
portion of long-term debt)........................................... 2,395,821 2,395,821 2,395,821
Long term debt and other liabilities
(excluding current portion)......................................... 2,952,861 2,952,861 2,952,861
Redeemable preferred stock, no par value; Series B shares,
60,000 shares issued and outstanding (actual and as adjusted)........ 280,630 280,630 280,630
Non-redeemable convertible preferred stock; no par value; Series A,
150,000 shares authorized, 10,000 shares issued and outstanding;
Series C, 1,600,000 shares authorized, 813,336 shares issued and
outstanding, ; Series D, 500 shares authorized, no shares issued
and outstanding; Series E, 275 shares authorized, no shares issued
and outstanding; Series F, 6,500 shares authorized, 5,000 shares
issued and outstanding; Series G, 10,000 shares authorized, 10,000
shares issued and outstanding ...................................... 1,404,874 1,404,874 1,404,874
Common Stock, no par value; 20,000,000 shares authorized, 5,394,343
shares issued and outstanding, actual; 13,166,779 shares
outstanding, as adjusted............................................ 12,455,397 12,455,397 12,455,397
Retained earnings (deficit)......................................... (11,849,419) (11,849,419) (11,849,419)
Total common stock, non-redeemable preferred stock
and other stockholders' equity...................................... 2,010,812 2,260,812 2,260,812
</TABLE>
DIVIDEND POLICY
The Company has not paid any cash or other dividends on its Common
Stock since its inception and does not anticipate paying any such
dividends in the foreseeable future. The Company intends to retain any
earnings for use in the Company's operations and to finance the expansion
of its business. See "Risk Factors -- No Dividends."
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 if 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").
OVERVIEW
Results of Operations - Six Months Ended April 30, 1998 and 1997
Revenues for the six months ended April 30, 1998 (the "1998 Interim
Period") were$1,774,942, an increase of $298,919, or 20%, from $1,476,023 for
the six months ended April 30, 1997 (the "1997 Interim Period"). This increase
is attributable to (i) an increase in store sales of $349,197, or 48%, to
$1,069,376 in the 1998 Interim Period from $720,179 in the 1997 Interim
Period, as a result of the St. Pete's acquisition, (ii) an increase in
commissary and product sales of $274,676, or 77%, to $631,119 in the 1998
Interim Period from
14
<PAGE>
$356,443 in the 1997 Interim Period, as a consequenceof a greater number of
stores and a concomitant increase demand for product during the 1998 Interim
Period, which were offset by (iii) a decrease in franchising activities of
$324,954, or 14%, to $74,447 in the 1998 Interim Period from $399,401 in the
1997 Interim Period.
Future equipment and commissary sales will be dependent on the Company's
franchising activities and such sales will therefore increase or decrease in
direct proportion to the Company's success in expanding its system of
franchised stores.
Cost of sales increased by $531,873, or 62% to $1,382,760 in the 1998
Interim Period from $850,887 in the 1997 Interim Perioddue tothe increase in
sales. 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.
Selling, general and administrative expenses decreased by $261,252, or
16%, to $1,328,161 in the 1998 Interim Period from 1,589,4113 in the 1997
Interim Period. This decrease in both absolute dollars and as a percentage of
revenues is attributable to The Company's cost-cutting measures.
Depreciation and amortization increased by $13,634, or 9%, to $162,575 in
the 1998 Interim Period from $148,941 in the 1997 Interim Period.
Interest expense increased by $66,989, or 267%, to $85,241 in the 1998
Interim Period from $18,252 in the 1997 Interim Period. Interest expense
increased as a result of the debt assumed in the acquisition of the St. Pete's
Bagels.
The net loss increased by $496,452, or 36% to $1,865,405 in the 1998
Interim Period from $1,368,953 in the 1997 Interim Period. The first quarter
loss acounts for 73% of the year to date loss indicating a positive trend to
reduce losses. 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, including the support structure necessary to fulfill its
obligations under its franchise agreements and the anticipation of additional
franchise sales. Consequently, total revenues are not yet sufficient to
support the Company's overhead. Management anticipates, that during the fiscal
year ending October 31, 1998, 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 fro newly opened Company-owned stores.
There can be no assurance, however as to whether, and to what extent, the
Company will actually experience additional revenues from any of these
sources. The Company's ability to operate profitably in the future is
substantially dependent upon its ability to sell store and market development
franchises and to open additional franchise stores.
Results of Operations - 1997 and 1996
Revenues for the year ended October 31, 1997 ("Fiscal 1997") were
$2,647,554 an increase of $569,698, or 25%, from $2,240,187 for the year ended
October 31, 1996 ("Fiscal 1996"). This increase is attributable to (I) an
increase in store sales of $376,008, or 27%, to $1,777,274 in the Fiscal 1997
from $1,401,266 in the Fiscal 1996, as a result of an increase to ten stores
from six stores by the Company during the year, (ii) an increase in commissary
and product sales of $94,793, or 26%, to $456,462 in Fiscal 1997 from $361,669
in Fiscal 1996, as a consequence of a greater number of franchise stores, and
a concomitant increase in demand for product during the Fiscal 1997, (iii) an
increase in equipment sales of $91,922, or 46%, to $291,320 in Fiscal 1997
from $199,398 in Fiscal 1996, and (iv) an increase in franchising activities
of $6,975, or 3%, to $284,829 in the Fiscal 1997 from $277,854 in Fiscal 1996
consisting of: (a) an increase in ongoing royalties
15
<PAGE>
of $57,969, or 93%, to $120,445 in Fiscal 1997 from $62,476 in Fiscal 1996,,
which increase was offset by (b) a decrease in initial non-recurring franchise
and market development fees of $50,994, or 24%, to $164,384 in the Fiscal 1997
from $215,378 in Fiscal 1996. Future equipment and commissary sales will be
dependent on the Company's franchising activities, and such sales will
therefore increase or decrease in direct proportion to Franchising revenue.
Cost of sales increased by $712,297, or 45%, to $2,174,389 in Fiscal 1997
from $1,572,185 in Fiscal 1996. This increase is primarily due to an increase
in store sales. Cost of sales as a percentage of store and product sales
increased to 84% in Fiscal 1997 from 83% in Fiscal 1996, reflecting an
increase attributable to additional costs associated with the relocation of
the Company's Lodi, New Jersey commissary and production facility to its new
headquarters in South Plainfield, New Jersey. 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.
Selling, general and administrative expenses increased by $2,708,594, or
127%, to $4,840,666 in Fiscal 1997 from $2,132,072 in Fiscal 1996. This
increase in both absolute dollars and as a percentage of revenues is
attributable to the implementation of the Company's national expansion plan,
substantial consulting fees incurred during the 1997 quarter and substantial
professional fees related to pending acquisitions and investment banking
services. The increase is primarily due to (i) an increase in salaries and
related costs of $509,543, or 59%, to $1,357,001 in Fiscal 1997 from $856,590
in Fiscal 1996, (ii) an increase in selling expense of $461,418, or 125%, to
$831,836 in Fiscal 1997 from $370,418 in Fiscal 1996, primarily due to
increased advertising costs to attract new franchisees and increased shipping
costs associated with increased product sales, (iii) an increase in occupancy
costs of $270,776, or 74%, to $636,732 in Fiscal 1997 from $365,956 in Fiscal
1996 attributable to an increase to ten stores operated by the Company from
six stores during the Fiscal 1996, and the move of the Company's headquarters
(iv) an increase in professional fees and related costs associated with the
Company becoming a public Company, investment banking services and pursuing an
acquisition strategy of $203,467, or 154%, to $335,964 in Fiscal 1997 from
$132,497 in Fiscal 1996, and (v) an increase in consulting fees of $1,100,117,
or 2,802%, to $1,139,373 in Fiscal 1997 from 39,256 in Fiscal 1996. This
increase is primarily attributable to charges incurred under consulting
contracts relating to investment banking services and financial public
relations.
Depreciation and amortization increased by $84,690, or 34%, to $336,430 in
Fiscal 1997 from $251,740 in Fiscal 1996, primarily as a consequence of the
Company owning and operating four more stores in Fiscal 1997.
Interest expense increased by $950,453, or 2,846%, to $983,893 in Fiscal
1997 from $33,440 in Fiscal 1996. This increase is attributable to the
discount granted in the Company's convertible debentures
The net loss increased by $3,581,401, or 181%, to $5,554,993 in Fiscal
1997 from $1,973,592 as a result of the factors discussed above, particularly
the lack of franchise sales and associated equipment sales, and the consulting
fees incurred in the period. To date, the Company has operated at a loss as a
result of the application of resources in excess of revenues to develop its
operating infrastructure, including the support structure necessary to fulfill
its obligations under its franchise agreements and the anticipation of
additional franchise sales. Consequently, total revenues are not yet
sufficient to support the Company's overhead. Management anticipates, that
during the fiscal year ending October 31, 1998, 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. There can be no assurance, however as to whether, and to
what extent, the Company will actually experience additional revenues from any
of these sources. The Company's ability to operate profitably in the future is
substantially dependent upon its ability to sell store and market development
franchises and to open additional franchise stores.
16
<PAGE>
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 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
17
<PAGE>
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 that 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
In April 1996, the Company completed the Private Placements of its Common
Stock pursuant to which it received proceeds of $2,413,986. Of the net
proceeds, $410,000 consisted of property in the form of two unopened retail
bagel stores in the final stages of construction.
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 per
share, yielding net proceeds to the Company of $3,235,000. The proceeds of
that offering were used to redeem Series A and Series B Preferred Stock, open
Company-owned retail 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.
Since July 1997, the Company has raised $1,605,000 through the sale of
convertible securities, of which approximately $1,300,000 has been converted
into common stock.
The Company's revenues are not yet sufficient to support the Company's
operating expenses. Cash used by operating activities for the year ended
October 31, 1997 was $4,007,950 compared to cash used by operating activities
of $1,727,159 during the year months ended October 31, 1996.
Additional funds will be required to support the Company's capital
requirements during the period it continues to operate at a loss.
BUSINESS
Overview
All American Food Group, Inc. (together with its wholly owned
subsidiaries, the "Company") franchises bagel stores, licenses a gourmet soup
line, operates retail bagel stores and distributes equipment and food products
to its franchisees and licensees. In the bagel segment of its business, the
Company owns and operates seven retail stores and franchises bagel stores
under the name "Goldberg's New York Bagels" and "Goldberg's New York Deli and
Bagels." The Company distributes its proprietary line of gourmet soups in bot
its bagel stores and to unaffiliated licensees under the trademark "Soup
Chef."
The Company franchises its bagel stores under two distinct but
complimentary concepts. Stores operating under the trade name "Goldberg's New
York Bagels" offer bagels and related dairy products in a fully kosher retail
environment and under strict kosher supervision. In addition to bagels, the
menu consists of various spreads, salads, bakery items and beverages,
including coffee and other hot and cold beverages. Some of the kosher stores
operate under the trade name "Sammy's New York Bagels", the original retail
name for the fully
18
<PAGE>
kosher stores.
The stores operating under the alternative trade name "Goldberg's New York
Deli and Bagels" or variations thereof, offer a similar menu, but are not
restricted to a kosher diary menu. These stores offer a full line of
delicatessen meats, including turkey, roast beef, ham, salami and similar cold
cuts. Although the Company has sought to maintain the maximum compatibility
between the two store concepts, the bagel and deli stores generally have a
wider choice of food items to offer in each retail category than the fully
kosher stores.
The Company's operations are based on those of a group of bagel shops
operating in New York and New Jersey under variations of the "Goldberg" name
since 1938. In October 1993, the Company acquired two such restaurants (one of
which subsequently was sold), together with exclusive franchise rights to
their recipes, flours, mixes and equipment and the prior owners' related bagel
bakery equipment business. In September 1994, the Company acquired three
Sammy's kosher stores (one of which subsequently was sold) and a commissary.
Since its acquisition of the Goldberg's and Sammy's stores, the Company has
engaged in an extensive process of analyzing, standardizing and documenting
all aspects of its retail bagel operations, preparing franchise materials and
developing its franchise system and program. In addition, it retrofitted one
of the Goldberg's locations to serve as a prototype store for purposes of
marketing franchises and training personnel. As of July 31, 1998, the
Company's retail system consisted of eighteen Goldberg's and nine kosher
stores located in nine states, including seven Goldberg's and one kosher
stores owned and operated by the Company and ten Goldberg's and seven kosher
stores operated under franchise or license arrangements with the Company.
The Company also distributes and services its bagel bakery equipment for
use by its franchisees. The Company's equipment utilizes the old-fashioned
method of boiling, then baking bagels with revolving tray ovens. Management
believes that the Company is the only franchisor of bagel stores that provides
bagel equipment directly to its franchisees.
In October 1997, the Company acquired certain recipes and expertise
associated wit the production of a line of gourmet soups previously sold under
the retail name "The Soupman." The Company also retained Faud el Hashmi, the
founder and executive chef of "The Soupman" concept under a long term
consulting agreement. The Company has spent significant resources in a the
development of a business plan for he manufacture, distribution and retail
licensing of a gourmet soup line, including several retail tests in various
store locations. Based on these results, the Company has now completed
agreements for the production and manufacture of its proprietary soups by
third party food vendors, and developed prototype kiosks and counter-top units
for use in the retail sale of the gourmet soups.
In addition to adding the gourmet soup line to its own and franchised
bagel stores, the Company has now launched a licensing program for the sale of
"SoupChef(TM)" licenses to the food service industry. Based on its test
results and the preliminary response to its licensing efforts, the Company
expects that the "SoupChef" line of gourmet soups will be able to produce
significant revenue to the Company beginning in its 1999 fiscal year.
The Company intends to expand its retail operations primarily through
franchising, and to a lesser extent, through acquisitions in key markets.
Management believes that food service franchising in general, and the
franchising of bagel and gourmet soup 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 nearly doubled from 1993 to 1996. Management believes that this
increased demand for bagels arises primarily from increased consumer demand
for healthier, low-fat food products and that the versatility, convenience and
relatively low price of bagels add to their appeal.
Plan of Operations
19
<PAGE>
The Company will seek to increase its revenue, thereby generating operating
cash flow in the future, by implementing the following actions:
- Expanding franchise operations. The Company will seek to increase
the sale of franchises by (i) advertising in national and regional
publications and business magazines and (ii) upgrading its promotional
material. In addition, depending upon the availability and utilization of
existing staff, the Company may hire additional sales personnel. The
Company also expects to increase its sale of franchises by opening
additional Company-owned flagship stores to generate interest from
experienced multi-store developers to enter into multi-unit Market
Development Agreements. Management anticipates that the sale of additional
franchise territories and the opening of additional stores in such
territories should result in increases in franchise revenues.
- Increasing product sales. The Company intends to open new
Company-owned retail stores and expects increased sales from its
commissary to new franchise stores. The Company continuously develops new
products, which management believes will lead to increased sales as the
variety of products grows. The Company has retained an advertising firm to
help increase store revenues, increase franchise sales and promote brand
name recognition. See "-- Advertising."
- Making acquisitions. The Company intends to acquire other bagel
stores or complementary outlets which provide entry into new markets.
Management anticipates that, over a period of time, these acquisitions
will increase revenues significantly.
- SoupChef(TM) revenue. The Company plans to launch its proprietary
"Soup Chef" concept as a retail business opportunity to existing food
service operators. Revenue from this venture will accrue to the Company
based on the quantity of soup sold to such retail locations.
History of the Company
The Company was formed for the purpose of establishing a chain of
franchised bagel restaurants using the recipes, procedures, experience and
expertise of an existing, well-seasoned bagel restaurant and bakery operation.
In October 1993, the Company acquired all the assets of Howberg Bakery
Equipment Co., Inc. (the "Equipment Company"), Bagels of New Milford, Inc. and
Goldberg's Famous Bagels of Orangeburg, Inc. (together, the "Goldberg
Companies"), each a retail and wholesale bagel and related foodstuff company.
(The Goldberg family continues to operate ten bagel stores that are not
affiliated with the Company and, subject to certain noncompetition covenants,
may open additional stores in the future.) See "-- Renegotiation of Certain
Acquisition Terms."
The assets of the Goldberg Companies consisted of two bagel stores
operated by the Goldberg family of Westwood, New Jersey (one of which
subsequently was sold), including the exclusive franchise rights to the
recipes, flour, mixes and proprietary equipment used in these stores. The
Goldberg family has been operating retail bagel shops for over 50 years under
variations of the Goldberg name.
The Equipment Company was engaged in the manufacture, assembly, sale and
servicing of equipment used in the production of bagels. In connection with
the sale of equipment, the Equipment Company also provided consulting services
in the area of store design, equipment layout, training, food preparation and
virtually all other aspects of the retail food business. The Company currently
operates the business of the Equipment Company under the name "All American
Equipment Company."
On September 29, 1994, the Company completed the acquisition of 100% of
the outstanding stock of four interrelated corporations (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
20
<PAGE>
of analyzing, standardizing and documenting all aspects of its retail bagel
operations, preparing franchise materials and developing its franchise system
and program. In addition, it retrofitted one of the Goldberg's locations to
serve as a prototype store for purposes of marketing franchises and training
personnel.
The Company was incorporated as a subsidiary of Jutland Enterprises Inc.
("Enterprises") 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 104 New Era Drive, South
Plainfield, New Jersey 07080 and its telephone numbers are (908) 757-3022.
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.
Inasmuch as most flavors of bagels have no fat or cholesterol, they
represent an attractive alternative to doughnuts, pastries and other breakfast
baked goods, while at the same time offering substantially more versatility
and variety than more traditional bread products. Further, because bagels can
be used in sandwiches, bagel restaurants can be expected to attract customers
throughout the day. Management believes that lunch time business accounts for
approximately 40% of a typical bagel store's daily business. And, since
customers frequently desire to purchase bagels for home consumption, bagel
restaurants also can rely upon take-out trade for a significant portion of
their revenues.
While bagels historically have been a staple ethnic food along the East
Coast and in certain other urban areas throughout the country, management
believes that there is a substantial potential market in smaller urban and
suburban areas. Further, until recently the retail bagel industry has been
composed almost exclusively of one and two-store operations and a few larger
regional chains, some of which have indicated the intention to expand to a
national scope. Management believes that there is a significant market for
high quality bagels and that there is a significant market niche for companies
able to provide such bagels on a consistent basis through a nationwide system
of retail outlets. The Company believes that its system of producing bagels in
each store using proprietary ingredients and its equipment is the optimal
method for delivering fresh, consistently high quality products to a large and
geographically dispersed market.
Competitive Strengths
Management believes that the Company has a unique combination of
characteristics that will help it to successfully build a nationwide chain of
franchised and licensed 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
21
<PAGE>
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 bagel products and operating systems were
developed based on the experience of the Goldberg family of Westwood, New
Jersey during the 58 years of operation of its family-owned bagel shops. Based
on this half century of experience and management's experience in operating
and franchising other food concepts, the Company has analyzed, standardized
and documented all aspects of its retail bagel operations to develop its
operating and franchise systems. See "-- Franchising" and "Management."
Complementary Concepts. Management believes that the Company's franchise
program is unique in offering two complementary bagel concepts -- Goldberg's,
which offers a traditional bagel/delicates- sen 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.
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, preformed,
uncooked bagels on a weekly basis for on-premises preparation. Management
anticipates that, in the future, it will utilize this facility for the
production of bagels for sale to Goldberg's as well as Sammy's franchisees.
See "-- Properties."
Equipment Business. Management believes that the Company is unique in
designing and distributing its bagel bakery proprietary equipment and in its
ability to provide consulting services in all areas of the retail bagel
business, including store design, equipment layout, training and food
preparation. Management also believes that these unique capabilities provide
the Company with a distinct advantage in equipping and advising its franchised
outlets and in ensuring the quality of its products. In addition, since the
Company continues to provide equipment to unaffiliated bagel shops and
bakeries, equipment sales represent an additional source of revenue to the
Company. Management believes that equipment sales will benefit from continued
demand for bagels nationwide. See "-- Plan of Operations" and "-- The Bagel
Business."
Gourmet Soup. Management believes that there is ample evidence in the
general media, the food industry press and in its own trials to indicate that
the sale of gourmet soups is one of the most rapidly growing segments of the
food business. The Company's own line of soups, along with its distinct method
of marketing the soups through in store kiosks, represents an outstanding
additional business opportunity to the Company, both as an added item to the
menu of its bagel stores and as a stand-alone licensing venture.
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.
22
<PAGE>
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. The kosher stores offer
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 the
kosher store 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 the kosher stores generally
are open between the hours of 6 a.m. and 6 p.m. seven days a week.
The Company's restaurants typically are located in strip-style
neighborhood and community shopping centers or other high-traffic areas and
consist of an overall area of between 750 and 2,600 square feet, including a
dining area providing seating for between eight and 30 customers, a take-out
counter, and kitchen, food preparation and storage areas. Decor is intended to
evoke a 1938 bagel shop and includes an original photo montage of New York
City scenes from that era, additional vintage photographs and memorabilia,
wainscoting and a tin ceiling.
Kosher Certification and Supervision
All of the kosher 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 its kosher stores places
them in a unique niche as the only franchised food chain subject to national
kosher certification currently available in the United States.
Franchising
Neither the following discussion, nor the other information contained in
this Prospectus, constitutes, and neither shall be construed as, an offer to
sell a Goldberg's franchise. Such offers may be made only by an Offering
Circular in compliance with applicable state law and the Federal Trade
Commission Disclosure Rule. The description of the franchises set forth in
this Prospectus is not intended to be a complete description of a Goldberg's
franchise business.
The Company offers single-unit franchises, as well as Market Development
Agreements covering a number of stores to be opened in a designated area
within a specified period of time. The Company currently may sell its
franchises in 40 states and expects to receive authorization to sell in an
additional 10 states by December 31, 1997. The Company has entered into a
Market Development Agreement for the State of Ohio, covering 15 retail
23
<PAGE>
stores, a Market Development Agreement for the State of Arizona, covering 15
retail stores, a Market Development Agreement covering a portion of the State
of New York covering 37 retail stores, a Market Development Agreement covering
a portion of the State of South Carolina covering 6 stores, a Market
Development Agreement covering a portion of the State of Pennsylvania covering
3 stores and a licensing agreement covering the country of Israel.
Franchise revenue includes the sale of single unit franchises pursuant to
Single Unit Agreements, the sale of Company-owned stores to franchisees, the
sale of market development franchises pursuant to Market Development
Agreements and ongoing royalty and advertising fees.
Single Unit Agreements provide for payment of a nonrefundable initial
franchising fee (an "Initial Franchise Fee"), a weekly royalty on gross sales,
and a weekly cooperative advertising fund contribution. The Company's material
obligations under the terms of all Single Unit Agreements are assisting in
site selection and franchisee training. Initial Franchise Fees under Single
Unit Agreements are recognized as revenues when the Company has no further
material obligations in respect of the establishment of such franchise, which
occurs upon the opening of the store.
Market Development Agreements provide for the payment, by the Market
Developer, of a nonrefundable initial fee (a "Market Development Fee") based
on the size, population and overall market potential of the territory subject
to the Market Development Agreement (the "Market Area"). The Market Developer
assumes substantially all of the responsibilities that otherwise would be
assumed by the Company, as franchiser within the Market Area. In exchange, the
Market Developer receives (i) the exclusive right to build stores for the
Market Developer's own account or to seek third party franchisees within the
Market Area and (ii) the right to share with the Company, on a 50/50 basis,
initial and ongoing single store fees within the Market Area. The Market
Development Agreement includes a development schedule setting forth the number
of stores to be developed by the Market Developer during the term of the
Agreement. If the Market Developer fails to maintain the store development
schedule, the Market Developer loses the exclusive right to develop the Market
Area. Under Market Development Agreements, the Company's obligations in
respect of the development of single unit franchises within the Market Area
are limited to (i) approval of franchisees presented by the Market Developer
and (ii) approval of store sites. The Company has no further material
obligations in respect of a Market Development Agreement at the time of
execution of the Agreement. Market Development Fees paid in cash or by
promissory notes fully collateralized by liquid assets or as to which the
Company has obtained an independent third-party valuation are recognized as
revenues by the Company upon execution of the Market Development Agreement and
payment of the fee. In the absence of such collateral or valuation, the
Company recognizes Market Development Fees on a cash basis as payments on such
notes are received.
The Company's portion of the Initial Franchise Fee on single unit
franchises sold within a Market Developer's Market Area is recognized as
revenues when the Company has no further material obligations in respect of
the establishment of such franchise, which occurs upon opening of the store.
The Company seeks franchisees committed to the Company's high standards of
product quality and customer service. All franchised stores must operate in
strict compliance with the standards and procedures set out in the Company's
operations manuals. Each store must be under the management of a manager who
has completed the Company's training program, although franchisees are not
required to participate in the day-to-day management of their stores. The
Company conducts regular inspections (both scheduled and unannounced) to
ensure that franchises are operating in accordance with Company standards and
procedures. The Company provides support to its franchisees covering equipment
and technical issues 24 hours a day and seven days a week through a toll-free
hotline.
Exclusivity. Each Single Unit Agreement provides the franchisee with an
exclusive area, within which the Company is not permitted to sell another
franchise. Such exclusive areas, which are determined on a unit-by-unit basis
based on population density, traffic patterns and other relevant
considerations, generally range from
24
<PAGE>
a radius of four blocks in densely populated urban areas to one mile or more
in suburban locations.
Market Development Agreements provide that, if the franchisee meets his
development schedule, the Company will not sell other franchises within the
developer's territory ("Market Area").
Real Estate and Local Regulation. Franchisees are obligated to purchase or
lease (for a term of at least ten years) the sites for their units.
Franchisees may designate a specific location or a locality in which they wish
to operate, subject to the exclusivity rights of other Goldberg's and Sammy's
franchisees. The Company provides assistance and guidance in site selection
and lease negotiation, and must approve all sites prior to lease execution. In
addition, the Company provides plans and specifications for a prototype store,
as well as assistance in obtaining financing, permits and licenses, and with
construction of leasehold improvements. Franchisees are expected to bear the
expense of any modification of the prototype plans and specifications required
to meet local building, fire or health codes and lease and other similar
requirements, as well as the costs of remodeling, fireproofing or other
leasehold improvements. Franchises also are responsible for, and expected to
bear the expense of, local licensing matters related to occupancy and
operation of the business.
Financing. The Company does not offer direct or indirect financing in
connection with its franchises. Similarly, it does not guarantee the debt,
lease or other obligations of any franchisee. The Company will, however,
render assistance in arranging financing and negotiating leases.
Training and Field Support. Prior to opening, each franchisee (or an owner
thereof) and at least one manager of each franchised Goldberg's or Sammy's
restaurant must complete a 13-day training program including approximately 35
and 70 hours of classroom and on-the-job training, respectively, covering
areas essential to the management and operation of both a retail and wholesale
bagel business, including bagel preparation and production; store operating
procedures; accounting and cost control; employee matters; in-and out-of-store
marketing; ordering; catering; equipment maintenance; and sanitation matters.
All training is conducted by senior Company personnel at the Company's
corporate headquarters in Fairfield, New Jersey, or in nearby Company- owned
stores. As of the date of this Prospectus, the Company had not established a
permanent schedule for its training courses, but instead schedules such
courses as needed to meet the opening schedules of new stores. The Company
does not charge for this training and provides all participants with their
midday meal, but franchisees are expected to defray living expenses for
themselves and their employees during the training sessions. Similar training
is required of all new managers subsequently hired and is provided by the
Company.
Refresher and ongoing training is available to franchisees on an
individualized basis, through consultative meetings at franchise sites, at
corporate stores and at corporate headquarters.
The Company provides on-site and other supervisory guidance and assistance
in connection with the opening of each Goldberg's and Sammy's store. Once
open, the Company conducts regular operational visits and provides ongoing
guidance and assistance based upon the results of such visits and review of
reports submitted to it. Such guidance and assistance may relate to standards,
methods and operating procedures; preparation of authorized food, beverages
and other products and services; selection, purchase and preparation of food,
beverage and other products, as well as fixtures, equipment, signs, materials
and supplies; formulation and implementation of advertising and promotional
programs; and establishment and operation of administrative, bookkeeping,
accounting, inventory control, sales and general operating procedures.
The Company periodically distributes operational bulletins and newsletters
to its franchisees and provides ongoing assistance with technical and
equipment problems through its 24-hour hotline, as well as personal
consultations either at the franchise site or at the Company's executive
offices.
Pricing. Prices are set by individual franchisees, pursuant to guidelines
provided by the Company, in light of local competitive and market conditions.
25
<PAGE>
Purchasing. Franchisees are required to purchase bagel mix and/or dough
conditioner, in the case of Goldberg's stores, and prepared dough, in the case
of Sammy's stores, directly from the Company. In addition, all franchisees are
required to purchase the Company's bagel kettle and bagel oven. Management
believes that purchase of these items from the Company is essential to
maintaining the Company's quality control standards, and to ensuring the
consistent high quality of the bagels offered at all of its Goldberg's and
Sammy's stores.
With respect to other items used in the operation of its stores, the
Company designates approved types and brands of products. In certain instances
the Company may designate a single supplier or a limited group of suppliers
for a product or brand of product, in order to increase the volume of
purchases from suppliers and permit the Company's franchisees as a whole to
benefit from discounts associated with quantity purchasing.
In the event that a franchisee proposes to purchase any brand or type of
product not previously approved for purchase by the Company or to purchase
approved items from a supplier not previously approved, the franchisee is
required to submit to the Company information regarding the manufacturer's or
supplier's business reputation, delivery and service performance, reliability,
financial condition and credit worthiness. In addition, in the case of
previously unapproved products, the franchisee must submit samples for review
by the Company to determine compliance with the Company's specifications and
standards. The Company then reviews the submission and, within 30 days, makes
a determination whether or not to approve the supplier or product.
The Company provides its franchisees with operational and accounting forms
for use in the operation of their stores. The Company also provides its
franchisees with promotional and advertising materials and other marketing
tools.
Advertising. Each franchisee is responsible for developing local
advertising and promotional materials, all of which are subject to prior
review and approval by the Company. In addition, the Company administers
promotional funds for the benefit of all of its Goldberg's and Sammy's
franchisees. Franchisees are obligated to contribute to the applicable fund a
promotional fee equal to 1% of gross sales. Franchisees also may be required
to participate in local or regional advertising cooperatives. Contributions to
such cooperatives will be at least 1% of gross sales, and will be controlled
by the local cooperative. See "-- Advertising." Stores owned and operated by
the Company are required to contribute to the promotional funds and to
participate in advertising cooperatives on the same basis as franchised
stores.
Franchise Fees and Royalty Payments. Current Single Unit Agreements
provide for an initial single unit payment of $25,000 for either a Goldberg's
or a Sammy's store. If a franchisee opens additional stores, either under a
Market Development Agreement or pursuant to additional Single Unit Agreements,
the initial payment is $17,500 per unit. In addition, franchisees of both
concepts pay a bi-weekly royalty and service fee 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
26
<PAGE>
between $12,000 and $45,000 annually and that a new franchisee will incur
between $30,000 and $80,000 in real estate related expenses with respect to
each store.
Term and Termination. Each Single Unit Agreement runs for an initial term
of ten years, subject to renewal for up to two additional five-year terms upon
agreement of the franchisee to refurbish and redecorate or secure new
premises. The Company has the right to terminate franchise agreements for a
variety of reasons, including failure to open a restaurant or complete
training; loss or surrender of restaurant premises; material
misrepresentation; conviction of a felony; failure to attend required training
programs; unauthorized assignment of a restaurant; unauthorized use of
trademarks or confidential information; failure to comply with Company
specifications or procedures; failure to make payments due to third parties;
failure to make payments due to the Company or to submit required reports; and
sanitation problems.
Store Locations
The following table sets forth, by location, the number of Company owned,
franchised and licensed Goldberg's and Sammy's restaurants open or under
development, as of October 24, 1997:
COMPANY-OWNED STORES:
Date Opened
Location Concept (Projected)
- -------- ------- -----------
1443 Queen Anne Road
Teaneck, NJ 07666................... Sammy's 6/92
40 North James Road
Columbus, OH 43213.................. Sammy's 1/94
197 Bleecker Street
New York, NY 10012.................. Goldberg's 2/96
121 Route 59 W.
Nanuet, NY 10954.................... Goldberg's 1/97
1408 Whalley Avenue Goldberg's
New Haven, CT 06515................. Bagel Connection 3/97
1865 2nd Avenue (96th St.)
New York, NY 10029.................. Goldberg's 12/96
7043 4th Street North Goldberg's
St. Petersburg, FL 33702............ St. Pete Bagel 8/87
249 Central Avenue Goldberg's
St. Petersburg, FL 33701............ St. Pete Bagel 2/90
210 East Madison Goldberg's
Tampa, FL 33602..................... St. Pete Bagel 5/95
4329 West Kennedy Blvd. Goldberg's
Tampa, FL 33609..................... St. Pete Bagel 6/96
27
<PAGE>
FRANCHISED AND LICENSED STORES:
Date Opened
Location Concept (Projected)
- -------- ------- -----------
134 North Avenue
New Rochelle, NY 10803.................. Sammy's 10/92
4951 East Grant Rd.
Tuscon, AZ 85712........................ Goldberg's 9/95
421 Route 59
Monsey, NY 10952........................ Sammy's 11/95
1583 - A West Lane Ave.
Upper Arlington, OH ..................... Sammy's 12/95
6449 Oracle Ave.
Tucson, AZ 85712........................ Goldberg's 2/96
162 City Center Drive
Columbus, OH 43215...................... Sammy's 6/96
1312 Grandview Avenue
Grandview Heights, OH ................... Sammy's 7/96
1461 Weaver Street
Scarsdale, NY 10583..................... Sammy's 12/96
3318 Highway 17 So.
No. Myrtle Beach, SC 29582.............. Goldberg's 2/97
3735 West Dempster Street Goldberg's Kosher
Skokie, IL 60076........................ New York Bagels 4/97
42 Pershing Drive Goldberg's
Derby, CT 06418......................... Bagel Connection 3/97
222 Main Street Goldberg's
Farmington, CT 06032.................... Bagel Connection 3/97
18 Old Stratford Road Goldberg's
Shelton, CT 06497....................... Bagel Connection 3/97
11130 Seminole Blvd. Goldberg's
Largo, FL 34640......................... St. Pete Bagel 2/95
5835 memorial Highway Goldberg's
Tampa, FL 33615......................... St. Pete Bagel 2/97
2989 Dixwell Avenue
Hamden, CT 06518........................ Goldberg's 10/97
3650 Nazareth Pike
Bethlehem, PA 18017..................... Goldberg's 10/97
28
<PAGE>
White Plains, NY......................... Sammy's 11/97
Mt. Kisco, NY............................ Sammy's 11/97
Albany, NY............................... Goldberg's 11/97
East Haven, NY........................... Goldberg's 11/97
Baltimore, MD............................ Goldberg's 06/98
Trademarks and Service Marks
Management believes that, in the food service industry, trademarks and
service marks are most effectively protected by constant, continued and
evolving use of various distinctive identifying symbols. The Company is not
dependent upon particular registered marks and does not believe that the
registration of such marks would materially enhance its competitive position,
business or prospects.
The Company provides bagel ovens and kettles and other bagel bakery
equipment to its franchisees and to unaffiliated purchasers and believes that
this equipment is uniquely suited to the production of high quality bagels.
Although the Company modifies and installs this equipment in a proprietary
manner, the Company does not believe these modifications and refinements are
patentable. It is the Company's practice to protect its proprietary dough
conditioner, bagel mix and bagel dough by relying on trade secret laws and
confidentiality agreements. There can be no assurance that the confidentiality
of its trade secrets will be maintained or that others will not independently
develop or obtain access to the same, comparable or improved recipes and
formulas. See "Risk Factors -- Lack of Trademark and Patent Protection."
Competition
The Company competes, and can be anticipated to compete, against well
established food service companies with greater product and name recognition
and with larger financial, marketing and distribution capabilities than the
Company's, as well as innumerable local food establishments that offer similar
products. The food service industry in general, and the take-out sector in
particular, are intensely competitive with respect to food quality, concept,
location, service and price.
The bagel industry is highly fragmented and has traditionally been
dominated by "mom and pop" operators, which, management believes, creates a
unique growth opportunity for the Company's expansion. In addition, there is a
growing number of national, regional and local chains, operating both owned
and franchised bagel stores, including a number of such chains that have
indicated the intention to expand to a national scope. The Company believes
that its most direct competitors are Manhattan Bagel Company, Inc.
("Manhattan"), Einstein Brothers Bagel, Inc. ("Einstein Brothers"), Bruegger's
Corporation ("Bruegger's") and Big Apple Bagels ("Big Apple").
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.
29
<PAGE>
There are also several regional bagel chains and independent bagel shops
which may be expected to compete with the Company. The Company's stores also
compete with take-out and fast-food restaurants, delicatessens and prepared
food stores, bakeries, supermarkets and convenience stores. The Company
believes that the start-up costs associated with opening a retail food
establishment offering similar products on a stand-alone basis are competitive
with the start-up costs associated with commencing a Goldberg's or Sammy's
store and accordingly, such start-up costs are not an impediment to entry into
the retail bagel business. See "Risk Factors -- Competition; Ease of Entry
into Business."
As a franchiser, the Company competes for qualified franchisees with a
wide variety of other investment opportunities both within and outside of the
food service industry. Management believes that the consistent quality of its
products, the efficiency of its operating systems, its proprietary
ingredients, its equipment and its franchisee support arrangements will permit
it to compete effectively, particularly against other franchisers of bagel
stores.
Advertising
The Company presently advertises and plans to continue advertising, its
franchises in current stores, franchise trade shows, newspapers and business
opportunity magazines. The Company and its franchisees also advertise products
in newspapers, through direct mailing and on radio and television. See "--
Franchising."
The Company administers promotional funds ("Promotional Funds") to support
promotion and marketing programs designed to expand awareness of and demand
for Goldberg's and Sammy's products. Each Promotional Fund furnishes
Goldberg's or Sammy's franchisees, as the case may be, with promotional,
advertising and marketing materials, which may include such items as direct
mail pieces, media materials and brochures. The Company retains sole
discretion over creative concepts, materials and endorsements used in the
Promotional Funds' programs and over associated geographic, market and media
placement and allocation. The Promotional Funds may pay the cost of preparing
materials, employing advertising agencies and administering regional and local
promotional and advertising programs and public relations activities.
Franchisees are obligated to contribute to the appropriate Promotional
Fund a promotional fee equal to 1% of gross sales.
In the future, franchisees also may be required to participate in local or
regional advertising cooperatives. The cooperatives are expected to be made up
of franchisees within a given Designated Market Area for the purpose of
pooling advertising funds in order to purchase advertising effectively and
efficiently. Each franchisee will be entitled to one vote within the
cooperative for each store owned, and advertising purchases will be determined
by majority vote. Contributions will be determined by the members of each
cooperative, and will range from a required minimum of 1% of gross sales.
Stores owned and operated by the Company are required to contribute to the
promotional funds and to participate in advertising cooperatives on the same
basis as franchised stores within the same Designated Market Areas.
Each franchisee is responsible for developing local advertising and
promotional materials, all of which are subject to prior review and approval
by the Company.
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
30
<PAGE>
comply with such regulations may have an adverse effect on the Company and its
franchisees. See "Risk Factors -- Government Regulation."
The Company's franchise operations are subject to regulation by the
Federal Trade Commission ("FTC") in compliance with the FTC's rule entitled
"Disclosure Requirements and Prohibitions Concerning Franchising and Business
Opportunity Ventures," which requires, among other things, that the Company
prepare and update periodically a comprehensive disclosure document, known as
the Uniform Franchise Offering Circular ("UFOC"), in connection with the sale
and operation of its franchises. In addition, some states require a franchiser
to register its franchise with the state before it may offer the franchise.
The Company believes that its UFOC, together with any applicable state
versions or supplements, complies with both the FTC guidelines and all
applicable state laws regulating franchising in those states in which it has
offered franchises.
In addition to the rules governing the offer and sale of franchises, the
Company is also subject to a number of state laws, as well as foreign laws (to
the extent it offers franchises outside of the United States), that regulate
substantive aspects of the franchiser-franchisee relationship, including, but
not limited to, those concerning termination and non-renewal. Currently, 18
states, the District of Columbia, Puerto Rico and the Virgin Islands, have
franchise termination and non-renewal laws. These laws govern the termination
and/or non-renewal of the franchise agreement and, by and large, require the
franchiser to have good cause, reasonable cause or just cause in order to
terminate the franchise agreement or not to renew the franchise agreement. In
addition, some of these laws provide for longer cure periods than currently
contemplated by the Company's franchise agreements.
Each store will be subject to regulation by federal agencies and to
licensing and regulation by state and local health, sanitation, safety, fire
and other departments. Difficulties in obtaining or the failure to obtain
required licenses or approvals could delay or prevent the opening of a new
store. The Company believes that it is in substantial compliance with the
applicable laws and regulations governing its operations.
While the Company intends to comply with all federal, state and foreign
laws and regulations, there can be no assurance that it will continue to meet
the requirements of such laws and regulations, which, in turn, could result in
a withdrawal of approval to franchise in one or more jurisdictions. Any such
loss of approval would have a material adverse effect upon the Company's
ability to successfully market its franchises. Violations of franchising laws
and/or state laws and regulations regulating substantive aspects of doing
business in a particular state could subject the Company and its affiliates to
rescission offers, monetary damages, penalties, imprisonment and/or injunctive
proceedings. The state laws and regulations concerning termination and
non-renewal of franchisees are not expected to have a material impact on the
Company's operations. In addition, under court decisions in certain states
absolute vicarious liability may be imposed upon franchisers based upon claims
made against franchisees. The Company currently does not carry insurance
against such claims although it intends to obtain coverage in the future.
However, there can be no assurance that the Company will be able to obtain
such coverage or that such coverage will be sufficient to cover claims against
the Company. Further, there can be no assurance that existing or future
franchise regulations will not have an adverse effect on the Company's ability
to expand its franchise program.
Properties
The Company's executive offices are located at 104 New Era Drive, South
Plainfield, New Jersey 07080. The Company first occupied this location on
April 1, 1997. The headquarters consist of approximately 23,000 square feet.
The Company's lease on its headquarters location, bagel producing commissary
and warehouse commenced February 15, 1997 and expires on January 31, 2007. The
lease provides a renewal option of one five-year term. The commissary operates
under kosher supervision and produces bagels for all Company-owned and
franchised stores. See "-- Kosher Certification and Supervision."
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
31
<PAGE>
Lodi warehouse. The Lodi facility currently is operating at full capacity, and
management expects that additional space will be needed for the Company to
continue to distribute equipment to its franchisees effectively.
The following table sets forth the location, size and certain information
pertaining to the lease, on each of the Company's three Goldberg's stores (two
of which are operating and one of which is under development and projected to
open no later than September 24, 1997), two Sammy's stores and its commissary.
<TABLE>
<CAPTION>
Lease Terms
Area ---------------------------------------
Location Concept (Sq. Ft.) Commencement Expiration Renewals
-------- ------- --------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
1443 Queen Anne Road
Teaneck, NJ 07666................. Sammy's 750 8/1/91 7/31/03 None
40 North James Road
Columbus, OH 43213................ Sammy's 2600 11/1/93 10/31/03 None
197 Bleecker Street
New York, NY 10012................ Goldberg's 1260 11/1/94 10/31/03 None
121 Route 59 West
Nanuet, NY 10954.................. Goldberg's 1961 7/1/95 6/30/05 None
1408 Whalley Avenue
New Haven, CT 06515............... Goldberg's 3425 9/1/93
1865 2nd Avenue (96th Street)
New York, NY 10029................ Goldberg's 1,550 9/1/84 09/13/04 Five Year
7043 4th Street ThreeYear
St. Petersburg, FL 33702.......... Goldberg's 2,034 5/1/95 04/30/98 Option
249 Central Avenue
St. Petersburg, FL 33701.......... Goldberg's 1,100 3/1/90 03/01/96 Two Year
210 East Madison
Tampa, FL 33701................... Goldberg's 1,300 10/3/94 10/14/99 Five Year
4329 W. Kennedy Boulevard Two Two
Tampa, FL 33609................... Goldberg's 1,650 7/1/96 08/01/98 Year Terms
</TABLE>
Employees
At July 31, 1998, the Company had 136 employees, consisting of 100
full-time and 36 part-time employees. The Company has never experienced a work
stoppage and no employees are represented by any labor union. The Company
believes that its employee relations are good.
Legal Proceedings
From time to time the Company is involved in litigation arising in the
ordinary course of its business. The Company is not currently engaged in any
legal proceedings which are expected, individually or in the aggregate, to
have a material adverse effect on the Company.
32
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Personnel
The current directors, executive officers and key personnel of the Company
are as follows:
Name Age Positions with the Company
---- --- --------------------------
Directors and Executive Officers
Andrew Thorburn..................... 54 Chairman of the Board and Chief
Executive Officer
Robert Bagnell...................... 41 Director and Chief Financial Officer
Michael Vizziello................... 31 Director and Vice President for
Development
Tom Lisker.......................... 65 Director and Director of Marketing
Key Personnel
Larry Wiese......................... 32 Director of Design and Equipment
Glenn Addis......................... 48 Vice President Operations
Fouad El-Hachimi.................... 33 Manager, Soup Chef Division
Kurt Cuccaro........................ 32 Regional Vice President
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.
The following sets forth certain biographical information with respect to
the directors, executive officers and key personnel of the Company.
Directors and Executive Officers
Andrew Thorburn has been President, Chief Executive Officer and Chairman
of the Board of Directors of the Company since October 1993. From 1987 until
October 1993, he was President of All American Enterprises, Inc., Somerset,
New Jersey, an unrelated company that was the franchiser of Treats Bakery
Stores ("Treats") and Perkits Frozen Yogurt ("Perkits"). From December 1994 to
February 23, 1996, he served as Chairman of the Board (a non- executive
position) of Blue Chip Computerware, Inc. ("Blue Chip"), which became a
shareholder on July 1, 1994, but no longer is a shareholder of the Company. He
also has served as Chairman, President and Chief Executive Officer of Jutland
Enterprises Inc., founder of the Company, commencing in March 1988. He has
been in the food industry since 1985 and prior to that time was Chief
Marketing Officer of H.C. Copeland and Associates, Inc., a subsidiary of the
Travelers Insurance Company, which he helped to develop from a start-up
venture into a national sales company with 600 employees.
Robert Bagnell joined the Company in early 1998. He became a director in
August 1998. He has had a broad experience as a food service executive,
including positions with Price Waterhouse and Pizza Hut prior to joining Boston
Market in 1994. At Boston Market he served as senior finance executive for the
Northeast Division, overseeing 350 retail locations generating more than $400
million in revenue.
Michael Viziello joined the Company in January, 1998. He became a director
in August 1998. He is charged with the expansion of both the Company's bagel and
gourmet soup concepts, as well as, licensing and co-branding opportunities. Mr.
Vizziello was previously responsible for franchise development at Cones and
Coffee, which he grew from a startup operation to a chain of over 60 franchised
units open and under development. He has an equally impressive sales record with
ADP and other companies with whom he has worked.
33
<PAGE>
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.
Key Personnel
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.
Glenn Addis, former manager of the corporate store in Columbus, Ohio, has
been with the Company since 1995. He is now Regional Director of the New
York/New Jersey Region. Prior to joining All American, Mr. Addis had worked
for ARA Services, where he was general manager of the Fine Dining Division of
the private clubs in Miami International Airport. He also served as Food and
Beverage Director for Doubletree Hotels, Hilton, and Holiday Inn. From 1978 to
1982, Mr. Addis was the owner of four restaurants in LaCrosse, Wisconsin.
Kurt Cuccaro, the founder and principal stockholder of St. Pete's Bagels,
a six store chain located in the Tampa, Florida market, has extensive
experience in all phases of the bagel business, from the managment of a
central cmmissary, to the operation of a retail store. Mr. Cuccaro became the
Company's Regioal Vice President for Southeastern Operations upon the
Comapny's acquistion of St. Pete's Bagels in September 1997.
Fouad El-Hachimi is a Moroccan-trained international chef, who founded the
"Soupman" gourmet soup concept. He has extensive experience in the creation of
gourmet soups and has been featured on many local and national media reports,
usually portrayed as the chief rival to the "Soup Nazi" of Seinfield fame. He
has responsibility for the development of the Company's "Soup Chef(TM)"
concept, and the ongoing roll out of new varieties of soup, as well as quality
control in the manufacture of the entire soup line.
Directors' Compensation
Directors of the Company currently receive no compensation for their
service as such.
Limitation of Liability and Indemnification Matters
As permitted pursuant to the corporate law of the State of New Jersey, the
Company's state of incorporation, the Charter and By-Laws require that the
Company indemnify its directors and officers against certain liabilities
incurred in their service in such capacities to the fullest extent permitted
by applicable law. These provisions would provide indemnification for
liabilities arising under the federal securities laws to the extent that such
indemnification is found to be enforceable under, and to be in accordance with
applicable law. In addition, as permitted by New Jersey law, the Charter
eliminates the personal liability of the directors and officers to the Company
or its shareholders for monetary damages for breaches of such director's or
officer's duty of care or other duties as a director or officer; except
liabilities for any breach of duty based upon an act or omission (a) in breach
of such person's duty of loyalty to the corporation or its shareholders, (b)
not in good faith or involving a knowing violation of law or (c) resulting in
receipt by such person of an improper personal benefit. This limitation on
liability could have the effect of limiting directors' and officers'
liabilities for violations of the federal securities laws.
Omnibus Stock Plan
The Company has adopted the All American Food Group, Inc. Amended and
Restated Omnibus Stock Plan
34
<PAGE>
(the "Plan") to promote the long-term growth and profitability of the Company
by (i) providing key directors, officers and employees of the Company and its
subsidiaries with incentives to improve shareholder value and contribute to
the growth and financial success of the Company and (ii) enabling the Company
to attract, retain and reward the best available persons for positions of
substantial responsibility. As described more fully below, the Plan provides
for grants of options to purchase specified numbers of shares of Common Stock
at predetermined prices.
The following discussion represents only a summary of certain of the Plan
terms and is qualified in its entirety by reference to the complete Plan, a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part.
Shares Available; Maximum Awards; Participants. A total of 350,000 shares
of the Company's Common Stock has been reserved for issuance pursuant to
options granted pursuant to the Plan. The Plan allows the Company to grant
options to employees, officers and directors of the Company and its
subsidiaries; provided that only employees of the Company and its subsidiaries
may receive incentive stock options under the Plan. The Company has not
granted any options under the Plan.
Stock Option Features. Under the Plan, options to purchase the Company's
Common Stock may take the form of incentive stock options ("ISOs") under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or
nonqualified stock options ("NQSOs"). As required by Section 422 of the Code,
the aggregate fair market value (as defined in the Plan) of shares of Common
Stock (determined as of the date of grant of the ISO) with respect to which
ISOs granted to an employee are exercisable for the first time in any calendar
year may not exceed $100,000. The foregoing limitation does not apply to
NQSOs.
Initially, each option will be exercisable over a period, determined by
the Board of Directors or the Compensation Committee of the Board of Directors
of the Company, in its discretion, of up to ten years from the date of grant.
Options may be exercisable during the option period at such time, in such
amounts, and in accordance with such terms and conditions and subject to such
restrictions as are determined by the Board or the Compensation Committee and
set forth in option agreements evidencing the grant of such options; provided
that no option may be exercisable less than six months from its date of grant.
The exercise price of options granted pursuant to the Plan is determined
by the Board or the Compensation Committee, in its discretion; provided that
the exercise price of an ISO may not be less than 100% of the fair market
value (as defined in the Plan) of the shares of the Company Common Stock on
the date of grant. The exercise price of options granted pursuant to the Plan
is subject to adjustment as provided in the Plan to reflect stock dividends,
splits, other recapitalizations or reclassifications or changes in the market
value of the Company Common Stock. In addition, the Plan provides that, in the
event of a proposed change in control of the Company (as defined in the Plan),
the Board or the Compensation Committee is to take such actions as it deems
appropriate to effectuate the purposes of the Plan and to protect the grantees
of options, which action may include (i) acceleration or change of the
exercise dates of any option; (ii) arrangements with grantees for the payment
of appropriate consideration to them for the cancellation and surrender of any
option; and (iii) in any case where equity securities other than Common Stock
are proposed to be delivered in exchange for or with respect to Common Stock,
arrangements providing that any option shall become one or more options with
respect to such other equity securities. Further, in the event the Company
dissolves and liquidates (other than pursuant to a plan of merger or
reorganization), then notwithstanding any restrictions on exercise set forth
in the Plan or any grant agreement pursuant thereto (i) each grantee shall
have the right to exercise his option at any time up to ten days prior to the
effective date of such liquidation and dissolution; and (ii) the Board or the
Compensation Committee may make arrangements with the grantees for the payment
of appropriate consideration to them for the cancellation and surrender of any
option that is so canceled or surrendered at any time up to ten days prior to
the effective date of such liquidation and dissolution. The Board or the
Compensation Committee also may establish a different period (and different
conditions) for such exercise, cancellation, or surrender to avoid subjecting
the grantee to liability under Section 16(b) of the Exchange Act.
The shares purchased upon the exercise of an option are to be paid for by
the optionee in cash or cash
35
<PAGE>
equivalents acceptable to the Compensation Committee. In addition, the Plan
provides for broker-assisted cashless exercises in the discretion of the
Compensation Committee.
Except as permitted pursuant to Rule 16b-3 under the Exchange Act, and in
any event in the case of an ISO, an option is not transferable except by will
or the laws of descent and distribution. In no case may the options be
exercised later than the expiration date specified in the option agreement.
Plan Administration. The Plan initially is administered by the Board of
Directors of the Company.
The Board of Directors will decide when and to whom to make grants, the
number of shares to be covered by the grants, the vesting schedule, the type
of awards and the terms and provisions relating to the exercise of the awards.
The Board of Directors may interpret the Plan and may at any time adopt such
rules and regulations for the Plan as it deems advisable. The Board of
Directors may at any time amend or terminate the Plan and change its terms and
conditions, except that, without shareholder approval, no such amendment may
(i) materially increase the maximum number of shares as to which awards may be
granted under the Plan; (ii) materially increase the benefits accruing to Plan
participants; or (iii) materially change the requirements as to eligibility
for participation in the Plan.
Accounting Effects. Under current accounting rules, neither the grant of
options at an exercise price not less than the current fair market value of
the underlying Common Stock, nor the exercise of options under the Plan, is
expected to result in any charge to the earnings of the Company.
Certain Federal Income Tax Consequences. The following is a brief summary
of certain Federal income tax aspects of awards under the Plan based upon the
Federal income tax laws in effect on the date hereof. This summary is not
intended to be exhaustive and does not describe state or local tax
consequences.
Incentive Stock Options. An optionee will not realize taxable income upon
the grant of an ISO. In addition, an optionee will not realize taxable income
upon the exercise of an ISO, provided that such exercise occurs no later than
three months after the optionee's termination of employment with the Company
(one year in the event of a termination on account of disability). However, an
optionee's alternative minimum taxable income will be increased by the amount
that the fair market value of the shares acquired upon exercise of an ISO,
generally determined as of the date of exercise, exceeds the exercise price of
the option. If an optionee sells the shares of Common Stock acquired upon
exercise of an ISO, the tax consequences of the disposition depend upon
whether the disposition is qualifying or disqualifying. The disposition of the
shares is qualifying if made more than two years after the date the ISO was
granted and more than one year after the date the ISO was exercised. If the
disposition of the shares is qualifying, any excess of the sale price of the
shares over the exercise price of the ISO would be treated as long-term
capital gain taxable to the option holder at the time of the sale. If the
disposition is not qualifying, i.e., a disqualifying disposition, the excess
of the fair market value of the shares on the date the ISO was exercised over
the exercise price would be compensation income taxable to the optionee at the
time of the disposition, and any excess of the sale price of the shares over
the fair market value of the shares on the date the ISO was exercised would be
capital gain.
Unless an optionee engages in a disqualifying disposition, the Company
will not be entitled to a deduction with respect to an ISO. However, if an
optionee engages in a disqualifying disposition, the Company generally will be
entitled to a deduction equal to the amount of compensation income taxable to
the optionee.
Nonqualified Stock Options. An optionee will not realize taxable income
upon the grant of an NQSO. However, when the optionee exercises the NQSO, the
difference between the exercise price of the NQSO and the fair market value of
the shares acquired upon exercise of the NQSO on the date of exercise is
compensation income taxable to the optionee. The Company generally will be
entitled to a deduction equal to the amount of compensation income taxable to
the optionee.
Executive Compensation
36
<PAGE>
Summary Compensation Table
The following summary compensation table sets forth certain information
regarding compensation paid during each of the indicated fiscal periods to the
person serving as the Company's Chief Executive Officer during the last year.
No executive officers received salary and bonus in an amount exceeding
$100,000 during any of the fiscal periods.
<TABLE>
<CAPTION>
Name and Fiscal Annual
Principal Position Period(1) Salary Other(2)
------------------ --------- ------ --------
<S> <C> <C> <C>
Andrew Thorburn, Chief Executive Officer.................. 1997 $125,000 $28,000
1996 $100,003 --
1995 $39,000 --
Chris Decker, Chief Financial and Administrative Officer.. 1997 $120,000 --
1996 $120,500 --
1995 $46,000 --
Anthony Foster, Chief Operating Officer................... 1997 $126,000 $36,891
1996 $101,703 $17,881(3)
1995 -- --
</TABLE>
- ----------
(1) The Company's 1996 fiscal period was from November 1, 995 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.
(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.
CERTAIN TRANSACTIONS
During 1995, Blue Chip Computerware, Inc. ("Blue Chip"), which, at the
time, was an affiliate of the Company, purchased 475,000 shares of the
Company's Series C Preferred Stock for which the Company received aggregate
consideration of $475,000. During 1996, the Company redeemed 402,000 of such
shares of Series C Preferred Stock at a price of $1.00 per share.
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.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of July 31, 1998, certain information
as to the beneficial ownership of Common Stock of each of the Company's
directors, all officers and directors as a group, and each person known by the
Company to be the beneficial owner of more than 5% of the Company's Common
Stock.
<TABLE>
<CAPTION>
Percentage
Amount and Nature of of Common Stock
Beneficial Ownership -------------------------
<S> <C> <C>
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Immediately Before Before After
Beneficial Stockholder Offering(1) Offering Offering(2)
---------------------- ------------------ -------- -----------
<S> <C> <C> <C>
Andrew Thorburn........................... 67,101 * *
104 New Eva Dr.
South Plainfield, NJ 07080
Robert Bagwell 0 * *
104 New Eva Dr.
South Plainfield, NJ 07080
Michael Vizziello 25,000 * *
104 New Eva Dr.
South Plainfield, NJ 07080
All officers and directors as a group
(6 persons)............................. 132,101(3) 2.5% *
</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. The ownership of the shares deemed to be held by the Selling
Stockholders, due to their ownership of Series G and H Preferred Stock is not
reflected due to their contractual obligation to the Company pursuant to which
they are not entitled to convert any Preferred Stock to the extent that after
such conversion the number of shares of Common Stock beneficially owned by
such shareholder and its affiliates (excluding any shares deemed beneficially
owned through any continuing ownership of the Preferred Stock) exceeds 4.9% of
the outstanding Common Stock. The conversion price will be adjusted and the
number of shares beneficially owned and being offered by the Selling
Stockholder will vary in accordance with the terms of the Preferred Stock to
reflect changes in the market price of common stock, stock dividends, stock
splits, and certain other circumstances. See "Description of Securities."
(2) Assumes that the listed shareholders will continue to hold the shares
currently held thereby after completion of the Offering.
(3) Includes all shares reflected above as beneficially owned by Messrs.
Thorburn, Bagwell and Vizziello.
DESCRIPTION OF SECURITIES
General
The authorized capital stock of the Company consists of an aggregate of
24,000,000 shares of capital stock, consisting of 20,000,000 shares of Common
Stock, no par value, and 4,000,000 shares of Preferred Stock, no par value. As
of July 31, 1998, there were outstanding 1,867,661 shares of Common Stock and
190,000, 180,000, 982,503, 0, 0, 5,000, 10,000 and 35,000 shares of Series A,
Series B, Series C, Series D, Series F, Series G and Series H Preferred Stock,
respectively.
Common Stock
38
<PAGE>
Holders of Common Stock have one vote per share on each matter submitted
to a vote of the shareholders. Holders of the Common Stock do not have
preemptive rights to purchase additional shares of Common Stock or other
subscription rights. The Common Stock carries no conversion rights and is not
subject to redemption or to any sinking fund provisions. All shares of Common
Stock are entitled to share equally in dividends from legally available
sources as determined by the Board of Directors, subject to any preferential
dividend rights of the Preferred Stock (described below). Upon dissolution or
liquidation of the Company, whether voluntary or involuntary, holders of the
Common Stock are entitled to receive assets of the Company available for
distribution to the stockholders, subject to the preferential rights of the
Preferred Stock. As of July 31, 1998, there were approximately 500 holders of
record of the Company's Common Stock.
Preferred Stock
Preferred Stock may be issued from time to time in one or more series. The
Board of Directors is authorized to determine the rights, preferences,
privileges and restrictions granted to, and imposed upon any series of
Preferred Stock and to fix the number of shares of any series of Preferred
Stock and the designation of any such series, subject, to the consent of the
existing holders of preferred stock, in certain instances. The issuance of
Preferred Stock could be used, under certain circumstances, as a method of
preventing a takeover of the Company and could permit the Board of Directors,
without any action of the holders of the Common Stock to issue Preferred Stock
which could have a detrimental effect on the rights of holders of the Common
Stock, including loss of voting control. Anti-takeover provisions that could
be included in the Preferred Stock when issued may depress the market price of
the Company's securities and may limit stockholders' ability to receive a
premium on their shares of Common Stock by discouraging takeover and tender
offer bids.
The Company has issued seven of Preferred Stock, designated Series A
Partially Redeemable Convertible Preferred Stock ("Series A Preferred Stock"),
Series B Redeemable Convertible Preferred Stock ("Series B Preferred Stock") and
Series C Convertible Preferred Stock ("Series C Preferred Stock" and,
collectively with the Series A Preferred Stock and the Series B Preferred Stock,
"Pre-IPO Preferred Stock"), Series D Convertible Preferred Stock, Series E
Convertible Preferred Stock, Series F Convertible Preferred Stock, Series G
Convertible Preferred Stock and Series H Convertible Preferred Stock. The Series
A Preferred Stock was issued to Howard Goldberg in connection with the Company's
acquisition of the Goldberg Companies. The Series B Preferred Stock was issued
to the shareholders of the Sammy's Companies in connection with the Company's
acquisition of all of the outstanding shares of the Sammy's Companies. See
"Business -- History of the Company." The Series C Preferred Stock was issued by
the Company to a number of affiliated and unaffiliated purchasers in various
capital raising transactions. See "Certain Transactions." The Series D through
H Preferred Stock was issued by the Company to a number of unaffiliated
purchasers in various capital raising transactions.
Each share of the Pre-IPO Preferred Stock is convertible, at the election
of the holder thereof, into shares of the Common Stock of the Company on a
one-for-one basis, subject to adjustment in the event of certain events
including (i) stock dividends, splits and reverse splits; (ii)
reclassifications; (iii) issuances of warrants or rights to holders of Common
Stock at a price per share less than the then-current market price of the
Common Stock (as defined); (iv) other dividends or distributions to
shareholders of assets or evidences of indebtedness; and (v) mergers,
consolidations, sales of all or substantially all of the Company's assets,
statutory exchanges of its securities and similar transactions. The Pre- IPO
Preferred Stock has no preference as to dividends, which are payable only as
and when declared by the Board of Directors, and need not be declared,
notwithstanding the declaration of dividends with respect to any other class
or series of the Company's capital stock. The Pre-IPO Preferred Stock has no
preference upon liquidation of the Company, but instead participates pro rata,
on a share-for-share basis, with shares of Common Stock in respect of any
funds otherwise available for distribution to shareholders upon such
liquidation. Holders of Pre-IPO Preferred Stock have no voting rights, except
as required by applicable law.
The Company is obligated to redeem 60,000 Series B shares (or such lesser
number of shares as is then outstanding) at a price of $5.00 per share no
later than December 12, 1998. The Company, at its election, also may redeem
some or all of the shares of Preferred Stock outstanding at any time upon
payment of a redemption price equal to $5.00 plus a premium thereon equal to
6% per annum measured from September 1994 to the effective date
39
<PAGE>
of such redemption.
The Series C Preferred Stock is not subject to mandatory redemption by
either the Company or at the election of the holders thereof.
Except as required by New Jersey law, holders of Pre-IPO Preferred Stock
have no voting rights.
There are no shares of Series D or Series E Convertible Preferred Stock
which are currently outstanding. There are 5,000 shares of Series F, 10,000
shares of Series G and 35,000 shares of Series H Convertible Preferred Stock
currently outstanding.
The Series F Convertible Preferred Stock has voting rights on as converted
basis with the common stock and is non-voting and accrues quarterly dividends at
the rate of six percent (6%) per annum. In the event of any liquidation,
dissolution or winding up of the Company, the holders of these shares will be
entitled to receive, prior and in preference to any distribution of any assets
of the Company to the Common Stock holders, the amount of $100 per share plus
any and all accrued but unpaid dividends. These Preferred Stock shares are
convertible into Common Stock of the Company at a conversion price equal to 70%
of the closing price of the Common Stock for the five trading days preceding the
conversion date.
The Series G Convertible Preferred Stock has voting rights on an as
converted basis with the Common Stock and accrues quarterly dividends at
the rate of eight percent (8%) per annum. In the extent of any liquidation,
dissolution or winding up of the Company, the holders of these shares will be
entitled to receive, prior and in preference to any distribution of any assets
of the Company to the Common Stock holders, the amount of $100 per share plus
any and all accrued but unpaid dividends. These Preferred Stock shares are
convertible into Common Stock of the Company at a conversion price equal to 65%
of the closing price of the Common Stock for the five trading days preceding the
conversion date.
The Series H Convertible Preferred Stock has voting rights on an as
converted basis with the Common Stock and accrues quarterly dividends at the
rate of eight percent (8%) per annum. In the event of any liquidation,
dissolution or winding up of the Company, the holders of these shares will be
entitled to receive, prior and in preference to any distribution of any assets
of the Company to the Common Stock holders, the amount of $100 per share plus
any and all accrued but unpaid dividends. These Preferred Stock shares are
convertible into Common Stock of the Company at a conversion price equal to 75%
of the closing price of the Common Stock for the five trading days preceding the
conversion date.
Transfer Agent
The transfer agent for the Company's Common Stock is Continental Stock
Transfer and Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares of Common Stock by the Company and its
stockholders could adversely affect the prevailing market price of the Common
Stock. All of the 5,394,343 outstanding shares of the Company's Common Stock
are freely tradeable or eligible to have the restrictive legend removed
pursuant to Rule 144(k) promulgated under the Securities Act. Sales of
substantial amounts of Common Stock in the public market, or the perception
that such sales may occur, could have a material adverse effect on the market
price of the Common Stock. Pursuant to its Certificate of Incorporation, the
Company has the authority to issue additional shares of Common Stock and
Preferred Stock. The issuance of such shares could result in the dilution of
the voting power of Common Stock purchased in this Offering. See "Description
of Securities," "Shares Eligible for Future Sale," and "Principal
Shareholders."
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for the
Company by _______________________________.
EXPERTS
The financial statements of the Company at October 31, 1996 and October 31,
1997 and for the fiscal periods then ended, appearing in this Prospectus and
Registration Statement of which this Prospectus forms a part have been audited
by DelSanto and DeFreitas, Certified Public Accountants, independent auditors,
as set forth in their report thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement under
the Securities Act with respect to the securities offered by this Prospectus.
As permitted by the rules and regulations of the Commission, this Prospectus
does not contain all the information set forth in the Registration Statement
and the exhibits thereto. For further information with respect to the Company
and the securities offered hereby, reference is made to the Registration
Statement and the exhibits thereto, which may be examined without charge at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 or at the Regional Offices of the
Commission at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the Commission in Washington, D.C. upon payment of the prescribed fees. In
addition, such materials may be accessed electronically at the Commission's
site on the World Wide Web, located at
40
<PAGE>
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or other documents referred to herein are not necessarily
complete, and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended and, in accordance therewith, files reports
and other information with the Commission. Such reports and other information
may be inspected and copied at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such
materials can be obtained at prescribed rates from the Commission at such
address.
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements
Page No.
--------
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheet at October 31, 1997 and 1996 F-3
Consolidated Statement of Operations for the Years Ended October
31, 1997 and 1996 F-4
Consolidated Statement of Cash Flows for the Years Ended October
31, 1997 and 1996 F-5
Consolidated Statement of Stockholders' Equity (Deficit) for the
Years ended October 31, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
All American Food Group, Inc.
South Plainfield, New Jersey
We have audited the accompanying consolidated balance sheets of All American
Food Group, Inc. and Subsidiaries as of October 31, 1997 and 1996, and the
related consolidated statements of operations, cash flows and stockholders'
deficit for the years ended October 31, 1997 and 1996.
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, 1997 and 1996, and their
consolidated results of operations and cash flows for the years ended October
31, 1997 and 1996, in conformity with generally accepted accounting principles.
The accompanying Financial Statements have been prepared assuming that the
Company will continue as a going concern. As discussed at Note 1 to the
Consolidated Financial Statements, the Company has suffered recurring losses
from operations that raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. These financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
DelSanto and DeFreitas
Closter, New Jersey
February 7, 1998
F-2
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
October 31, October 31,
-------------------- ----------------
1997 1996
-------------------- ----------------
ASSETS
<S> <C> <C>
Current Assets:
Cash $326,603 $84,302
Accounts receivable, net of allowances for possible losses of $12,000
and $12,000 respectively 284,645 127,490
Notes receivable, current portion 20,441 97,115
Notes receivable - officer 127,000 --
Inventories 133,810 66,580
Prepaid expenses 918,775 407,516
-------------------- ----------------
Total Current Assets 1,811,274 783,003
Property, Plant and Equipment, at cost less accumulated depreciation
and amortization of $377,765 and $249,533 respectively 2,025,387 920,570
Intangible Assets, net of accumulated amortization of $583,096 and $418,460 1,261,146 293,319
respectively
Security Deposits 90,028 31,148
Notes receivable - long-term 55,099 160,434
-------------------- ----------------
Total Assets $5,242,934 $2,188,474
==================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable $80,693 $194,899
Accounts payable and accrued expenses 1,532,659 1,345,372
Capitalized lease obligations - current maturities 62,710 75,517
Loans from stockholders - current maturities 4,757 14,727
Current maturities of long-term debt 58,378 1,932
Deferred franchising revenue, current portion 33,505 189,615
-------------------- ----------------
Total Current Liabilities 1,772,702 1,822,062
Capitalized Lease Obligations 69,478 25,300
Loans from stockholders 1,398 5,454
Convertible debentures 1,300,000 --
Long-term debt 299,908 --
Deferred franchising revenue 26,290 160,434
-------------------- ----------------
Total Liabilities 3,469,776 2,013,250
-------------------- ----------------
Commitments and contingencies
Redeemable preferred stock, no par value, Series A, 0 and 115,000 shares
issued and outstanding respectively, Series B, 60,000 and 120,000 shares
issued and outstanding respectively, Redemption value of $300,000 at
October 31, 1997 268,033 562,678
-------------------- ----------------
Stockholders' Equity (Deficit):
Non-redeemable convertible preferred stock, no par value, Series A, 190,000
shares authorized, 10,000 and 75,000 shares issued and outstanding
respectively, Series B, 180,000 shares authorized, 60,000 shares issued
and outstanding, Series C, 1,600,000 shares authorized, 832,934 and
982,503 shares issued and outstanding respectively 322,470 537,905
Common stock, no par value, 20,000,000 shares authorized,
5,924,397 and 1,867,661 shares issued and outstanding respectively 11,130,669 3,360,136
Accumulated deficit (9,984,014) (4,285,495)
-------------------- ----------------
1,469,125 (387,454)
-------------------- ----------------
Total Liabilities and Stockholders' Equity (Deficit) $5,242,934 $2,188,474
==================== ================
</TABLE>
The Accompanying Notes to Consolidated Financial Statements are an
integral part of these financial statements.
F-3
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------------------------------------
1997 1996
----------------------- ----------------------------
<S> <C> <C>
Revenues:
Store sales $1,777,274 $1,401,266
Franchising revenue 284,829 277,854
Equipment and product sales 747,782 561,067
----------------------- ----------------------------
2,809,885 2,240,187
----------------------- ----------------------------
Operating expenses:
Cost of Sales - equipment and product costs and
store operations, exclusive of depreciation and amortization 2,094,008 1,572,185
Selling, general and administrative expenses 4,974,666 2,132,072
Loss on disposal of equipment 72,397 --
Depreciation and amortization 336,430 251,741
Settlement Costs - Employment Contracts 47,010 224,341
----------------------- ----------------------------
7,524,511 4,180,339
----------------------- ----------------------------
Operating loss (4,714,626) (1,940,152)
Interest expense 983,893 33,440
----------------------- ----------------------------
Net loss ($5,698,519) ($1,973,592)
======================= ============================
Adjusted net loss for net loss per common share calculation:
Net loss ($5,698,519) ($1,973,592)
Increase in carrying amount of redeemable preferred stock (48,385) (562,678)
----------------------- ----------------------------
Net loss attributable to common stock ($5,746,904) ($2,536,270)
======================= ============================
Shares outstanding:
Weighted average number of common shares outstanding 3,634,442 943,150
Additional shares -- 430,558
----------------------- ----------------------------
Adjusted shares outstanding 3,634,442 1,373,708
======================= ============================
Net loss per common share ($1.58) ($1.85)
======================= ============================
</TABLE>
The Accompanying Notes to Consolidated Financial Statements are an
integral part of these financial statements.
F-4
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------
1997 1996
----------------- ------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ($5,698,519) ($1,973,592)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 336,430 251,741
Common stock issued for services 748,022 --
Loss on disposal of equipment 72,397 --
Amortization of discount on issuance of convertible debentures 667,677 --
Decrease (increase) in:
Accounts receivable (131,132) (19,849)
Inventories (35,412) 57,069
Prepaid expenses 374,781 (362,265)
Security deposits (51,936) (914)
Increase (decrease) in:
Accounts payable and accrued expenses (91,306) 290,651
Deferred franchising revenue (71,952) 30,000
----------------- ------------------------
Total adjustments 1,817,569 246,433
----------------- ------------------------
Net cash (used in) operating activities (4,007,950) (1,727,159)
----------------- ------------------------
Cash Flows from Investing Activities:
Capital expenditures (347,477) (96,612)
Acquisition of intangible assets -- (33,572)
Business acquired, net of cash received (281,776) --
Notes receivable - officer (127,000) --
----------------- ------------------------
Net cash (used in) investing activities (756,253) (130,184)
----------------- ------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 3,235,337 2,003,986
Proceeds from issuance of convertible debentures 2,250,000 --
Proceeds from issuance of preferred stock -- 200,000
Redemption of preferred stock (343,029) (416,997)
Proceeds from issuance of notes payable -- 194,899
Payments of notes payable (195,729) --
Proceeds from capitalized lease obligations -- 10,900
Payments of capitalized lease obligations (80,442) (70,238)
Payments of loans from stockholders (14,026) (28,909)
Proceeds from long-term debt 51,818 --
Payments of current maturities of long-term debt (24,425) (5,699)
----------------- ------------------------
Net cash provided by financing activities 4,879,504 1,887,942
----------------- ------------------------
Net increase in cash 242,301 30,599
Cash - beginning of period 84,302 53,703
----------------- ------------------------
Cash - end of period $326,603 $84,302
================= ========================
</TABLE>
The Accompanying Notes to Consolidated Financial Statements are an
integral part of these financial statements.
F-5
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Non-Redeemable
Common Stock Preferred Stock
----------------------------------- ---------------------------------
Shares Amount Shares Amount
--------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Balance at October 31, 1995 945,650 $876,150 1,639,500 $1,022,580
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)
Net Loss -- -- -- --
--------------- ------------------ --------------- ----------------
Balance at October 31, 1996 1,867,661 3,360,136 1,117,503 537,905
Year Ended October 31, 1997:
Common stock issuance - Initial public
offering 1,265,000 3,235,337 -- --
Common stock issuance - acquisition
of businesses 504,800 1,103,906 -- --
Conversion of preferred stock to common
stock 214,569 167,050 (214,569) (167,050)
Increase in carrying amount of redeemable
preferred stock -- -- (48,385)
Common stock issuance for services 1,010,000 1,634,063 -- --
Common stock issued for property 10,000 12,500 -- --
Convertible debenture discount -- 667,677 -- --
Conversion of Convertible debentures to
common stock 1,052,367 950,000 -- --
Net Loss -- -- -- --
--------------- ------------------ --------------- ----------------
Balance at October 31, 1997 5,924,397 $11,130,669 902,934 $322,470
=============== ================== =============== ================
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
-------------- ------------------- ---------------
<S> <C> <C> <C>
Balance at October 31, 1995 $365,000 ($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 (365,000) -- (562,678)
Net Loss -- (1,973,592) (1,973,592)
-------------- ------------------- ---------------
Balance at October 31, 1996 0 (4,285,495) (387,454)
Year Ended October 31, 1997:
Common stock issuance - Initial public
offering -- -- 3,235,337
Common stock issuance - acquisition
of business's -- -- 1,103,906
Conversion of preferred stock to common
stock -- -- --
Increase in carrying amount of redeemable
preferred stock -- -- (48,385)
Common stock issuance for services -- -- 1,634,063
Common stock issued for property -- -- 12,500
Convertible debenture discount -- -- 667,677
Conversion of Convertible debentures to
common stock -- -- 950,000
Net Loss -- (5,698,519) (5,698,519)
-------------- ------------------------------------
Balance at October 31, 1997 $0 ($9,984,014) $1,469,125
============== =================== ===============
</TABLE>
The Accompanying Notes to Consolidated Financial Statements are an
integral part of these financial statements.
F-6
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
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. On March
17, 1997, the Company completed the acquisition of substantially all of the
assets of Bagel Connection, Inc., a private company consisting of one
company-owned and three franchised bagel stores operating under the name Bagel
Connection in New Haven, Ct. The operations at Bagel Connection, Inc. for the
period March 17, 1997, the Acquisition Date, through October 31, 1997 are
included within these financial statements. The purchase price was approximately
$390,000, consisting of the assumption of net liabilities of approximately
$340,000 and the issuance of 25,000 shares of common stock. On September 23,
1997, the Company acquired all of the outstanding stock of three interrelated
corporations all conducting business under the tradename "St. Pete Bagels,"
hereinafter referred to as the "St. Pete acquisition." The acquisition consisted
of a six store bagel chain located in St. Petersburg, FL. Four of the stores are
Company-owned and two are franchised units. The acquisition also included a
bagel production facility. The purchase price was approximately $1,220,000,
consisting of cash in the amount of $220,000 and the issuance of 479,800 shares
of common stock. The operations of St. Pete Bagels for the period of September
23, 1997, the acquisition date, through October 31, 1997 are included within
these financial statements. All 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.
The unaudited consolidated results of operations on a pro forma basis as though
St. Pete Bagels had been acquired as of the beginning of the Company's fiscal
year 1996 are as follows (Bagel Connection, Inc. excluded effect is
insignificant):
1997 1996
---- ----
Revenues and other income $4,299,000 $3,942,000
========== ==========
Net income (loss) (5,734,000) (2,612,000)
========== ==========
Earnings (loss) per common share (1.61) (1.41)
===== =====
(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 New York Bagels & Deli " and "Goldbergs
New York Bagels."
(c) Going Concern --
As shown in the Accompanying Consolidated Financial Statements, the Company
incurred a net loss of $5,698,519 for the year ended October 31, 1997 and has an
accumulated deficit of $9,984,014 as of such date. During fiscal year
October 31, 1997 the Company used cash in operating activities of $4,007,950.
This creates an uncertainty about the Company's ability to continue as a going
concern. Management of the Company is developing a plan to reduce its operating
loss and to raise capital through the issuance of additional stock (or debt).
The ability of the Company to continue as a going concern is dependent on the
plan's success and there can be no assurance that the Company will be
successful. See Note 20 of the Consolidated Financial Statements regarding
certain subsequent events. The Consolidated Financial Statements do not include
any adjustment that might be necessary if the Company is unable to continue as a
going concern.
(d) Principles of Consolidation --
The consolidated financial statements include the accounts of All American Food
Group, Inc. and its subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
(e) Cash and Cash Equivalents --
At October 31, 1997 and 1996 cash represented monies on deposit in financial
institutions.
F-7
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
1. Organization and Summary of Significant Accounting Policies -- (continued)
(f) Concentration of Credit Risk --
The Company maintains cash and cash equivalents with various financial
institutions. Company policy is designed to limit exposure with any one
institution. Credit risk with respect to trade accounts and notes receivable is
minimal, due to the terms under which the Company transacts its business.
(g) Fair Value of Financial Instruments --
The Company estimates that the fair value of all financial instruments at
October 31, 1997 and 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.
(h) Inventories --
Inventories are stated at the lower of cost (first-in, first-out ("FIFO")) or
market.
(i) 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.
(j) Intangible Assets --
The values assigned to intangible assets result from the business combinations
described in Note 1(a) and are based on an independent appraisals 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.
(k) 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 non-refundable initial franchise fee (an "Initial Franchise Fee"), a weekly
royalty on gross sales, and a weekly cooperative advertising fund contribution.
The Company's material obligations under the terms of all Single Unit Agreements
are assisting in site selection and franchisee training. Initial Franchise Fees
under Single Unit Agreements are recognized as revenues when the Company has no
further material obligations in respect of the establishment of such franchise,
which occurs upon the opening of the store.
F-8
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
1. Organization and Summary of Significant Accounting Policies (continued)
(k) Franchise Revenue Recognition --(continued)
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 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 the ongoing single store fees within the Market Area. Under Market
Development Agreements, 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, 1997 and 1996, the Company had
deferred the recognition of $39,795 and $257,549 respectively, of revenues
relating to notes from Market Developers. See notes 3 and 8.
The Company's portion of the Initial Franchise Fee on single unit franchises
sold within a Market Developer's Market Area is recognized as revenues when the
Company has no further material obligations in respect of the establishment of
such franchise, which occurs upon opening of the store. As of October 31, 1997,
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, 1997 of $284,829 consists of
initial non-recurring franchise and market development fees of $62,500 and
$101,884, respectively, and ongoing royalties of $120,445. 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 $62,476.
(l) 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
F-9
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
1. Organization and Summary of Significant Accounting Policies -- (continued)
(l) Net Loss per Share --(continued)
October 31, 1997 and 1996 was adjusted by an increase of $48,385 and $562,678
respectively, representing the increase in the carrying amount of redeemable
preferred stock. (See Note 13). The weighted average number of common shares
outstanding was adjusted by an increase of 430,558 shares for the year ended
October 31, 1996. 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 per share are the same.
(m) Stock Options --
The Company accounted for stock option grants for the fiscal period ended
October 31, 1996 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.
During fiscal year ended October 31, 1997 the Company accounted for stock
options granted to employees under APB Opinion No. 25, and accounted for stock
options granted to non-employees under Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation."
(n) 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.
F-10
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
2. Inventories:
Inventories at October 31, consist of the following:
1997 1996
----------- ----------
Food and paper products $ 105,800 $ 37,774
Equipment and parts 28,010 28,806
----------- ----------
Total inventories
$ 133,810 $ 66,580
=========== ==========
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 and other franchise revenues.
The market developer notes, which are non-interest bearing have been discounted
based on an imputed interest rate of 9%:
1997 1996
------------ -----------
Notes receivable (market developer), paid
by the application of 50% of compensation
due to Market Developer $ 39,795 $ 48,230
Notes receivable (market developer), due in
quarterly installments of $20,000 -- 209,319
Notes receivable, due in monthly
installments of $850, 10% per annum,
60 months (note secured by equipment) 35,745 --
------------ -----------
75,540 257,549
Less current portion 20,441 97,115
------------ -----------
$ 55,099 $160,434
============ ===========
4. Notes Receivable-Officer:
Notes receivable officer of $127,000 are due on demand and bear interest at the
rate of 7% per annum.
5. Fixed Assets:
Fixed assets and accumulated depreciation at October 31, consist of the
following:
<TABLE>
<CAPTION>
Estimated
1997 1996 Useful Lives
------------ --------- -------------
<S> <C> <C> <C>
Machinery and equipment - retail stores $ 1,062,318 $ 495,182 7 years
Office furniture and warehouse equipment 200,851 172,200 7 years
Trucks and delivery vehicle 145,559 31,370 3 to 5 years
Leasehold improvements - retail stores 791,436 243,155 Term of lease
Construction in progress 202,988 228,196
------------ ---------
2,403,152 1,140,103
Accumulated depreciation (377,765) (249,533)
------------ ---------
Fixed assets, net of accumulated
depreciation $ 2,025,387 $ 902,570
============ ==========
</TABLE>
F-11
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
5. Fixed Assets--(continued)
Depreciation expense aggregated $171,794 and $103,944 for the year ended October
31, 1997 and, 1996, respectively. At October 31, 1997 certain debt is secured by
approximately $569,000 of fixed assets.
6. Intangible Assets:
Intangible assets and accumulated amortization at October 31, are as following:
<TABLE>
<CAPTION>
Estimated
1997 1996 Useful Lives
------------ --------- -------------
<S> <C> <C> <C>
Kosher certification $ 165,771 $ 165,771 5 years
Non-compete agreements 266,789 216,789 4 years
Lease acquisition costs 33,572 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
Trademark 75,000 -- 10 years
Goodwill 1,007,463 -- 10 years
------------ ---------
1,844,242 711,779
Accumulated amortization (583,096) (418,460)
------------ ---------
Intangible assets, net of accumulated
amortization $ 1,261,146 $ 293,319
============ =========
</TABLE>
Amortization expense aggregated $164,636 and $147,797 for the year ended October
31, 1997 and 1996, respectively.
7. Notes Payable:
Notes payable at October 31, 1997 bear interest at the rates ranging from 10% to
13% and are due on demand. 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%.
8. 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:
F-12
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
8. Deferred Franchising Revenue--(continued)
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Single store, Initial Franchise Fees received,
stores not yet open $ 20,000 $ 92,500
Market development fees 39,795 257,549
-------- ---------
59,795 350,049
Less current portion 33,505 189,615
-------- ---------
Deferred franchising revenue, long-term $ 26,290 $ 160,434
======== =========
</TABLE>
9. Equipment Lease Obligations:
The Company and its subsidiaries are obligated under various equipment lease
arrangements which have been capitalized in the accompanying financial
statements. Property, plant, and equipment presented on the consolidated balance
sheet includes approximately $569,000 of assets capitalized under these leasing
arrangements. Accumulated depreciation recorded on these assets approximated
$61,000 at October 31, 1997. 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 at various dates through May
2001. The future minimum payments required under the lease arrangements with
their present value at October 31, 1997 are as follows:
Present Interest Minimum
Year Ended October 31, Value Expense Payments
---------------------- -------- ------- --------
1998 $62,710 $12,277 $ 74,987
1999 40,910 4,488 45,398
2000 26,215 1,789 28,004
2001 2,353 125 2,478
-------- ------- --------
$132,188 $18,679 $150,867
======== ======= ========
10. Loans From Stockholders:
Loans from stockholders primarily consist of obligations assumed in the Sammy's
acquisition. These loans are due in monthly installments including interest
expense at annual rates ranging from 5.0% to 16.76%. The loans are payable
through dates ranging from November 1997 through February 1999.
The future minimum payments required under the loans, with their present value
at October 31, 1997, are as follows:
Present Interest Minimum
Year Ended October 31, Value Expense Payments
---------------------- -------- ------- --------
1998 $ 4,757 $ 207 $ 4,964
1999 1,398 14 1,412
-------- ------- --------
$ 6,155 $ 221 $ 6,376
F-13
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
11. Long-term Debt:
Long-term debt at October 31, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Notes payable to bank in monthly installments of $1,234 including
interest at the rate of 10% per annum through July 2001 secured
by a vehicle $ 48,970 --
Notes payable to bank in monthly installments consisting of $300
of principal plus interest at 10% per annum, maturing at
December 1998 secured by equipment and leasehold improvements 122,614 --
Notes payable to bank in monthly installments of $3,000
including interest at the rate of 10% per annum, maturing at
December 2003 secured by equipment and leasehold improvements 148,566 --
Notes payable to bank in monthly installments of $408 including
interest at the rate of 10.08% per annum through June 2000,
secured by a vehicle 11,715 --
Notes payable to bank in monthly installments of $650 including
interest at the rate of 15% per annum through October 2000 26,421 --
Note payable to bank in monthly installments of $405 plus
interest at 1.5% above the prime rate, through February 1997,
secured by equipment -- $1,042
Note payable to individual in monthly installments of $153 including
interest at the rate of 12.5% per annum, payable through April 1997
-- 890
--------- ------
358,286 1,932
Less current portion 58,378 1,932
--------- ------
Long-term debt $299,908 $ --
========= ======
</TABLE>
See Note 18 for the discussion of Convertible Debentures which mature on
September 30, 1999.
12. 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:
1997 1996
-------- ---------
Deferred tax assets
Accounts receivable and other reserves $ 159,000 $ 12,000
Net operating loss carryovers 8,551,000 2,400,000
-------- ---------
8,710,000 2,412,000
Less valuation allowance 7,338,000 2,021,000
-------- ---------
Deferred tax asset, net 1,372,000 391,000
Deferred tax liabilities:
Difference between assigned value and the tax basis
assets and liabilities resulting from the Goldberg's, St. Pete and
Sammy's acquisitions 1,372,000 391,000
---------- --------
Net deferred tax assets (liabilities) $ -- $ --
========== ========
For income tax reporting, the Company has net operating loss carryfowards
available to reduce future federal and state income taxes of approximately
$8,551,000. These loss carryfowards will expire in the years 2004 and 2012,
respectively, for state and federal tax purposes.
F-14
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
13. Redeemable and Non-redeemable Preferred 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.
Series A Shares:
Upon the completion of the Company's initial public offering the Company reached
a settlement with Mr. Goldberg, under which the Company redeemed 115,000 of the
Series A Preferred stock for $25,000, and Mr. Goldberg converted the remainder
of the Preferred stock into 65,000 shares of common stock, and consequently,
there are no Series A Preferred shares outstanding at this time.
Series B Shares:
Upon the completion of the Company's initial public offering, in accordance with
its obligations to the holders of the Series B Preferred Stock during the year
ended December 31, 1997, the Company redeemed 60,000 shares at $5.30 per share,
for a total redemption cost of $318,029.
Twenty four months after completion of the Company's initial public offering,
which date would be December 12, 1998, the Company has the further obligation to
offer to redeem an additional 60,000 shares of the Series B Preferred stock at a
redemption price of $5.00 per share. Upon the receipt of such offer the holders
of the Series B Preferred stock can accept the offer or convert the shares into
an equal number of shares of the common stock of the Company.
At October 31, 1997 the present value of the amount necessary to redeem the
maximum number of shares of Series B Preferred Stock has been reflected in the
accompanying consolidated financial statements as "Redeemable Preferred Stock,
Series B.
F-15
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
13. Redeemable and Non-redeemable Preferred Convertible Preferred
Stock--(continued)
The following presents the previous 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, 1997, and the redemption amounts for the preferred
shares.
Series A Series B
----------------- ------------------
Shares Amount Shares Amount
------ ------ ------ ------
Carrying amount at October 115,000 $24,439 120,000 $538,239
31, 1996 and accretion
for the year then ended
Accretion for year ended
October 31, 1997 561 47,824
Redemption Amount (115,000) (25,000) (60,000) (318,030)
Carrying amount at October ------ ------ ------ ------
31, 1997 -- -- 60,000 $268,033
-------- ------- ------- --------
The maturity schedule of the redemptions is as follows:
Year Ended October 31, Amount
---------------------- ------
1999 $ 300,000
---------
300,000
Less unrecognized accretion 31,967
---------
Carrying amount at October 31, 1997 $ 268,033
=========
The unrecognized accretion will be recorded over the period to anticipated
redemption using the interest method.
Series C Preferred Stock:
The Company also has outstanding 832,934 shares of Series C Non-redeemable
Convertible Preferred stock. The Certificate of Designation for this series
provides that the Company may, at its sole option, redeem all or part of the
stock for $5.00 a share, subject to the holder's election to convert the shares
into an equal number of common shares of the Company. The shares have no
conditions under which the Company must redeem all or portion of theses shares.
As discussed in Note 14, Related Party Transactions, the Company agreed to
redeem 416,997 shares of this stock during the fiscal year ended October 31,
1996. The Company does not intend to redeem any additional shares of
non-redeemable preferred stock.
F-16
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
14. Related Party Transactions:
As described above, during the year ended October 31, 1996 the Company
voluntarily redeemed 416,997 shares of Series C Preferred Stock. Of this total
401,997 shares were redeemed from an affiliate, Blue Chip Computerware, Inc.,
for consideration of $1.00 per share, equivalent to the price Blue Chip paid to
acquire the shares. This was done in connection with the financial
reorganization of Blue Chip. As of October 31, 1997, the Company had loaned
$127,000 to an officer of the Company.
15. Stock Options and Warrants;
The Company accounts for stock options and warrants granted to
employees in accordance with APB #25 and for non-employees in accordance with
FASB #123. As of October 31, 1997, the Company has granted, at the market price
on date of grant, options and warrants to purchase 985,000 shares of the
Company's common stock, consisting of 90,000 options granted to vendors, 35,000
options granted to a Director, 5,000 options granted to a customer, 175,000
options granted to 2 key officers of the Company and 680,000 options/warrants
granted to various consultants and investment bankers.
The options/warrants are exercisable at any time during the period
they are outstanding, the following summarizes the activity during the periods
presented:
Employees Non-employees
-------------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ------------ ---------- --------
Outstanding at October 31,
1995 -0- -0- $40,000 $1.00
Granted during Fiscal Year
Ended 1996 50,000 $2.00 30,000 2.00
------------- ------------ ---------- --------
Outstanding at October 31, 50,000 2.00 70,000 $1.43
1996
Granted during Fiscal Year
Ended 1997 125,000 3.125 740,000 2.16
------------- ------------ ---------- --------
Outstanding at October 31,
1997 175,000 $2.80 810,000 $2.10
------------- ------------ ---------- --------
At October 31, 1997 none of the above option/warrants have been
exercised, forfeited or expired. Pro forma information, pursuant to FAS #123,
giving effect to the fair value of employee and non-employee options/warrants
granted during the fiscal year ended 1997 is not presented as such information
is not materially different from the historical information presented.
16. Supplemental Cash Flow Information:
Year Ended Year Ended
October 31, 1997 October 31, 1996
Interest paid $44,616 $32,648
Income taxes paid -- --
Non-cash investing and financing activities:
Exchange of common stock for capital
assets 1,001,534 410,000
Sale of market area for note -- 209,289
Exchange of common stock for consulting
services 1,614,062 --
F-17
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
17. Commitments and Contingencies
(a) Leases --
The Company rents real and personal property under various non-cancelable leases
expiring at various dates through 2004. 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 $511,000 and $277,000 for the years ended October 31,
1997 and 1996, respectively. These amounts included contingent rental expense of
approximately $7,000 and $21,000, respectively.
Minimum annual rental commitments under leases in effect at October 31, 1997 are
summarized as follows:
Equipment
Year Ended October 31, Real Estate & Other
---------------------- ------------ ---------
1998 $ 466,000 $ 26,000
1999 437,000 1,000
2000 388,000 --
2001 370,000 --
2002 374,000 --
Later years 1,031,000 --
------------ ---------
Total minimum lease payments $3,066,000 $27,000
============ =========
(b) 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
provided for annual salaries through December 31, 1996 and include non-compete
covenants through December 31, 1998. Additionally the former shareholders are
entitled to receive monthly payments equal to 10% of the single unit franchising
fees paid to the Company for the period through September, 1999.
The total compensation expense under these "Sammy's" agreements for the years
ended October 31, 1997 and 1996 was $47,010 and $224,341, respectively, and such
amounts have been reflected as Settlement Costs - Employment Contracts on the
accompanying Statement of Operations.
The Company entered into an employment contract with the former president and
principal shareholder of St. Pete Bagels as part of the Acquisition. Effective
September 19, 1997, the employment contract provides for a first year salary of
$75,000, and $85,000, annually, for the next four years. Additionally, it
provides for compensation of 10% of the franchise fees paid for franchises sold
or renewed within a specified territory and 20% royalties received from
franchised stores.
F-18
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
17. Commitments and Contingencies (continued)
(c) 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.
18. Common Stock:
Initial Public Offering:
As of December 5, 1996, the Company effected a one-for-two reverse split of the
Company's Common Stock, completion of which was a condition to the closing of
the Offering. These financial statements, including the notes thereto, give
effect to this reverse stock split.
On December 17, 1996, the Company completed a public offering of 1,100,000
shares of the Company's common stock for a public offering price of $3.50 per
share yeilding the Company net proceeds of $2,752,000. In January of 1997, the
underwriters of the initial public offering exercised their over-allotment
option by purchasing an additional 165,000 shares at a price yielding net
proceeds to the Company of $483,000.
The Company also sold to the Underwriter, for nominal consideration, warrants to
purchase 110,000 shares of the Company's common stock at an aggregate price.
These warrants have not been exercised and expire in 2001.
Non-cash Stock Issuance:
The Company exchanged common stock for capital assets of $1,001,584 and
consulting services of $1,614,062 during fiscal year ended October 31, 1997.
These transactions resulted in the issuance of 514,800 and 950,000 shares
respectively valued at the current market price at date of issuance. The
accompanying Consolidated Statement of Operations includes approximately
$728,000 of consulting expenses. The remaining $886,000 is included in Prepaid
Expenses on the Consolidated Balance Sheet.
Licensing Arrangement:
In November, 1997, the Company entered into a settlement agreement with a
licensee whereby the company repurchased a retail bagel store for $250,000,
payable in cash or in common stock of the Company. Subsequent to October 31,
1997 the Company has issued 75,000 shares of common stock representing
approximately $50,000 of the consideration. This settlement agreement has been
reflected in the accompanying financial statements at October 31, 1997.
Other:
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.
19. Convertible Debentures:
During July and August 1997, the Company completed the sale of $950,000 of 5%
Convertible Debentures to "Non-U.S. Persons" as defined in Regulation S under
the Securities Act of 1933. The debentures are convertible into shares of the
Company's common stock at a price which is the lesser of a 15% discount of the
five day average closing price of the Company's common stock prior to the date
of funding or a 30% discount of the five day average closing price of the
Company's common stock prior to the date of conversion. The discount for the
beneficial conversion feature has been computed as of the funding dates and is
credited to paid in capital and is charged to operations as interest expense
using the interest method over the 41 day period which represents the first
dates the debentures are convertible. Interest expense in the accompanying
Consolidated Statement of Operations includes $410,143 of discount amortization
for fiscal year ended October 31, 1997. As of October 31, 1997 the $950,000
Debentures have been converted to 1,052,367 shares of common stock.
On September 16, 1997, the Company completed a private placement issue of 6%
Convertible Debentures aggregating $2,600,000 under Regulation D under the
Securities Act of 1933. The Debentures were payable in two tranches. The first
tranche was paid on September 16, 1997. The Debentures are convertible into
shares of the Company's common stock at the option of the Holder at a discount
ranging from 18% to 25% of the market price at the conversion date. The
Debentures provide for an annual interest rate of 6% payable quarterly and
require the Company to file a Form SB-2 Registration Statement for the shares
underlying the Convertible Debenture. Such Registration Statement became
effective on December 12, 1997. The discount for the beneficial conversion
feature that represents an amount that would be incurred if the Debentures were
converted on the date they were funded has been credited to paid in capital and
is charged to operations as Interest Expense. Interest Expense in the
accompanying Consolidated Statement of Operations includes $260,534 for
discounts for fiscal year ended October 31, 1997. The Convertible Debenture
matures on September 30, 1999.
Under the terms of the Debenture, the market price of the Company's common stock
must have exceeded $1.25 per share for 20 out of 30 trading days during a
specified period as a requisite to the funding of the second $1,300,000 tranche.
The Company's common stock did not trade at those levels during the specified
period, and the Company's right to require funding of the second tranche has
thus expired.
F-19
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(continued)
OCTOBER 31, 1997
20. Subsequent Events:
Acquisition:
In December, 1997, the Company purchased four previously operating
retail bagel stores in Toledo, Ohio which the Company intends to reopen as
Company owned stores. The consideration was approximately 300,000 shares of the
Company's common stock. On December 9, 1997 the Company issued 147,971 shares
and on January 30, 1998 the Company authorized the issuance of the remaining
shares.
Capital Transactions:
In December, 1997, the Company sold $300,000 of Series D 8% Convertible
Preferred Stock and 300 Warrants. Each warrant entitles the holder to purchase
350 shares of the Company's common stock. The Debentures are convertible into
shares of the Company's common stock at the option of the holder at a 20%
discount of the average market price for five days prior to the conversion date.
The holder of the Series D Convertible Preferred Stock subsequently elected to
convert $100,000 of this Preferred Stock into 410,810 shares of the Company's
common stock.
In January 1998, the Company sold $275,000 of Series E 12% Convertible
Preferred Stock. The Debentures are convertible into shares of the Company's
common stock at the option of the holder at a 30% discount of the average market
price for five days prior to the conversion date.
In January, 1998 the Company issued 805,753 shares of its common
stock to the holders of the 6% Convertible Debentures, discussed at Note 19,
for conversion of $120,000 of said Note.
In connection with the addition of a gourmet soup business, the Company
issued a total of 375,000 shares of common stock to two unrelated entities in
November, 1997.
In February 1998 the Company issued 320,000 restricted shares of
its common stock to two of its officers for services rendered.
Impairment of assets
Subsequent to October 31, 1997 the Sub-lessor of premises from whom
the Company sub-leased two retail bagel store facilities filed for protection
under Federal Bankruptcy Laws. The Company has subsequently vacated these
premises and anticipates recognizing losses approximating $320,000 in the
first quarter of fiscal year ended October 31, 1998.
NASDAQ maintenance requirements
The Company's stock is currently quoted on the NASDAQ Small Capital
Stock Market. NASDAQ trading criteria require the per share price of a company's
common stock be above $1 per share. Subsequent to October 31, 1997 the price per
share of the Company's common stock has been trading below $1. Presently, the
Company does not meet the $2 million minimum tangible net worth criteria for
continued listing on the NASDAQ. Management of the Company is developing plans
to meet the NASDAQ criteria for continued listing. In the event of a delisting,
the Company will be in default of certain debenture provisions.
F-20
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
April 30, October 31,
------------ -----------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash $71,894 $326,603
Accounts receivable, net of allowances for possible
losses of $12,000 and $12,000 respectively 401,100 284,645
Notes receivable, current portion 49,290 20,441
Notes receivable - officer 127,000 127,000
Inventories 105,406 133,810
Prepaid expenses 854,289 918,775
---------- ----------
Total Current Assets 1,608,979 1,811,274
Property, Plant and Equipment, at cost less accumulated depreciation
and amortization of $417,362 and $377,765 respectively 2,584,132 2,025,387
Intangible Assets, net of accumulated amortization of $639,276 and
$583,096 respectively 904,708 1,261,146
Security Deposits 89,828 90,028
Notes receivable - long-term 56,696 55,099
---------- ----------
Total Assets $5,244,343 $5,242,934
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes payable $76,726 $80,693
Accounts payable and accrued expenses 2,058,676 1,568,659
Capitalized lease obligations - current maturities 48,422 62,710
Loans from stockholders - current maturities 5,850 4,757
Current maturities of long-term debt 174,042 58,378
Deferred franchising revenue, current portion 32,105 33,505
---------- ----------
Total Current Liabilities 2,395,821 1,808,702
Capitalized Lease Obligations 60,514 69,478
Loans from stockholders 5,454 1,398
Long-term debt 191,072 299,908
Convertible debentures 300,000 1,300,000
Deferred franchising revenue 0 26,290
---------- ----------
Total Liabilities 2,952,861 3,505,776
---------- ----------
Commitments and contingencies
Redeemable preferred stock, Series B, 60,000 shares issued and outstanding
Redemption value of $300,000 at April 30, 1998 280,630 268,033
---------- ----------
Stockholders' Equity (Deficit):
Non-redeemable convertible preferred stock, no par value, Series A,
190,000 shares authorized, 10,000 issued and outstanding, Series B,
180,000 shares authorized 60,000 shares issued and outstanding,
Series C, 1,600,000 shares authorized 832,934 issued and outstanding,
Series E, 275 authorized, 275 and 0 shares issued and outstanding,
respectively, Series F, 5,000 shares authorized 5,000 and 0 shares
issued and outstanding, respectively, Series G, 10,000 shares
authorized, 10,000 and 0 issued and outstanding, respectively 1,404,874 322,470
Common stock, no par value, 20,000,000 shares authorized,
2,390,806 and 599,940 shares issued and outstanding respectively 12,455,397 11,130,669
Accumulated deficit (11,849,419) (9,984,014)
---------- ----------
2,010,852 1,469,125
---------- ----------
Total Liabilities and Stockholders' Equity (Deficit) $5,244,343 $5,242,934
========== ==========
</TABLE>
The Accompanying Notes to Consolidated
Financial Statements are an integral part of these financial statements.
-3-
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Store sales $460,661 $381,789 $1,069,376 $720,179
Franchising revenue 33,539 70,581 74,447 399,401
Equipment and product sales 437,447 185,050 631,119 356,443
------------- ------------- ------------ ------------
931,647 637,420 1,774,942 1,476,023
------------- ------------- ------------ ------------
Operating expenses:
Cost of Sales - equipment and
product costs and store operations,
exclusive of depreciation and amortization 714,608 427,170 1,382,760 850,887
Cost of Sales - franchising activities,
exclusive of depreciation and amortization 0 0 436,490 190,473
Selling, general and administrative expenses 678,673 814,964 1,328,161 1,589,413
Loss on disposal of equipment (3,939) 0 245,120 0
Depreciation and amortization 56,139 79,922 162,575 148,941
Settlement Costs - Employment Contracts 0 0 0 47,010
------------- ------------- ------------ -------------
1,445,481 1,322,056 3,555,106 2,826,724
------------- ------------- ------------ -------------
Operating loss (513,834) (684,636) (1,780,164) (1,350,701)
Interest expense 19,865 7,911 85,241 18,252
------------- ------------- ------------ ------------
Net loss ($533,699) ($692,547) ($1,865,405) ($1,368,953)
============= ============= ============ =============
Adjusted net loss for net loss per common
share calculation:
Net loss ($533,699) ($692,547) ($1,865,405) ($1,368,953)
Increase in carrying amount of redeemable
preferred stock (6,448) (19,072) (12,596) (31,981)
------------- ------------- ------------ ------------
Net loss attributable to common stock ($540,147) ($711,619) ($1,878,001) ($1,400,934)
============= ============= ============ ============
Shares outstanding:
Weighted average number of common shares
outstanding 1,581,798 321,002 1,495,373 285,863
Adjusted shares outstanding 1,581,798 321,002 1,495,373 285,863
============= ============= ============ ============
Net loss per common share ($0.34) ($2.22) ($1.26) ($4.90)
============= ============= ============ ============
</TABLE>
The Accompanying Notes to Consolidated Financial Statements
are an integral part of these financial statements.
-4-
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
April 30,
----------------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ($1,865,405) ($1,368,953)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 162,575 148,941
Decrease (increase) in:
Accounts receivable (116,455) (166,133)
Inventories 28,404 (32,440)
Notes receivable (30,446) (97,000)
Prepaid expenses 64,486 153,829
Security deposits 200 (59,012)
Increase (decrease) in:
Accounts payable and accrued expenses 490,017 (375,164)
Deferred franchising revenue (27,690) (92,500)
----------------- -----------------
Total adjustments 571,091 (519,479)
----------------- -----------------
Net cash (used in) operating activities (1,294,314) (1,888,432)
----------------- -----------------
Cash Flows from Investing Activities:
Capital expenditures (598,342) (140,676)
Business acquired, net of cash received (453,943) (62,349)
----------------- -----------------
Net cash (used in) investing activities (1,052,285) (203,025)
----------------- -----------------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 1,324,728 3,235,337
Proceeds from issuance of preferred stock 1,082,404 0
Redemption of preferred stock (300,000) (338,513)
Payments of notes payable (3,967) (194,899)
Payments of capitalized lease obligations (23,252) (53,214)
Payments of loans from stockholders 5,149 (11,709)
Payments of current maturities of long-term debt 6,828 (9,299)
----------------- -----------------
Net cash provided by financing activities 2,091,890 2,627,703
----------------- -----------------
Net increase in cash (254,709) 536,246
Cash - beginning of period 326,603 84,302
----------------- -----------------
Cash - end of period $71,894 $620,548
================= =================
</TABLE>
The Accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements.
-5-
<PAGE>
ALL AMERICAN FOOD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED APRIL 30, 1998
(Unuadited)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
----------------------- ---------------------- Accumulated
Shares Amount Shares Amount Deficit Total
--------- ----------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1997: 599,940 $11,130,669 902,934 $322,470 ($9,984,014) $1,469,125
Common stock issuance for services 294,833 473,786 $473,786
Conversion of convertible debentures
to common stock 307,069 180,000 $180,000
Common stock issuance - acquisition
of business 29,594 295,942 295,942
Conversion of preferred stock to common
stock 996,870 300,000 (300) (300,000) 0
Preferred stock issuance 15,575 1,395,000 $1,395,000
Increase in carrying amount of redeemable
preferred stock -- (12,596) (12,596)
Exercise of warrants to purchase common
stock 162,500 75,000 $75,000
Net Loss (1,865,405) (1,865,405)
--------- ----------- --------- ---------- ------------ ------------
Balance at April 30, 1998 2,390,806 $12,455,397 918,209 $1,404,874 ($11,849,419) $2,010,852
========= =========== ========= ========== ============= ============
</TABLE>
The Accompanying Notes to Consolidated Financial
Statements are an integral part of these financial statements.
-6-
<PAGE>
ALL AMERICAN FOOD GROUP, INC. & AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The Company was formed in September 1993 under the name Jutland
Food Group, Inc., for the purpose of establishing a chain of franchised bagel
stores. In October 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. 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," The
acquisition consisted of three certified kosher retail bagel stores and a bagel
production facility, all operating under rabbinical supervision. 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.
Effective September 23, 1997 the Company acquired four operating stores, a bagel
production facility, and 2 franchised stores operating under the name"St. Pete
Bagel Company".
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, 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 New York Bagels" and "Sammy's New York
Bagels."
The Company has recently developed a line of gourmet soups, for sale
in its own and franchised bagels stores, as well as forming the basis of a
separate retail concept for expansion through licensing and franchising. Sold
under the name "SoupChef", the soup is manufactured for the Company under a
supplier contract, and will provide the Company with an additional revenue
source beginning in September of 1998.
(2) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by All
American Food Group, Inc. (the "Company") and are unaudited. The financial
statements have been prepared in accordance with the instructions for Form
10-QSB and, therefore do not necessarily include all information and footnotes
required by generally accepted accounting principles. In the opinion of the
Company, all adjustments (all of which were of a normal recurring nature)
necessary to present fairly the Company's financial position, results of
operations and cash flows as of April 30, 1998 and for all periods presented
have been made. A description of the Company's accounting policies and other
financial information is included in its October 31, 1997 audited financial
statements filed on Form 10-KSB. The consolidated results of operations for the
quarter and six month periods ended April 30, 1998 are not necessarily
indicative of the results expected for the full year.
All historical share and per share data have been adjusted to reflect the
1:10 reverse split completed by the Company on 2/24/97.
- 7 -
<PAGE>
ALL AMERICAN FOOD GROUP, INC. & AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) NET LOSS PER COMMON SHARE
Net loss per common share was determined by dividing net loss, as
adjusted, by the weighted average number of common shares outstanding,. The net
loss for each period ended April 30, 1998 was adjusted by the increase in the
carrying amount of redeemable preferred stock.
(4) CAPITAL TRANSACTIONS
A. PREFERRED STOCK
On March 30, 1998 the Company sold 10,000 shares of its Series G
Preferred stock for total consideration of $100,000. The preferred stock is
convertible into common stock at a 25% discount to the market price, and the
Company is obligated to file a registration statement to register underlying
shares. As of the date of this report none of these shares have been converted
into common stock, and the registration statement has not been filed by
the Company.
On February 25, 1998 the Company issued 5,000 shares of its Series F
Preferred stock in an exchange for $500,000 its outstanding Convertible
Debentures, originally issued in September of 1998 for total consideration of
$500,000. Conversion terms of the Series F Preferred stock are the same as the
Debenture, and the Company is required to include the underlying shares in its
registration statement filing.
B. ISSUANCE OF COMMON STOCK
On February 24 and March 6, 1998 the Company issued a total of 147,403
common shares upon the conversion of its Series D Preferred Stock.
On March 18, 1998 the Company issued a total of 220,690 shares of its
common stock in partial conversion of its $1.3 million issue of Convertible
Debentures.
On March 6, the Company issued 100,000 shares of common stock upon the
exercise of warrants to purchase the stock at $.50, and 62,500 shares upon the
exercise of warrants to purchase the stock at $.35. These transactions produced
total consideration to the Company of $75,000.
On April 2, 1998 the Company issued 93,000 shares to various vendors
and employees of the Company as compensation for services rendered.
On April 27, 1998 the Company issued a total of 249,333 registered
shares and an additional 285,000 shares of Restricted stock, in connection
with the hiring of a public relations firm rendering services to the Company
under a consulting agreement relating to increasing the Company's visibility
in the financial community.
- 8 -
<PAGE>
(5) SUBSEQUENT EVENTS
A. On May 4, 1998 the holder of the Company's Series E Preferred Stock,
originally issued on January 11, 1998, converted the preferred shares into
809,286 shares of common stock, which stock is to be included in the Company's
registration statement.
B. Between May 11, 1998 and June 3, 1998 the Company sold a total of
$300,000 of its Convertible Debentures, of which $125,000 was immediately
converted into 197,638 shares of common stock.
- 9 -
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy, by
any person in any jurisdiction in which it is unlawful for such person to make
such offer or solicitation. Neither the delivery of this Prospectus nor any
offer, solicitation or sale made hereunder shall, under any circumstances
create any implication that the information herein is correct as of any time
subsequent to the date of the Prospectus.
- ---------------
TABLE OF CONTENTS
Page
Prospectus Summary................................................. 3
Risk Factors....................................................... 6
Dilution...........................................................
Use of Proceeds.................................................... 12
Capitalization..................................................... 13
Dividend Policy.................................................... 14
Selected Financial Data............................................
Management's Discussion and Analysis
or Plan of Operation............................................. 14
Business........................................................... 18
Management......................................................... 33
Certain Transactions............................................... 37
Principal Shareholders............................................. 37
Description of Securities.......................................... 38
Shares Eligible for Future Sale.................................... 40
Legal Matters...................................................... 40
Experts............................................................ 40
Additional Information............................................. 40
Index to Financial Statements...................................... F-1
- ---------------
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14A:3-5 of the New Jersey Business Corporation Act (the "NJBCA")
gives the Company power to indemnify each of its directors and officers
against expenses and liabilities in connection with any proceedings involving
him by reason of his being or having been a director or officer if (a) he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Company and (b) with respect to any
criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. However, in a proceeding by or in the right of the Company, there
shall be no indemnification in respect of any liabilities or expenses if the
officer or director shall have been adjudged liable to the Company unless the
court in such proceeding determines he is entitled to indemnification for such
liabilities and/or expenses. Furthermore, no indemnification shall be made to
or on behalf of a director or officer if a judgment or other final
adjudication adverse to such director or officer establishes that his acts or
omissions (a) were in breach of his duty of loyalty to the Company and its
stockholders, (b) were not in good faith or involved a knowing violation of
law or (c) resulted in receipt by the director or officer of an improper
personal benefit. The NJBCA defines an act or omission in breach of a person's
duty of loyalty as an act or omission which that person knows or believes to
be contrary to the best interests of the Company or its stockholders in
connection with a matter in which he has a material conflict of interest. If a
director or officer is successful in a proceeding, the statute mandates that
the Company indemnify him against expenses.
The Company's Restated Certificate of Incorporation, as permitted by New
Jersey law, eliminates the personal liability of the directors and officers to
the Company or its shareholders for monetary damages for breaches of such
director's or officer's duty of care or other duties as a director or officer;
except liabilities for any breach of duty based upon an act or omission (a) in
breach of such person's duty of loyalty to the corporation or its
shareholders, (b) not in good faith or involving a knowing violation of law or
(c) resulting in receipt by such person of an improper personal benefit. This
limitation on liability could have the effect of limiting directors' and
officers' liability for violations of the federal securities laws. In
addition, the Company's Restated Certificate of Incorporation and Restated
By-Laws provide broad indemnification rights to directors and officers so long
as the director or officer acted in a manner believed in good faith to be in
or not opposed to the best interest of the Company and with respect to
criminal proceedings if the director had no reasonable cause to believe his or
her conduct was unlawful. The Company believes that the protection provided by
these provisions will help the Company attract and retain qualified
individuals to service as officers and directors. These provisions would
provide indemnification for liabilities arising under the federal securities
laws to the extent that such indemnification is found to be enforceable under,
and to be in accordance with, applicable law and generally will limit the
remedies available to a shareholder who is dissatisfied with a Board decision
protected by these provisions, and such shareholder's only remedy may be to
bring a suit to prevent the Board's action.
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses payable by the Company in
connection with the issuance and distribution of the securities being
registered hereunder, other than underwriting discounts and commissions.
Except for the SEC registration fee, all amounts are estimates.
SEC Registration Fee $ 148
Printing and Engraving Expenses 5,500
Legal Fees and Expenses 25,000
II-1
<PAGE>
Accounting Fees and Expenses 2,500
Registrar and Transfer Agent Fees and Expenses 1,000
Miscellaneous Expenses 5,852
Total $40,000
All of the costs identified above will be paid by the Company.
Item 26. Recent Sales of Unregistered Securities.
The following sets forth certain information regarding sales of, and
other transactions with respect to, securities of the Company issued within
the past three years, which sales and other transactions were not registered
pursuant to the Securities Act of 1933, as amended (the "Securities Act"). All
of such sales and transactions were exempt from the registration requirements
of the Securities Act pursuant to Section 4(2) thereof or as otherwise
indicated herein.
In September 1994 and October 1995, the Company issued 120,000 and 70,000
shares, respectively, of Series A Partially Redeemable Convertible Preferred
Stock to Howard Goldberg in connection with the Company's acquisition of the
assets of the Goldberg Companies and as part of the reconciliation of all
outstanding indebtedness and other obligations incurred in connection
therewith.
During the nine months ended October 31, 1995, Blue Chip purchased 425,000
shares of Series C Convertible Preferred Stock at a price of $1.00 per share.
During the three-month period ended January 31, 1996, Blue Chip Computerware,
Inc. purchased an additional 50,000 shares of Series C Convertible Preferred
Stock at the price of $1.00 per share.
On August 4 and December 4, 1995, the Company sold 21,500 and 25,000
shares, respectively, of Series C Preferred Stock to an unaffiliated investor
at a price of $1.00 per share.
On October 31, 1995, the Company issued 2,500 shares of Common Stock to an
employee in lieu of compensation in the amount of $1,750.
On December 4, 1995, the Company sold 25,000 shares of Series C Preferred
Stock to an unaffiliated investor at a price of $1.00 per share.
Between January 24, 1996 and April 29, 1996, the Company sold an aggregate
of 886,951 shares of Common Stock in two separate private placements at a
purchase price of either $2.00 or $4.00 per share. In connection with the
private placements, the Company has received $2,414,000 (net of expenses of
$48,000) including cash and other consideration valued at $410,000 which was
accepted in the form of two retail bagel stores in the final stages of
construction.
Pursuant to an agreement to which the Company and the principal
shareholders of the corporation (the "Bleecker Corporation") that owned the
Goldberg's store on Bleecker Street in New York, New York were parties, and an
agreement between the Company and the corporation (the "Nanuet Corporation")
that owned the Goldberg's store in Nanuet, New York, the Company initially
agreed to issue a total of 60,000 shares of its Common Stock to such principal
shareholders of the Bleecker Corporation and a total of 42,501 shares of its
Common Stock to the Nanuet Corporation. At the request of these holders, stock
certificates representing an aggregate of 102,501 shares were issued to the
shareholders in the Bleecker Corporation and/or the Nanuet Corporation.
In April 1997, the Company issued 10,000 shares of common stock to Terry
Schiffern in exchange for certain office furniture.
II-2
<PAGE>
In April 1997, the Company issued 12,500 shares of common stock to Gary
Lengel and 12,500 shares of common stock to Jack Lengel in connection with the
Company's purchase of the Connecticut-based retail bagel store chain known as
The Bagel Connection.
In July-August 1997 the Company sold $950,000 of convertible debentures to
"non-U.S. persons" as defined in Regulation S. The debentures are due in July
2000, bear interest at the rate of 5% and are payable at the Company's option
in cash or common stock. The debentures were convertible into shares of the
Company's common stock at a price which is the lesser of a 15% discount of the
five day average closing price of the Company's common stock prior to the date
of funding or a 30% discount of the five day average closing price of the
Company's common stock prior to the date of conversion.
In September, 1997, the Company completed a private placement of an issue
of 6% Convertible Debentures in the total amount of $2,600,000, payable in two
tranches. The first tranche of $1,300,000 was paid on September 16, 1997. The
terms of the Convertible Debentures provide for an annual interest rate of 6%
payable quarterly, provide for conversion into shares of common stock at the
option of the holder at a 25% discount to the five day average closing price of
the Company's Common Stock prior to the date of conversion.
In September 1997, the Company issued 191,823 shares of common stock to
Kurt Cuccaro and Mary Cuccaro, as tenants by the entireties, 239,900 shares of
its common stock to Kurt Cuccaro individually, and 48,077 shares of its common
stock to Cindy Richmond in connection with the Company's acquisition of the
Tampa, Florida-based retail bagel store chain known as St. Pete's Bagels.
In February 1998, the Company issued 5,000 shares of Series F Preferred
Stock in exchange for $500,000 principal amount of its 6% Convertible
Debentures. The Preferred Stock is convertible into Common Stock at a 25%
discount to the five day average closing price of the Common Stock prior to
conversion.
In March 1998, the Company issued 10,000 shares of Series G Preferred Stock
in a private placement with two accredited non-U.S. investors. The Preferred
Stock is convertible into Common Stock at a 35% discount to the five day average
closing price of the Common Stock prior to the date of conversion.
In May 1998, the Company issued 25,000 shares of Series H Preferred Stock in
a private placement with two accredited non-U.S. investors. The Preferred Stock
is convertible into Common Stock at a 25% discount to the five day average
closing price of the Common Stock prior to the date of conversion.
Item 27. Exhibits.
The following exhibits are filed as part of this Registration Statement:
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 (incorporated
herein by reference to Exhibit 3.3 of the Company's Annual Report on Form
10-KSB for the fiscal year ended October 31, 1996 (the "Form 10-KSB Report").
4.1 Certificate of Designation for Class F Preferred Stock *
4.2 Certificate of Designation for Class G Preferred Stock
(incorporated by reference to Schedule I of Exhibit 10.13 filed
herewith).
4.3 Certificate of Designation for Class H Preferred Stock
(incorporated by reference to Schedule I of Exhibit 10.14 filed
herewith).
4.4 Form of Warrant *
5.1 Opinion of Counsel re: legality of securities being registered.
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
II-3
<PAGE>
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 (incorporated herein by reference
to Exhibit 10.10 of the Company's Form 10-KSB Report).
10.11 Abstract of lease entered into by the Company in December 1996
(incorporated herein by reference to Exhibit 10.11 of the Company's Form
10-KSB Report).
10.12 Agreement and Plan of Merger, dated September 19, 1997, between
All American Food Group, Inc,. St. Pete Bagels Acquisition Corp., Sam & Son,
Inc., Bagel Man, Inc. and St. Pete Bagel Co., Inc. (incorporated herein by
reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated
October 7, 1997).
10.13 Form of Subscription Agreement (Class G Preferred Stock) *
10.14 Form of Subscription Agreement (Class H Preferred Stock) *
21.1 Subsidiaries of the Company (incorporated by reference to exhibit
21.1 of the Company's Form 10K- SB Report).
23.1 Consent of DelSanto & DeFreitas (**).
23.2 Consent of Counsel (**)
27.1 Financial Data Schedule. *
- ----------
* Filed herewith.
** To be filed by amendment.
Item 28. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sales securities, a
post-effective amendment to this Registration Statement to;
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement;
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Act, to treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission (the
"Commission") such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable.
The undersigned registrant hereby undertakes:
II-4
<PAGE>
(1) For determining any liability under the Act, to treat the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in the form of prospectus
filed by the registrant under Rule 424(b)(1), or (4), or 497(h) under the Act
as part of this Registration Statement as of the time the Commission declared
it effective.
(2) For determining any liability under the Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and the offering of the securities at that time as the initial bona
fide offering of those securities.
II- 5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form SB-2 and has duly caused this amendment no. 6
to the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized in Fairfield, New Jersey, on this 25th day of
August, 1998.
ALL AMERICAN FOOD GROUP, INC.
By: /s/ Andrew Thorburn
------------------------------
Andrew Thorburn
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ANDREW THORBURN Chairman of the Board, August 25, 1998
-------------------- Directors, President and
Andrew Thorburn Chief Executive Officer
/s/ ROBERT BAGNELL Chief Financial Officer August 25, 1998
-------------------- and Director
Robert Bagnell
/s/ MICHAEL VIZZIELLO Vice President and Director August 25, 1998
--------------------
Michael Vizziello
/s/ TOM LISKER Director August 25, 1998
--------------------
Tom Lisker
II-6
</TABLE>
<PAGE>
ALL AMERICAN FOOD GROUP, INC.
RESOLUTION ESTABLISHING RIGHTS AND
PREFERENCES FOR CLASS F CONVERTIBLE PREFERRED STOCK
RESOLVED, that there shall be a series of shares of the Corporation
designated "Class F Convertible Preferred Stock"; that the number of shares of
such series shall be 6,500 and that the rights and preferences of such series
(the "6% Preferred") and the limitations or restrictions thereon, shall be as
set forth herein;
The following shall be adopted and incorporated by reference into the
foregoing resolutions as if fully set forth therein:
1. Dividends.
(a) The holders of the 6% Preferred shall be entitled to
receive out of any assets legally available therefor cumulative dividends at
the rate of $12 per share per annum, accrued daily and payable quarterly in
arrears on March 31, June 30, September 30 and December 31 of each year in
preference and priority to any payment of any dividend on the Common Stock.
Such dividends shall accrue on any given share from the day of original
issuance of such share and shall accrue from day to day whether or not earned
or declared. If at any time dividends on the outstanding 6% Preferred at the
rate set forth above shall not have been paid or declared and set apart for
payment with respect to all preceding periods, the amount of the deficiency
shall be fully paid or declared and set apart for payment, but without
interest, before any distribution, whether by way of dividend or otherwise,
shall be declared or paid upon or set apart for the Common Stock of the
Corporation.
(b) Any dividend payable on a dividend payment date may be
paid, at the option of the Corporation, either (i) in cash or (ii) in shares of
Common Stock, if the Common Stock issuable upon conversion of such shares has
been registered for resale under the Securities Act of 1933, as amended (the
"Act"), and the registration statement including a current prospectus with
respect thereto remains in effect at the date of delivery of such shares or an
exemption from such registration is available under Regulation S of the Act.
2. Liquidation Preference; Redemption.
(a) In the event of any liquidation, dissolution or winding
up of the Corporation, either voluntary or involuntary, the holders of the 6%
Preferred shall be entitled to receive, prior and in preference to any
distribution of any assets of the Corporation to the holders of the Common
Stock, the amount of $100.00 per share plus any and all accrued but unpaid
dividends (the "Liquidation Preference").
(b) A consolidation or merger of the Corporation with or into
any other corporation or corporations, or a sale of all or substantially all of
the assets of the Corporation (other than a sale or transfer to a wholly owned
subsidiary of the Corporation), shall, at the option of the holders of the 6%
Preferred, be deemed a liquidation, dissolution or winding up within the
meaning of this Section 2 if the shares of stock of the Corporation outstanding
immediately prior to such transaction represent immediately after such
transaction less than a majority of the voting power of the surviving
corporation (or of the acquirer of the Corporation's assets in the case of a
sale of assets). Such option may be exercised by the vote or written consent of
holders of a majority of the 6% Preferred at any time within thirty (30) days
after written notice (which shall be given promptly) of the essential terms of
such transaction shall have been given to the holders of the 6% Preferred in
the manner provided by law for the giving of notice of meetings of
shareholders.
(c) The Corporation, at its option, may cause all outstanding
shares of the 6% Preferred to be redeemed at any time beginning two (2) years
after the Closing Date, provided the Corporation has given notice of its
intention to redeem to the holders of the 6% Preferred at least twenty (20)
days prior to the redemption date. On
<PAGE>
the redemption date, the Corporation shall pay such holders by cashier's check
or wire transfer in immediately available funds the amount of $100 per share,
plus all accrued but unpaid dividends and any amounts due under Section 1
hereof. Promptly thereafter, the holders shall surrender the certificate or
certificates representing the 6% Preferred, duly endorsed, at the office of the
Corporation or of any transfer agent for such shares, or at such other place
designated by the Corporation.
3. 6% Preferred - Optional Conversion. The holders of the 6%
Preferred shall have optional conversion rights as follows:
(a) Right to Convert. Shares of 6% Preferred shall be
convertible, at the option of the holder thereof, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing (x)
the Liquidation Preference of the 6% Preferred determined pursuant to Section 2
hereof on the date the notice of conversion is given, by (y) the Conversion
Price determined as hereinafter provided in effect on the applicable conversion
date.
(b) Mechanics of Conversion. To convert shares of 6%
Preferred into shares of Common Stock under Section 3(a), the holder shall give
written notice to the Corporation (which notice may be given by facsimile
transmission) that such holder elects (with the right to revoke) to convert the
shares and shall state therein date of the conversion, the number of shares to
be converted and the name or names in which such holder wishes the certificate
or certificates for shares of Common Stock to be issued. Promptly thereafter,
the holder shall surrender the certificate or certificates representing the
shares to be converted, duly endorsed, at the office of the Corporation or of
any transfer agent for such shares, or at such other place designated by the
Corporation; provided, that the holder shall not be required to deliver the
certificates representing such shares if the holder is waiting to receive all
or part of such certificates from the Corporation. The Corporation shall
immediately issue and deliver to or upon the order of such holder, against
delivery of the certificates representing the shares which have been converted,
a certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled. The Corporation shall cause such issuance to be
effected within five (5) business days and shall transmit the certificates by
messenger or overnight delivery service to reach the address designated by such
holder within five (5) business days after the receipt of such notice. The
notice of conversion may be given by a holder at any time during the day up to
5:00 p.m. South Plainfield, New Jersey time and such conversion shall be deemed
to have been made immediately prior to the close of business on the date such
notice of conversion is given. The person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock at the
close of business on such date.
(c) The Company understands that a delay in the issuance of
the Shares of Common Stock beyond the Delivery Date could result in economic
loss to the Buyer. As compensation to the Buyer for such loss, the Company
agrees to pay late payments to the Buyer for late issuance of Shares upon
Conversion in accordance with the following schedule (where "No. Business Days
Late" is defined as the number of business days beyond five (5) business days
from Delivery Date:
Liquidated Damages per
No. Business Days Late $10,000 of 6% Preferred
---------------------- -----------------------
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
10 $1,000 +$200 for each Business
Day Late beyond 10 days
<PAGE>
The Company shall pay any payments incurred under this Section in immediately
available funds upon demand. Furthermore, in addition to any other remedies
which may be available to the Buyer, in the event that the Company fails for
any reason to effect delivery of such shares of Common Stock within five
business days after the Delivery Date, the Buyer will be entitled to revoke the
relevant Notice of Conversion by delivering a notice to such effect to the
Company whereupon the Company and the Buyer shall each be restored to their
respective positions immediately prior to delivery of such Notice of
Conversion.
(d) Delivery of Common Stock Upon Conversion. Upon receipt of
a Notice of Conversion, the Company shall, no later than the later of the (a)
third business day following the Conversion Date, and (b) the date of such
receipt (the "Delivery Period"), issue and deliver to the Buyer (x) that number
of shares of Common Stock issuable upon conversion of that portion of Preferred
Stock being converted. In lieu of delivering physical certificates representing
the Common Stock issuable upon conversion, provided the Company's transfer
agent is participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer program, upon request of the Buyer and its compliance with
the provisions contained in this paragraph, so long as the certificates
therefor do not bear a legend and the Buyer thereof is not obligated to return
such certificate for the placement of a legend thereon, the Company shall use
its best efforts to cause its transfer agent to electronically transmit the
Common Stock issuable upon conversion to the Buyer by crediting the account of
Buyer's Prime Broker with DTC through its Deposit Withdrawal Agent Commission
system.
(e) Determination of Conversion Price.
(i) The "Conversion Price" shall be equal to
the lower of: (a) seventy percent (70%) of the average of the closing bid
prices of the Common Stock as reported by NASDAQ during the five (5)
consecutive trading days preceding the conversion date (but not including such
date); (b) seventy percent (70%) of the average of the closing bid prices of
the Common Stock for the five (5) consecutive trading days prior to the Closing
Date; or (c) seventy percent (70%) of the closing bid price of the Common Stock
on the trading day immediately preceding the conversion date.
(ii) The "closing bid price" of the Common Stock
on a trading day shall be the closing bid price of the Common Stock on
NASDAQ or any other principal securities price quotation system or market on
which prices of the Common Stock are reported. The term "trading day" means a
day on which trading is reported on the principal quotation system or market on
which prices of the Common Stock are reported.
(iii) If, during the period of consecutive trading
days provided for above, the Corporation shall declare or pay any dividend
on the Common Stock payable in Common Stock or in rights to acquire Common
Stock, or shall effect a stock split or reverse stock split, or a combination,
consolidation or reclassification of the Common Stock, the Conversion Price
shall be proportionately decreased or increased, as appropriate, to give effect
to such event.
(f) Distributions. If the Corporation shall at any time or
from time to time make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other distribution
payable in securities of the Corporation or any of its subsidiaries other than
additional shares of Common Stock, then in each such event provision shall be
made so that the holders of 6% Preferred shall receive, upon the conversion
thereof, the securities of the Corporation which they would have received had
they been the owners on the date of such event of the number of shares of
Common Stock issuable to them upon conversion.
(g) Certificates as to Adjustments. Upon the occurrence of
any adjustment or readjustment of the Conversion Price pursuant to this Section
3, the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and cause the independent
public accountants regularly employed to audit the financial statements of the
Corporation to verify such computation and prepare and furnish to each holder
of 6% Preferred a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is
based. The Corporation shall, upon the reasonable written request at any time
of any holder of 6% Preferred, furnish or cause to be furnished to such holder
a like certificate prepared by the Corporation setting forth (i) such
adjustments and readjustments, and (ii) the number of other securities and the
amount, if any, of other property which at the time would be received upon the
conversion of 6% Preferred with respect to each share of Common Stock received
upon such conversion.
<PAGE>
(h) Notice of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any security or
right convertible into or entitling the holder thereof to receive additional
shares of Common Stock, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property,
or to receive any other right, the Corporation shall mail to each holder of 6%
Preferred at least ten (10) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution, security or right and the amount and character of
such dividend, distribution, security or right.
(i) Issue Taxes. The Corporation shall pay any and all issue
and other taxes, excluding any income, franchise or similar taxes, that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of shares of 6% Preferred pursuant hereto; provided, however, that
the Corporation shall not be obligated to pay any transfer taxes resulting from
any transfer requested by any holder in connection with any such conversion.
(j) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the 6% Preferred, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the 6% Preferred, and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the 6% Preferred, the
Corporation will take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose, including, without limitation, engaging
in best efforts to obtain any requisite shareholder approval.
(k) Fractional Shares. No fractional shares shall be issued
upon the conversion of any share or shares of 6% Preferred. All shares of
Common Stock (including fractions thereof) issuable upon conversion of more
than one share of 6% Preferred by a holder thereof shall be aggregated for
purposes of determining whether the conversion would result in the issuance of
any fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of a fraction of a share of Common Stock, the
Corporation shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the fair market
value of such fraction on the date of conversion (as determined in good faith
by the Board of Directors of the Corporation or an authorized Committee
thereof).
(l) Notices. Any notice required by the provisions of this
Section to be given to the holders of shares of 6% Preferred shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at its address appearing on the books of the Corporation.
(m) Reorganization or Merger. In case of any reorganization
or any reclassification of the capital stock of the Corporation or any
consolidation or merger of the Corporation with or into any other corporation
or corporations or a sale of all or substantially all of the assets of the
Corporation to any other person (other than a sale or transfer to a wholly
owned subsidiary of the Corporation), and the holders of 6% Preferred do not
elect to treat such transaction as a liquidation, dissolution or winding up as
provided in Section 2 hereof, then, as part of such reorganization,
consolidation, merger or sale, provision shall be made so that each share of 6%
Preferred shall thereafter be convertible into the number of shares of stock or
other securities or property (including cash) to which a holder of the number
of shares of Common Stock deliverable upon conversion of such share of 6%
Preferred would have been entitled upon the record date of (or date of, if no
record date is fixed) such event and, in any case, appropriate adjustment (as
determined by the Board of Directors) shall be made in the application of the
provisions herein set forth with respect to the rights and interests thereafter
of the holders of the 6% Preferred, to the end that the provisions set forth
herein shall thereafter be applicable, as nearly as equivalent as is
practicable, in relation to any shares of stock or the securities or property
(including cash) thereafter deliverable upon the conversion of the shares of 6%
Preferred.
4. Re-issuance of Certificates. In the event of a conversion (or, if
applicable, redemption) of 6% Preferred in which less than all of the shares of
6% Preferred of a particular certificate are converted or redeemed, as the case
may be, the Corporation shall promptly cause to be issued and delivered to the
holder of such certificate, a certificate representing the remaining shares of
6% Preferred which have not been so converted or redeemed.
<PAGE>
5. Other Provisions. For all purposes of this Resolution, the term
"date of issuance" and the terms "Closing" or "Closing Date" shall mean the day
on which Shares are first issued by the Corporation. Any provision herein which
conflicts with or violates any applicable usury law shall be deemed modified to
the extent necessary to avoid such conflict or violation. The term "NASDAQ"
herein refers to the principal market on which the Common Stock of the
Corporation is traded. If the Common Stock is listed on a securities exchange,
or if another market becomes the principal market on which the Common Stock is
traded or through which price quotations for the Common Stock are reported, the
term "NASDAQ" shall be deemed to refer to such exchange or other principal
market.
6. Voting Rights. The 6% Preferred shall have the right to vote on all
matters with the holders of the Common Stock (and not as a separate class) on
an "as converted" basis, based on the number of shares of Common Stock into
which the 6% Preferred are convertible on the record date of any such action.
7. Attorneys' Fees. Any holder of 6% Preferred shall be entitled to
recover from the Corporation the reasonable attorneys' fees and expenses
incurred by such holder in connection with enforcement by such holder of any
obligation of the Corporation hereunder.
8. No Adverse Actions. The Corporation shall not in any manner,
whether by amendment of the Certificate of Incorporation (including, without
limitation, any Certificate of Designation), merger, reorganization,
re-capitalization, consolidation, sales of assets, sale of stock, tender offer,
dissolution or otherwise, take any action, or permit any action to be taken,
solely or primarily for the purpose of increasing the value of any class of
stock of the Corporation if the effect of such action is to reduce the value or
security of the 6% Preferred.
<PAGE>
THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND MAY BE REOFFERED
AND SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM REGISTRATION IS
AVAILABLE.
THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF ARE
SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH HEREIN.
EXERCISABLE AT ANY TIME UNTIL 5:00 P.M., NEW YORK CITY TIME, ON THE
FIFTH ANNIVERSARY OF THE EXPIRATION DATE OR, IF NOT A BUSINESS DAY, THE
IMMEDIATELY FOLLOWING BUSINESS DAY UNLESS EXTENDED PURSUANT TO THIS WARRANT
CERTIFICATE.
No.
ALL AMERICAN FOOD GROUP, INC.WARRANT CERTIFICATE
Warrant Certificate for One Warrant
to Purchase _______ shares of Common Stock
of All American Food Group, Inc.
This Warrant Certificate certifies that, for value received,
_____________________, Inc., or registered assigns (the "Holder"), is the
owner of one Warrant (as defined below), which entitles the Holder to purchase
at any time from and after the date hereof and until 5:00 p.m., New York City
time, on the fifth anniversary of the issue date or, if not a business day,
the immediately following business day, at the purchase price equal to $______
(the "Exercise Price"), up to an aggregate of _______ shares of common stock,
par value $.01 per share (the "Common Stock"), of All American Food Group,
Inc., a New Jersey corporation (the "Company"). The number of shares
purchasable upon exercise of the Warrants and the Exercise Price shall be
subject to adjustment from time to time as herein provided. In this Warrant
Certificate, the right to purchase each share of Common Stock is referred to
as a "Warrant"; the shares of Common Stock or, pursuant to the terms hereof,
other securities, issuable upon exercise of the Warrants are referred to as
the "Warrant Shares."
The Warrants are subject to the following terms, conditions and
provisions:
SECTION 1. Registration; Transferability; Exchange of Warrant
Certificate.
1.1 Registration. The Company shall number and register each Warrant
in a register (the "Warrant Register") maintained at the office of the Company
(the "Office") as they are issued by the Company. The Company shall be
entitled to treat the Holder of any Warrant as the owner in fact thereof for
all purposes and shall not be bound to recognize any equitable or other claim
to or interest in such Warrant on the part of any other person, and shall not
be liable for any registration of transfer of Warrants which are registered or
to be registered in the name of a fiduciary or the nominee of a fiduciary
unless made with the actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration or transfer, or
with knowledge of such facts that its participation therein amounts to bad
faith.
<PAGE>
1.2 Transfer. Subject to compliance with the restrictions on transfer
set forth herein and in Section 3 hereof, the Warrants shall be transferable
only on the Warrant Register maintained at the Office upon delivery thereof
duly endorsed by the Holder or by his, her or its duly authorized attorney or
representative, or accompanied by proper evidence of succession, assignment or
authority to transfer. In all cases of transfer by an attorney, the original
power of attorney, duly approved, or a copy thereof, duly certified, shall be
deposited and remain with the Company. In case of transfer by executors,
administrators, guardians or other legal representatives, duly authenticated
evidence of their authority shall be produced, and may be required to be
deposited and to remain with the Company in its discretion.
1.3 Exchange of Warrant Certificates. Subject to the provisions
herein, each Warrant Certificate may be exchanged for another Warrant
Certificate(s) entitling the Holder to purchase a like aggregate number of
Warrant Shares as this Warrant Certificate then entitles such Holder to
purchase. If the Holder desires to exchange this Warrant Certificate, it shall
make such request in writing and deliver it to the Company, and shall
surrender, properly endorsed, this Warrant Certificate. Thereupon, the Company
shall sign and deliver to the person entitled thereto a new Warrant
Certificate as so requested.
SECTION 2. Terms of Warrants; Exercise of Warrants.
2.1 Terms of Warrants. Subject to the terms of this Warrant
Certificate, each Holder shall have the right, which may be exercised at any
time from the date hereof until 5:00 p.m., New York City time, on the fifth
anniversary of the issue date or, if not a business day, the immediately
following business day (the "Expiration Date") to purchase from the Company
(and the Company shall issue and sell to the Holder of the Warrant) up to an
aggregate of _______ fully paid and nonassessable Warrant Shares or such other
number of Warrant Shares which the Holder may at the time be entitled to
purchase in accordance with this Warrant Certificate. Each Warrant not
exercised prior to 5:00 p.m., New York City time, on the Expiration Date shall
become void, and all rights under this Warrant Certificate shall cease as of
such time.
2.2 Exercise of Warrants. The Warrants evidenced by this Warrant
Certificate may be exercised in whole or in part upon surrender to the
Company, at its Office, of this Warrant Certificate, with the Purchase Form
attached hereto duly completed and signed, and upon payment to the Company of
the Exercise Price for the number of Warrant Shares in respect of which such
Warrants are then exercised. Payment of the aggregate Exercise Price shall be
at the option of the Holder in cash or by bank check payable to the order of
the Company or a combination thereof.
Subject to Section 3 hereof, upon the surrender of this Warrant
Certificate, with the Purchase Form duly executed and payment of the Exercise
Price as aforesaid, the Company shall cause to be issued and delivered with
all reasonable dispatch to or upon the written order of the Holder and in such
name or names as the Holder may designate a certificate(s) for the number of
Warrant Shares so purchased, together, at the option of the Company as
provided in Section 7 hereof, with cash in respect of any fractional Warrant
Shares otherwise issuable upon such surrender. Such certificate(s) shall be
deemed to have been issued as of the date of the surrender of this Warrant
Certificate and
<PAGE>
payment of the Exercise Price, as aforesaid. The rights of purchase
represented by this Warrant Certificate shall be exercisable, at the election
of the Holder, either in full at any time or from time to time in part prior
to the Expiration Date. In the event that the Holder of this Warrant
Certificate shall exercise fewer than all the Warrants evidenced hereby at any
time prior to the Expiration Date, a new Warrant Certificate evidencing the
remaining unexercised Warrant(s) shall be issued.
2.3 Exercise Price. The price per share at which each Warrant Share
shall be purchased upon exercise of each Warrant shall be equal to $______,
subject to adjustment pursuant to Section 6 hereof.
SECTION 3. Payment of Taxes. The Company covenants and agrees that it
will pay when due and payable all documentary, stamp and other taxes, if any,
which may be payable in respect of the issuance or delivery of any Warrant or
of the Warrant Shares purchasable upon the exercise of such Warrants;
provided, however, that the Company shall not be required to pay any tax or
other governmental charge which may be payable in respect of any transfer
involved in the transfer or delivery of any warrant or the issuance or
delivery of certificates for Warrant Shares in a name other than that of the
Holder of such Warrants.
SECTION 4. Mutilated or Missing Warrants. In the event this Warrant
Certificate shall be mutilated, lost, stolen or destroyed, the Company shall
issue and deliver in exchange and substitution for and upon cancellation of
the mutilated Warrant Certificate, or in lieu of and in substitution for the
Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of
like tenor and representing an equivalent right or interest, but only upon, in
the event of a lost, stolen or destroyed certificate, receipt of evidence
satisfactory to the Company of such loss, theft or destruction. An applicant
for such a substitute Warrant Certificate shall also comply with such other
reasonable regulations and pay such other reasonable charges as the Company
may prescribe.
SECTION 5. Reservation and Availability of Warrant Shares; Purchase and
Cancellation of Warrants.
5.1 Reservation of Warrant Shares.
(a) The Company shall at all times reserve and keep
available free from preemptive rights, out of the aggregate of its authorized
but unissued shares of Common Stock, for the purpose of enabling it to satisfy
any obligations to issue the Warrant Shares upon exercise of Warrants, the
full number of Warrant Shares deliverable upon the exercise of all outstanding
Warrants evidenced by this Warrant Certificate. The Company or, if appointed,
the transfer agent for the Common Stock and every subsequent transfer agent
for any shares of the Company's capital stock issuable upon the exercise of
any of the rights of purchase aforesaid (each, a "Transfer Agent") will be
irrevocably authorized and directed at all times to reserve such number of
authorized shares as shall be required for such purpose. The Company will keep
a copy of this Warrant Certificate on file with each Transfer Agent. The
Company will furnish such Transfer Agent a copy of all notices of adjustments
and certificates related thereto which are transmitted to the Holder pursuant
to Section 6 hereof.
<PAGE>
(b) The Company covenants that all Warrant Shares issuable
upon exercise of Warrants will, upon issuance, be fully paid, nonassessable
and free from preemptive rights and free from all taxes, liens, charges, and
security interests with respect to the issuance thereof.
(c) Before taking any action which would cause an adjustment
pursuant to Section 6 reducing the Exercise Price, the Company will take any
and all corporate action which may, in the opinion of its counsel (which may
be counsel employed by the Company), be necessary in order that the Company
may validly and legally issue fully paid and nonassessable Warrant Shares at
the Exercise Price as so adjusted.
5.2 Warrant Shares Record Date. Each person in whose name any stock
certificate for Warrant Shares is issued shall for all purposes be deemed to
have become the holder of record of the Warrant Shares represented thereby on,
and such stock certificate shall be dated the date upon which this Warrant
Certificate was duly surrendered and payment of the Exercise Price (and any
applicable transfer taxes) was made.
5.3 Purchase of Warrants by the Company. The Company shall have the
right, except as limited by law, other agreements or herein, to purchase or
otherwise acquire in negotiated transactions Warrants evidenced hereby at such
times, in such manner and for such consideration as it may deem appropriate.
5.4 Cancellation of Warrants. Any Warrant Certificate surrendered for
exchange, substitution, transfer or exercise in whole or in part shall be
canceled by the Company and retired.
SECTION 6. Adjustment of Number of Warrant Shares and Exercise Price.
The number and kind of securities purchasable upon the exercise of each
Warrant and the Exercise Price shall be subject to adjustment from time to
time upon the happening of certain events as hereinafter described.
6.1 Mandatory Adjustments. The number and kind of securities
purchasable upon the exercise of each Warrant and the Exercise Price shall be
subject to adjustment as follows:
(a) In case the Company shall (i) declare or pay a dividend
on its outstanding Common Stock in shares of Common Stock or make a
distribution to all holders of its outstanding Common Stock in shares of
Common Stock, (ii) subdivide its outstanding shares of Common Stock into a
greater number of shares of Common Stock, (iii) combine its outstanding shares
of Common Stock into a smaller number of shares of Common Stock or (iv) issue
by reclassification of its shares of Common Stock other securities of the
Company (including any such reclassification in connection with a
consolidation, merger or other business combination in which the Company is
the surviving corporation), the number and kind of Warrant Shares purchasable
upon exercise of each Warrant shall be adjusted so that the Holder of each
Warrant upon exercise thereof shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Company that the Holder would
have owned or have been entitled to receive after the happening of any of the
events described above had such Warrant been exercised immediately prior to
the happening of such event or any record date with respect thereto. An
adjustment made pursuant to this paragraph (a) shall become effective on the
date of the dividend payment, subdivision, combination or issuance retroactive
to the record date with respect thereto, if any, for such event. Such
adjustment shall be made successively whenever such an issuance is made.
<PAGE>
(b) No adjustment in the number of Warrant Shares
purchasable hereunder shall be required unless such adjustment would require
an increase or decrease of at least one percent (1%) in the number of Warrant
Shares purchasable upon the exercise of each Warrant; provided, however, that
any adjustments which by reason of this Section 6.1(b) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations shall be made to the nearest one-thousandth of a
share. No adjustment need be made for a change in the par value of the Warrant
Shares.
6.2 Voluntary Adjustment by the Company. The Company may at its
option, at any time during the term of the Warrants, reduce the then current
Exercise Price to any amount deemed appropriate by the Board of Directors of
the Company; provided that if the Company elects so to reduce the then current
Exercise Price, such reduction shall remain in effect for at least a 15-day
period, after which time the Company may, at its option, reinstate the
Exercise Price in effect prior to such reduction.
6.3 Notice of Adjustment. Upon any adjustment of the number of
Warrant Shares purchasable upon the exercise of each Warrant or the Exercise
Price of such Warrant, as herein provided, the Company shall promptly mail
within 10 days thereafter by first class mail, postage prepaid, to each Holder
a notice of such adjustment(s) and a certificate of the Chief Financial
Officer of the Company, accompanied by the report thereon by a firm of
independent public accountants selected by the Board of Directors of the
Company (who may be the regular accountants for the Company), setting forth in
reasonable detail (i) the number of Warrant Shares purchasable upon the
exercise of each Warrant and the Exercise Price of such Warrant after such
adjustment(s), (ii) a brief statement of the facts requiring such
adjustment(s) and (iii) the computation by which such adjustment(s) was made.
6.4 No Adjustment for Dividends. Except as provided in Section 6.1
hereof, no adjustment in respect of any dividends or other payments or
distributions made to holders of securities issuable upon exercise of Warrants
shall be made during the term of a Warrant or upon the exercise of a Warrant.
6.5 Preservation of Purchase Rights Upon Merger, Consolidation, etc.
In case of any consolidation of the Company with or merger of the Company into
another person (whether or not the Company is the surviving corporation), or
in the case of any sale, transfer or lease to another person of all or
substantially all the property of the Company, the Company or such successor
or purchasing person, as the case may be, shall deliver to the Holder an
undertaking that the Holder shall have the right thereafter upon payment of
the Exercise Price in effect immediately prior to such action to purchase upon
exercise of each Warrant the kind and amount of securities, cash and property
which the Holder would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale, transfer or lease had such
Warrant been exercised immediately prior to such action, and if the successor
or purchasing person is not a corporation, such person shall provide
appropriate tax indemnification with respect to such shares and other
securities and property so that, upon exercise of the Warrants, the Holder
thereof would have the same benefits he otherwise would have had if such
successor or purchasing person were a corporation. Such undertaking shall
provide for adjustments, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 6. The provisions
of this Section 6.5 shall similarly apply to successive consolidations,
mergers, sales, transfers or leases.
<PAGE>
6.6 Statement on Warrants. Irrespective of any adjustments in the
number or kind of securities purchasable upon the exercise of the Warrants or
the Exercise Price, any Warrant Certificate theretofore or thereafter issued
may continue to express the same price and number and kind of shares as are
stated in this Warrant Certificate.
SECTION 7. Fractional Interests. The Company shall issue, upon
request of the Holder, fractional Warrant Shares on the exercise of Warrants.
If more than one Warrant shall be presented for exercise in full at the same
time by a Holder, the exercise thereof shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of the Warrants so
presented. If any fraction of a Warrant Share would be issuable on the
exercise of any Warrant (or specified portion thereof), the Company may, in
its sole discretion, issue such fraction of a Warrant Share or pay to the
Holder of the Warrant an amount in cash equal to the then current market price
per share of Common Stock computed as of the trading day immediately preceding
the date the Warrant is presented for exercise, multiplied by such fraction
(but in no event less than an amount equal to such fraction multiplied by the
Exercise Price in effect at such time) or if the Common stock is not then
currently traded such amount as the Board of Directors of the Company shall in
good faith determine.
SECTION 8. Registration Rights.
8.1 General. Unless otherwise agreed, after the 60th day following
the date hereof, the Company shall file a registration statement with the
Securities and Exchange Commission (the "Commission") under the Securities Act
providing for the public sale of all of the Warrant Shares.
8.2 Procedures. The following provisions shall also be applicable to
any such registration statement utilized pursuant to this Section 8:
(i) The registered holders whose shares of Warrant Shares
are to be included in any such registration statement (the "Sellers") shall
furnish the Company with such appropriate information (relating to the
intentions of such holders) in connection therewith as the Company shall
reasonably request in writing. Following the effective date of the
registration statement, the Company shall upon the request of any Seller
forthwith supply such reasonable number of prospectuses meeting the
requirements of the Securities Act as shall be requested by such Seller to
permit such Seller to make a public offering of all the securities of such
Seller included therein. The Company shall use reasonable efforts (i) to keep
such registration statement current until resales of such securities are
permitted pursuant to Rule 144 under the Securities Act (or, if earlier, until
all such securities are sold pursuant to the registration statement); (ii) to
qualify such securities for sale in such states as the Sellers shall
reasonably designate at the cost and expense of the Company provided that no
such qualification shall be required in any jurisdiction where, as a result
thereof, the Company would be subject to service of general process or to
taxation as a foreign corporation doing business in such jurisdiction to which
it is not then subject; and (iii) to qualify such offering, at the cost and
expense of the Company with the National Association of Securities Dealers,
Inc., if applicable.
<PAGE>
(ii) The Company shall indemnify and hold harmless each
Seller and each underwriter, within the meaning of the Securities Act, who may
purchase from or sell for any Seller any Warrant Shares from and against any
and all loss, liability, claim, damage and expense whatsoever (including, but
not limited to, any and all expenses whatsoever reasonably incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever) arising out of any untrue statement or
alleged untrue statement of a material fact contained in the registration
statement or any amendment thereto or any prospectus included therein required
to be filed or furnished by reason of this Section 8, or caused by any
omission or alleged omission to state therein a material fact requiring to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except insofar as
such loss, liability, claim, damage or expense is caused by any such untrue
statement or alleged untrue statement or omission or alleged omission based
upon information furnished in writing to the Company by such Seller or
underwriter expressly for use therein, which indemnification shall include
each person, if any, who controls any such Seller or underwriter within the
meaning of the Securities Act; provided, however, that the indemnity agreement
by the Company set forth in this Section 8 with respect to any such prospectus
which shall be subsequently amended prior to the written confirmation of the
sale of any such Shares, shall not inure to the benefit of any Seller or
underwriter from whom the person asserting any such loss, liability, claim,
damage or expense purchased the Shares which are the subject thereof (or to
the benefit of any person controlling such Seller or underwriter), if such
Seller or underwriter failed to send or give a copy of the prospectus as so
amended to such person at or prior to the written confirmation of the sale of
such Shares to such person and if the amended prospectus did not contain any
untrue statement or alleged untrue statement or omission or alleged omission
giving rise to such loss, liability, claim, damage or expense.
(iii) Such Seller and underwriter shall at the same time
indemnify the Company, their respective directors, each officer signing the
related registration statement and each person, if any, who controls the
Company, within the meaning of the Securities Act, from and against any and
all loss, liability, claim, damage and expense whatsoever (including, but not
limited to, any and all expenses whatsoever reasonably incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever) arising out of any untrue statement of a
material fact contained in any registration statement or any prospectus
required to be filed or furnished by reason of this Section 8 or caused by any
omission or alleged omission to state therein a material fact to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, insofar as such
loss, liability, claim, damage or expense is caused by any untrue statement or
alleged untrue statement or omission or alleged omission based upon
information furnished in writing to the Company by any such seller or
underwriter expressly for use therein.
SECTION 9. No Rights as Stockholders; Notices to Holder. Nothing
contained in this Warrant Certificate shall be construed as conferring upon
the Holder or its transferees the right to vote or to receive dividends
(except as provided in Section 6 hereof) or to consent or to receive notice as
stockholders in respect of any meeting of stockholders of the Company for the
election of the directors of the Company or any other matter, or any rights
whatsoever as stockholders of the Company. If, however, at any time prior to
the expiration of the Warrants and prior to their exercise, any of the
following events shall occur:
<PAGE>
(a) the Company shall declare any dividend payable in cash
or in any securities upon its shares of Common Stock or make any distribution
to the holders of its shares of Common Stock;
(b) the Company shall offer to all holders of its shares of
Common Stock any additional shares of Common Stock or securities convertible
into or exchangeable for shares of Common Stock or any right to subscribe for
or purchase any thereof;
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation, merger, sale, transfer or
lease of all or substantially all of its property, assets and business as an
entirety) shall be proposed; or
(d) any consolidation or merger to which the Company is a
party and for which approval of the holders of Common Stock is required, or of
the conveyance or transfer of the properties and assets of the Company as, or
substantially as, an entirety, or of any reclassification or change of
outstanding shares of Common Stock issuable upon exercise of the Warrants
(other than a change in par value to no par value, or from no par value to par
value) or as a result of a subdivision or combination.
then in any one or more of said events, the Company shall give to the
Holder by registered mail (return receipt requested) at least 20 days prior to
the applicable record date hereinafter specified, a written notice stating (i)
the date as of which the holders of record of shares of Common Stock to be
entitled to receive any such dividends, distributions, rights or warrants are
to be determined or (ii) the date on which any such dissolution, liquidation,
winding up, consolidation, merger, conveyance or transfer is expected to
become effective and the date as of which it is expected that holders of
record of shares of Common Stock shall be entitled to exchange their shares of
Common Stock for securities or other property, if any, deliverable upon such
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation, or winding up. Failure to mail or receive such notice or any
defect therein or in the mailing thereof shall not affect the validity of any
action taken in connection with such dividend, distribution or subscription
rights, or such proposed dissolution, liquidation, winding up, consolidation,
merger, conveyance, transfer or reclassification.
SECTION 10. Identity of Transfer Agent. Forthwith upon the
appointment of any Transfer Agent for the Common Stock, or any other shares of
the Company's capital stock issuable upon the exercise of the Warrants, the
Company shall promptly notify the Holder of the name and address of such
Transfer Agent.
SECTION 11. Notices. Any notice, except as provided in Section 9 of
this Warrant Certificate, or demand authorized by this Warrant Certificate to
be given by the Holder to the Company, shall be in writing and shall be
delivered in person or by facsimile transmission, or mailed by first class
mail, postage prepaid, to the Company, at 104 New Era Drive, South Plainfield,
New Jersey 07080. The Company may change the address to which notices to it
are to be delivered or mailed hereunder by notice to the Holder.
<PAGE>
Any notice pursuant to this Warrant Certificate by the Company to the
Holder shall be in writing and shall be mailed by first class mail, postage
prepaid, or otherwise delivered, to the Holder at its address on the books of
the Warrant Register.
Notices delivered personally shall be effective at the time delivered
by hand, notices sent by mail shall be effective two days after mailing,
notices sent by facsimile transmission shall be effective when receipt is
acknowledged and notices sent by courier guaranteeing next day delivery shall
be effective on the next business day after timely delivery to the courier.
SECTION 12. Supplements and Amendments. This Warrant Certificate may
not be supplemented, amended or otherwise modified without the prior written
consent of the Holder.
SECTION 13. Successors. All the covenants and provisions of this
Warrant Certificate by or for the benefit of the Company shall bind and inure
to the benefit of its respective successors and assigns hereunder.
SECTION 14. Merger or Consolidation of the Company. The Company will
not merge or consolidate with or into, or sell, transfer or lease all or
substantially all of its property to, any other corporation unless the
successor, transferee or lessee corporation, as the case may be (if not the
Company), shall expressly assume that due and punctual performance and
observance of each and every covenant and condition of this Warrant
Certificate to be performed and observed by the Company.
SECTION 15. Applicable Law. This Warrant Certificate and the Warrants
evidenced hereby shall be governed by and construed in accordance with the
laws of the State of New York, without giving effect to principles of conflict
of laws. The Company and the Holder agree to submit to the jurisdiction of the
courts of the State of New York in any action or proceeding arising out of or
relating to this Warrant Certificate and the Warrants evidenced hereby.
SECTION 16. Benefits of this Warrant Certificate. Nothing in this
Warrant Certificate shall be construed to give to any person or entity other
than the Company and the Holder any legal or equitable right, remedy or claim
under this Warrant Certificate; and this Warrant Certificate shall be for the
sole and exclusive benefit of the Company and the Holder.
SECTION 17. Captions. The captions of the Sections and paragraphs of
this Warrant Certificate have been inserted for convenience only and shall
have no substantive effect.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate
to be duly executed as of this __ day of March, 1998.
ALL AMERICAN FOOD GROUP, INC.
By:
--------------------------------
Name:
Title:
<PAGE>
PURCHASE FORM
(To be executed upon exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase __________ shares of
Common Stock as provided for herein and herewith tenders in payment for such
shares of Common Stock payment of the purchase price in full in the form of
cash or a bank check payable to the order of All American Food Group, Inc. or
a combination thereof in the amount of $________, all in accordance with the
terms hereof. The undersigned requests that a certificate for such shares of
Common Stock be registered in the name of _________________________ whose
address is ______________________________________ and that such certificate
shall be delivered to ____________________ whose address is
________________________________________. If said number of shares of Common
Stock is less than all of the shares of Common Stock purchasable hereunder,
the undersigned requests that a new Warrant Certificate representing the right
to purchase the remaining balance of the shares of Common Stock be registered
in the name of ______________________ whose address is
________________________________ and that such certificate shall be delivered
to _____________________ whose address is _____________________________________.
Dated: ________________________________
________________________________
(Insert social security or other
identifying number of holder)
Signature
------------------------------
Note: Signature must conform in all respects to name of holder as
specified on the face of this Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever, unless this Warrant
Certificate has been assigned.
<PAGE>
ASSIGNMENT
(To be executed only upon assignment of the Warrant Certificate)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto __________________________________________ (Name and Address of
Assignee Must Be Printed or Typewritten) the within Warrant Certificate,
together with all right, title and interest therein, and does hereby
irrevocably constitute and appoint ______________________, Attorney, to
transfer said Warrant Certificate on the books of the within-named Company,
with full power of substitution in the premises.
Dated: ___________________, 19__
-------------------------------
Signature of Registered Holder
Note: The above signature must correspond with the name as written on
the face of this Warrant Certificate in every particular, without alteration
or enlargement or any change whatever.
<PAGE>
SUBSCRIPTION AGREEMENT
ALL AMERICAN FOOD GROUP, INC.
THE SECURITIES WHICH ARE THE SUBJECT OF THIS SUBSCRIPTION AGREEMENT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") OR UNDER THE APPLICABLE SECURITIES LAWS OF ANY STATE AND
WILL BE OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE
REGISTRATION REQUIREMENTS OF THESE LAWS BY VIRTUE OF THE ALL AMERICAN
FOOD GROUP, INC.'S INTENDED COMPLIANCE WITH SECTIONS 3(b), 4(2) AND
4(6) OF THE ACT, THE PROVISIONS OF REGULATION D UNDER SUCH ACT AND
SIMILAR EXEMPTIONS UNDER STATE LAW. THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
("SEC"), ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY
AUTHORITY. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The undersigned purchaser (hereafter "the undersigned" or "the
purchaser") hereby offers to purchase certain shares (defined herein) of All
American Food Group, Inc. (the "Company"), a publicly held corporation formed
under the laws of the State of New Jersey. This offer to purchase may, for any
reason whatsoever, be revoked by the undersigned or rejected by the Company
prior to acceptance of this offer by the Company.
Section 1.1 Purchase and Sale of Shares. Upon the following terms
and conditions, the Company shall issue and sell to the Purchaser, and the
Purchaser shall purchase from the Company, the number of shares of Class G
Preferred Stock of the Company (the "Shares") set forth opposite its name below,
having the rights, designations and preferences set forth in Schedule I hereto.
Section 1.2 Purchase Price. The purchase price for the Shares
(the "Purchase Price") shall be $10 per Share.
Section 1.3 The Closing.
(a) The closing of the purchase and sale of the Shares (the "Closing"),
shall take place at the offices of Lehman & Eilen, 50 Charles Lindbergh
Boulevard -- Suite 505, Uniondale, New York 11553, at 5 p.m., local time on the
later of the following: (i) the date on which the last to be fulfilled or waived
of the conditions set forth in Section 4.1 and 4.2 hereof and applicable to the
Closing shall be fulfilled or waived in accordance herewith, or (ii) such other
time and place and/or on such other date as the Purchaser and the Company may
agree. The date on which the Closing occurs is referred to herein as the
"Closing Date."
(b) On the Closing Date, the Company shall deliver to the Purchaser
certificates representing the Shares to Grushko & Mittman, as Escrow Agent,
under that certain Funds Escrow Agreement, dated March 25, 1998, by and between
the Company and Purchaser, and Grushko & Mittman (the "Escrow Agent") shall
deliver to the Company the Purchase Price for all the Shares by cashier's check
or wire transfer in immediately available funds to such account as shall be
designated in writing by the Company. The Company shall also deliver to the
Escrow Agent, prior to the Closing Date 28,000 shares of Common Stock of the
Company for each $10,000 of Shares subscribed for, (the "Escrowed Shares") to be
held in escrow. While held in escrow, the Escrowed Shares and any additional
shares of Common Stock which may be later delivered by the Company to be held in
escrow as set forth below shall not be deemed issued and outstanding for any
purpose nor shall any holder of the Shares have any voting or dispositive rights
thereto. The certificate representing the Escrowed Shares shall be as described
in Section 5.1 of this Agreement. The terms and conditions of escrow shall be
set forth in an escrow agreement in the form annexed as an exhibit hereto (the
"Escrow Agreement"). The Company shall deliver to the Escrow Agent, from time to
time, at the request of the subscriber, within seven (7) business days after
notice of the Company of such request, such additional Common Shares in the form
described in Section 5.1 of this Agreement, as would be necessary to allow
conversion of all the Shares at the then applicable Conversion Price, as defined
in the Resolution annexed hereto. In addition, each party shall deliver all
documents, instruments and writings required to be delivered by such party
pursuant to this Agreement at or prior to the Closing.
(c) Upon conversion of the Shares into common stock, without par value,
of the Company (the "Common
<PAGE>
Stock"), the Company agrees to issue to Purchaser three-year warrants, in the
form attached hereto, to purchase such number of shares of the Company's Common
Stock as shall equal 150% of the Common Stock issued upon such conversion,
having an exercise price equal to the price at which the Shares were converted
into Common Stock (the "Warrants").
Section 1.4 Covenant to Register.
(a) For purposes of this Section, the following definitions shall
apply:
(i) The terms "register," "registered," and "registration"
refer to a registration under the Securities Act of 1933, as amended (the
"Act"), effected by preparing and filing a registration statement or similar
document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement, document or amendment thereto.
(ii) The term "Registrable Securities" means the shares of
common stock of the Company issuable upon conversion of the Shares, or upon
conversion of any stock issued in payment of dividends on the Shares, and any
securities of the Company or securities of any successor corporation issued as
or issuable upon the conversion or exercise of any warrant, right or other
security that is issued as a dividend or other distribution with respect to, or
in exchange for, or in replacement of, the Shares.
(iii) The term "holder" or "holder of Registrable Securities"
means the Purchaser and any permitted assignee of registration rights pursuant
to Section 1.4(g).
(b) (i) The Company shall use its best efforts to prepare and file a
registration statement on Form S-3 as soon as practicable and cause such
registration statement to become effective as soon as possible, but no later
than ninety (90) days from the date of this Agreement.
(ii) The Company may suspend the effectiveness of any
registration effected pursuant to this Subsection (b) in the event and for such
period of time as, such a suspension is required by the rules and regulations of
the Securities and Exchange Commission ("SEC"). The Company will use its best
efforts to cause such suspension to terminate at the earliest possible date.
(iii) (A) If a registration statement covering all Registrable
Securities is not effective by ninety (90) days after the date of this Agreement
(the "Target Date"), the Company shall pay the holder as liquidated damages an
amount equal to three percent (3%) of the total Purchase Price of the Shares
held by such holder for each thirty (30) day period following the Target Date
until such time as the registration statement is declared effective. The payment
set forth above shall be pro-rated daily as to any period of less than thirty
(30) days. Such payment shall be made to the holder by cashier's check or wire
transfer in immediately available funds to such account as shall be designated
in writing by the holder and shall be paid irrespective of the amount of
Registrable Securities held by holder.
(B) If, following effectiveness of a registration, either the
effectiveness of the registration statement is suspended or a current prospectus
meeting the requirements of Section 10 of the Act is not available for delivery
by the holder (either referred to herein as a "suspension"), the Company shall
thereupon pay to such holder as liquidated damages an amount equal to three
percent (3%) of the Purchase Price of the Shares held by such holder for each
thirty (30) day period of the suspension. The payment set forth above shall be
pro-rated daily as to periods of less than thirty (30) days. Such payment shall
be made to the holder by cashier's check or wire transfer in immediately
available funds to such account as shall be designated in writing by the holder,
and shall be paid irrespective of the amount of Registrable Securities held by
holder on or after the date following the suspension.
(C) Whenever required under this Section 1.4 to effect the
registration of any Registrable
2
<PAGE>
Securities, the Company shall, as expeditiously as reasonably possible:
(i) Prepare and file with the SEC a
registration statement or amendment thereto with respect to such Registrable
Securities and use its best efforts to cause such registration to become
effective as provided in Section 1.4(b)(i) hereof, and keep such registration
statement effective for so long as any holder of Registrable Securities desires
to dispose of the securities covered by such registration statement; provided,
however, that in no event shall the Company be required to keep the Registration
statement effective for a period greater than three (3) years from the Closing
Date;
(ii) Prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement and notify the holders of the
filing and effectiveness of such Registration statement and any amendments or
supplements;
(iii) Furnish to each holder of Registrable
Securities such numbers of copies of a current prospectus, including a
preliminary prospectus, conforming with the requirements of the Act, copies of
the registration statement any amendment or supplement to any thereof and any
documents incorporated by reference therein, and such other documents as such
holder of Registrable Securities may reasonably require in order to facilitate
the disposition of Registrable Securities owned by such holder of Registrable
Securities;
(iv) Use its best efforts to register and
qualify the securities covered by such registration statement under such other
securities or "Blue Sky" laws of the State of New York and such jurisdictions as
shall be reasonably requested by the holder of Registrable Securities;
(v) Notify each holder of Registrable
Securities immediately of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances then existing, and use its best efforts to
promptly update and/or correct such prospectus;
(vi) Furnish, at the request of any holder
of Registrable Securities, (A) an opinion of counsel of the Company, dated the
effective date of the registration statement, in form and substance reasonably
satisfactory to the holder and its counsel and covering, without limitation,
such matters as the due authorization and issuance of the securities being
registered and (B) a "comfort" letter or letters of the Company's independent
public accountants provided at the Company's expense in form and substance
reasonably satisfactory to the holder and its counsel;
(vii) Use its best efforts to list the
Registrable Securities covered by such registration statement with any national
market or securities exchange on which such securities are then listed;
(viii) Make available for inspection by the
holder of Registrable Securities, upon request, all SEC Documents (as defined
below) filed subsequent to the Closing and require the Company's officers,
directors and employees to supply all information reasonably requested by any
holder of Registrable Securities in connection with such registration statement;
and
(viiii) Furnish to each holder of Registrable
Securities prompt notice of the commencement of any stop-order proceedings under
the Act, together with copies of all relevant documents in connection therewith,
and use its best efforts to obtain withdrawal of any such stop order as soon as
possible.
(d) Upon request of the Company, each holder of
Registrable Securities will furnish to the Company in connection with any
registration under this Section such information regarding itself, the
Registrable Securities and other securities of the Company held by it, and the
intended method of disposition of such securities as shall
3
<PAGE>
be reasonably required to effect the registration of the Registrable Securities
held by such holder of Registrable Securities.
(e) (i) To the fullest extent permitted by
law, the Company shall indemnify, defend and hold harmless each holder of
Registrable Securities which are included in a registration statement and each
of its officers, directors, employees, agents, partners or controlling persons
(within the meaning of the Act) (each, an "indemnified party") from and against,
and shall reimburse such indemnified party with respect to, any and all claims,
suits, demands, causes of action, losses, damages, liabilities, costs or
expenses ("Liabilities") to which such indemnified party may become subject
under the Act or otherwise, arising from or relating to (A) any untrue statement
or alleged untrue statement of any material fact contained in such registration
statement, any prospectus contained therein or any amendment or supplement
thereto, or (B) the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading; provided,
however, that the Company shall not be liable in any such case to the extent
that any such Liability arises out of or is based upon an untrue statement or
omission so made in strict conformity with information furnished by such
indemnified party in writing specifically for use in the registration statement.
(ii) In the event of any registration
under the Act of Registrable Securities, each holder of such Registrable
Securities hereby severally agrees to indemnity, defend and hold harmless the
Company, and its officers, directors, employees, agents, partners, or
controlling persons (within the meaning of the Act) (each, an "indemnified
party") from and against, and shall reimburse such indemnified party with
respect to, any and all Liabilities to which such indemnified party may become
subject under the Act or otherwise, arising from or relating to (A) any untrue
statement or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein or any amendment or
supplement thereto, or (B) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading;
provided, that such holders will be liable in any such case to the extent and
only to the extent, that any such Liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, prospectus or amendment or supplement
thereto in reliance upon and in conformity with written information furnished by
such holder specifically for use in the preparation thereof, and such Liability
may in no event exceed the value of the Registrable Securities so registered on
behalf of such holder.
(iii) Promptly after receipt by any
indemnified party of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against another party
(the "indemnifying party") hereunder, notify such party in writing thereof, but
the omission so to notify such party shall not relieve such party from any
Liability which it may have to the indemnified party other than under this
Section and shall only relieve it from any Liability which it may have to the
indemnified party under this Section if and to the extent an indemnifying party
is materially prejudiced by such omission. In case any such action shall be
brought against any indemnified party and such indemnified party shall notify an
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel reasonably satisfactory to such
indemnified party, and, after notice from the indemnifying party to the
indemnified party of its election so to assume and undertake the defense
thereof, the indemnifying party shall not be liable to the indemnified party
under this Section for any legal expenses subsequently incurred by the
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected; provided,
however, that if the defendants in any such action include both parties and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to them which are different from or additional to those
available to the indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified party shall have the right to select a separate counsel
and to assume such legal defenses and otherwise to participate in the defense of
such action, with the reasonable expenses and fees of one such separate counsel
and other reasonable expenses related to such participation to be reimbursed by
the indemnifying party as incurred.
4
<PAGE>
(f) (i) With respect to the inclusion of
Registrable Securities in a registration statement, all fees, costs and expenses
of and incidental to such registration, inclusion and public offering shall be
borne by the Company; provided, however, that any security holders participating
in such registration shall bear their pro-rata share of the underwriting
discounts and commissions, if any, incurred by them in connection with such
registration.
(ii) The fees, costs and expenses of
registration to be borne by the Company as provided in this Subsection (f) shall
include, without limitation, all registration, filing and NASD fees, printing
expenses, fees and disbursements of counsel and accountants for the Company, and
all legal fees and disbursements and other expenses of complying with state
securities or Blue Sky laws of any jurisdiction or jurisdictions in which
securities to be offered are to be registered and qualified. Subject to
appropriate agreements as to confidentiality, the Company shall make available
to the holders of Registrable Securities and their counsel its documents and
personnel for due diligence purposes, and will pay the reasonable fees and
expenses of counsel designated by a majority in interest of the holders of
Registrable Securities included in the registration statement, if such counsel
is so designated. Except as otherwise provided herein, fees and disbursements of
counsel and accountants for the selling security holders shall be borne by the
respective selling security holders.
(g) The rights to cause the Company to register
all or any portion of Registrable Securities pursuant to this Section l.4 may be
assigned by Purchaser to a proper transferee or assignee as described herein.
The Purchaser shall notify the Company of the name and address of such
transferee or assignee, and the securities with respect to which such
registration rights are being assigned. Such assignment shall be effective only
if, (i) the Purchaser agrees in writing with the transferee or assignee to
assign such rights, and a copy of such agreement is furnished to the Company
after such transfer or assignment (subject to the purchase price of the shares
being kept confidential by the Purchaser and such transferee or assignee, (ii)
the Company is after such transfer or assignment, furnished with written notice
of (A) the name and address of such transferee or assignee, (B) the Registrable
Securities with respect to which such registration rights are being assigned,
(iii) following such transfer or assignment, the further disposition of the
Registrable Securities by the transferee or assignee is restricted under the Act
and applicable state securities laws, (iv) the transferee or assignee agrees in
writing with the Company to be bound by all of the provisions contained herein,
(v) such transfer shall have been made in accordance with the applicable
requirements of the purchase agreement covering the transaction and (vi) such
transferee shall be an "accredited investor", as that term is defined in Rule
501 of Regulation D, promulgated under the Act.
Section 2.1 Representations and Warranties of the Purchaser. The
Purchaser makes the following representations and warranties to the Company.
(a) Accredited Investor. The Purchaser is an
"accredited investor", as such term is defined in Rule 501(a) of Regulation D,
promulgated under the Act.
(b) Speculative Investment. The Purchaser is
aware that an investment in the Shares is highly speculative and subject to
substantial risks. The Purchaser is capable of bearing the high degree of
economic risk and the burden of this venture, including, but not limited to, the
possibility of complete loss of the Purchaser's investment in the Shares and
underlying securities which make liquidation of this investment impossible for
the indefinite future.
(c) Disposition. The Purchaser understands that
(i) except as provided for in Section 1.4, the Shares, the Warrants and the
underlying common stock of the Company (the "Securities"), have not been and are
not being registered under the Securities Act or any applicable state securities
laws, and may not be transferred unless (A) subsequently registered thereunder,
or (B) sold or transferred pursuant to an exemption from securities registration
under the Securities Act and any applicable state securities laws and (ii) any
resale of such Securities under circumstances in which the seller (or the person
through whom the sale is made) may be deemed to be an underwriter (as that term
is defined in the Securities Act) may require compliance with another exemption
under the Securities Act or the rules of the SEC thereunder.
(d) Privately Offered. The offer to acquire the
Shares was directly communicated to the Purchaser in such manner that the
Purchaser and its advisors were able to ask questions of and receive what
Purchaser
5
<PAGE>
considers satisfactory answers concerning the terms and conditions of this
transaction. At no time was the Purchaser presented with or solicited by or
through any leaflet, public promotional meeting, television advertisement, or
any other form of general advertising.
(e) Purchase for Investment. The Securities are
being acquired solely for the Purchaser's own account, for investment, and are
not being purchased with view to the resale, distribution, subdivision or
fractionalization thereof without a valid registration with applicable
governmental authorities.
(f) Reliance on Exemptions. The Purchaser
understands that the Securities are being offered and sold to Purchaser in
reliance upon specific exemptions from the registration requirements of federal
and state securities laws and that the Company is relying upon the truth and
accuracy of, and the Purchaser's compliance with, the representations,
warranties and agreements of the Purchaser set forth herein in order to
determine the availability of such exemptions and the eligibility of the
Purchaser to acquire the Securities.
Section 2.2 Representations and Warranties of the Company. The
Company hereby makes the following representations and warranties to the
Purchaser:
(a) Organization and Qualification. The Company
is a corporation duly incorporated and existing in good standing under the laws
of the State of New Jersey and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Company and
each such subsidiary, if any, is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary other than those in which the failure so to qualify would not have a
Material Adverse Effect. "Material Adverse Effect" means any adverse effect on
the business, operations, properties or financial condition of the entity with
respect to which such term is used and which is material to such entity and
other entities controlled by such entity taken as a whole.
(b) Authorization; Enforcement. (i) The Company
has the requisite corporate power and authority to enter into and perform this
Agreement and to issue the Shares and the Warrants, in accordance with the terms
hereof, (ii) the execution and delivery of this Agreement by the Company and the
consummation by it of the transactions contemplated hereby have been duly
authorized by all necessary corporate action, and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required, (iii) this Agreement has been duly executed and delivered by the
Company, (iv) this Agreement constitutes a valid and binding obligation of the
Company enforceable against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application) and (v) prior to the Closing
Date, any necessary Certificate of Amendment to the Company's Charter
authorizing Company to issue all of the Shares, in accordance with Schedule I,
will have been filed with the New Jersey Secretary of State and will be in full
force and effect, enforceable against the Company in accordance with its terms.
(c) Capitalization. The authorized capital
stock of the Company consists of 20,000,000 shares of Common Stock and 4,000,000
shares of Preferred Stock; there are 1,058,585 shares of Common Stock and
481,245 shares of Preferred Stock issued and outstanding; and, upon issuance of
the Shares in accordance with the terms hereof, there will be 1,058,585 shares
of Common Stock and a maximum of [481,245 + X] shares of Preferred Stock issued
and outstanding.
All of the outstanding shares of the Company's Common
Stock have been validly issued and are fully paid and nonassessable. Except as
set forth in the Company's recent registration statement on Form SB-2, no shares
of Common Stock are entitled to registration rights and there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company, or contracts, commitments,
understandings, or arrangements by which the
6
<PAGE>
Company is or may become bound to issue additional shares of capital stock of
the Company or options, warrants, scrip, rights to subscribe to, or commitments
to purchase or acquire, any shares, or securities or rights convertible into
shares, of capital stock of the Company. The Company has furnished to the
Purchaser true and correct copies of the Company's Certificate of Incorporation
as in effect on the date hereof (the "Charter"), and the Company's By-Laws, as
in effect on the date hereof (the "By-Laws").
(d) Issuance of Shares. The issuance of the
Shares and the Warrants have been duly authorized and, when paid for and issued
in accordance with the terms hereof, the Shares shall be validly issued, fully
paid and non-assessable and entitled to the rights and preferences set forth in
Schedule I hereto, and the Warrants, when issued, will be validly issued. The
Common Stock issuable upon conversion of the Shares and exercise of the Warrants
will be duly authorized and reserved for issuance and, upon conversion, will be
validly issued, fully paid and non-assessable and the holders shall be entitled
to all rights and preferences accorded to a holder of Common Stock.
(e) No Conflicts. The execution, delivery and
performance of this Agreement by the Company and the consummation by the Company
of the transactions contemplated hereby do not and will not (i) result in a
violation of the Company's Charter or By-Laws or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, or result
in a violation of any federal, state, local or foreign law, rule, regulation,
order, judgment or decree (including Federal and state securities laws and
regulations) applicable to the Company or any of its subsidiaries or by which
any property or assets of the Company or any of its subsidiaries is bound or
affected (except for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect); provided that, for purposes of such
representation as to Federal, state, local or foreign law, rule or regulation,
no representation is made herein with respect to any of the same applicable
solely to the Purchaser and not to the Company. The business of the Company is
not being conducted in violation of any law, ordinance or regulations of any
governmental entity, except for violations which either singly or in the
aggregate do not and will not have a Material Adverse Effect. The Company is not
required under Federal, state or local law, rule or regulation in the United
States to obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under this Agreement or issue and sell
the Shares in accordance with the terms hereof (other than any SEC, NASD or
state securities filings which may be required to be made by the Company
subsequent to the Closing, and any registration statement which may be filed
pursuant hereto); provided that, for purposes of the representation made in this
sentence, the Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Purchaser herein; and, provided, further,
that under the Nasdaq's new corporate governance rules, the Company will seek
shareholder approval of the issuance of the Shares, or an exemption therefrom.
(f) SEC Documents, Financial Statements. The
Common Stock of the Company is registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Company
has filed on a timely basis all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the Exchange Act, including material filed pursuant to Section
13(a) or 15(d), in addition to one or more registration statements and
amendments thereto heretofore filed by the Company with the SEC under the Act
(all of the foregoing including filings incorporated by reference therein being
referred to herein as the "SEC Documents"). The Company, through its agent, has
delivered to the Purchaser true and complete copies of the SEC Documents (except
for exhibits and incorporated documents). The Company has not provided to the
Purchaser any information which, according to applicable law, rule or
regulation, should have been disclosed publicly by the Company but which has not
been so disclosed, other than with respect to the transactions contemplated by
this Agreement.
As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the Act or
the Exchange Act as the case may be and the rules and regulations of the SEC
promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such SEC Documents, and none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were
7
<PAGE>
made, not misleading. The financial statements of the Company included in the
SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company as of the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
(g) No Material Adverse Change. Since the date
through which the most recently filed SEC Documents, no Material Adverse Effect
has occurred or exists with respect to the Company or any of its subsidiaries.
(h) No Undisclosed Liabilities. The Company and
its subsidiaries have no material liabilities or obligations not disclosed in
the SEC Documents, including, without limitation, any litigation, other than
those incurred in the ordinary course of the Company's or any of its
subsidiaries' respective businesses since the date of the most recently filed
SEC Documents which, individually or in the aggregate, do not or would not have
a Material Adverse Effect on the Company or any of its subsidiaries.
(i) No Undisclosed Events or Circumstances. No
event or circumstance has occurred or exists with respect to the Company or any
of its subsidiaries or their respective businesses, properties, prospects,
operations or financial condition which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company but which
has not been so publicly announced or disclosed.
(j) No General Solicitation. Neither the
Company, nor any of its affiliates, or, to its knowledge, any person acting on
its or their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the Act) in connection
with the offer or sale of the Shares or Warrants.
(k) No Integrated Offering. Neither the
Company, nor any of its affiliates, nor any person acting on its or their
behalf, has directly or indirectly made any offers or sales in any security or
solicited any offers to buy any security under circumstances that would require
registration of any of the Securities under the 1933 Act or cause the offering
of the Securities pursuant to this Agreement to be integrated with prior
offerings by the Company for purposes of the 1933 Act or any applicable
stockholder approval provisions, including, without limitation, under the rules
and regulations of NASDAQ SmallCap, as applicable, nor will the Company or any
of its subsidiaries take any action or steps that would require registration of
the Securities under the 1933 Act or cause the offering of the Securities to be
integrated with other offerings. The Company has not conducted and will not
conduct any offering that will be integrated with the issuance of the Securities
solely for purposes of Rule 4460(i) of the NASDAQ Stock Market, Inc.'s
Marketplace Rules.
(l) S-3 Eligibility. The Company currently
meets, and will take all necessary action to continue to meet, the "registrant
eligibility" requirements set forth in the general instructions to Form S-3:
(m) Common Stock Listing. The Company's common
stock is quoted on, and is listed for trading n the NASDAQ SmallCap Market. The
Company has received no notice, either oral or written, other than those
heretofore provided to Purchaser or its counsel, with respect to the continued
eligibility of the common stock for such listing, and the Company has maintained
all requirements for the continuation of such listing.
Section 3.1 Securities Compliance. The Company shall notify the
SEC and NASD, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Shares and Warrants, and the
common stock of the Company issuable upon conversion thereof, to the Purchaser,
and promptly provide Purchaser with copies thereof.
8
<PAGE>
Section 3.2 Registration and Listing. Until at least two (2)
years after all Shares have been converted into Common Stock, the Company will
cause its Common Stock to continue to be registered under Sections 12(b) or
12(g) of the Exchange Act, will comply in all respects with its reporting and
filing obligations under such Exchange Act, will comply with all requirements
related to any registration statement filed pursuant to this Agreement and will
not take any action or file any document (whether or not permitted by the Act or
the Exchange Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under said Acts, except as permitted herein. Until at least two (2) years after
all Shares have been converted into Common Stock, the Company will take all
action within its power to continue the listing or trading of its Common Stock
on the NASDAQ Small Cap Market and will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the NASD and NASDAQ. The covenants set forth in this Section 3.2 shall not be
deemed to prohibit a merger, sale of all assets or other corporate
reorganization if the entity surviving or succeeding to the Company is bound by
this Agreement with respect to its securities issued in exchange for or in
replacement of the Shares or Common Stock. The Company and Purchaser agree that
until the Company either obtains shareholder approval of the issuance of the
Shares, or an exemption from Nasdaq's new corporate governance rules as they may
apply to the Shares, the Purchaser may not and will not convert the Shares into
more than 19.9% of the shares of Company's Common Stock outstanding on the date
hereof.
Section 3.3 Listing. The Company shall promptly secure the
listing of the common stock issuable upon conversion of the Shares and exercise
of the Warrants upon each national securities exchange or automated quotation
system, if any, upon which shares of common stock are then listed (subject to
official notice of issuance) and shall maintain so long as any other shares of
common stock shall be so listed, such listing o all common stock from time to
time issuable upon conversion of the Shares or exercise of the Warrants. The
Company will obtain and maintain the listing and trading of its common stock on
NASDAQ SmallCap, and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the National
Association of Securities Dealers ("NASD") and such exchanges, as applicable.
The Company shall promptly provide to each Purchaser copies of any notices it
receives regarding the continued eligibility of the common stock for listing on
such exchanges or quotation systems, or any other exchange or quotation system
on which the common stock is then listed.
Section 4.1 Conditions Precedent to the Obligation of the Company
to Sell the Shares. The obligation hereunder of the Company to issue and/or sell
the Shares to the Purchaser is subject to the satisfaction, at or before the
Closing, of each of the conditions set forth below. These conditions may be
waived by the Company at any time in its sole discretion.
(a) Accuracy of the Purchaser's Representations
and Warranties. The representations and warranties of the Purchaser shall be
true and correct in all material respects as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a particular date).
(b) Performance by the Purchaser. The Purchaser
shall have performed all agreements and satisfied all conditions required to be
performed or satisfied by the Purchaser at or prior to the Closing.
(c) No Injunction. No statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental authority
of competent jurisdiction which prohibits the consummation of any of the
transactions contemplated by this Agreement.
(d) Legal action. No legal action, suit or
proceeding shall be pending or threatened which seeks to restrain or prohibit
the transactions contemplated by this Agreement.
(e) Execution. The Purchaser shall have
executed this Agreement and the related Funds Escrow Agreement and Shares Escrow
Agreements, and delivered such agreements to the Company.
Section 4.2 Conditions Precedent to the Obligation of the
Purchaser to Purchase the Shares. The obligation hereunder of the Purchaser to
acquire and pay for the Shares is subject to the satisfaction, at or before the
9
<PAGE>
Closing, of each of the conditions set forth below. These conditions may be
waived by the Purchaser at any time in its sole discretion.
(a) Accuracy of the Company's Representations
and Warranties. The representations and warranties of the Company shall be true
and correct in all material respects as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a particular date).
(b) Performance by the Company. The Company
shall have performed all agreements and satisfied all conditions required to be
performed or satisfied by the Company at or prior to the Closing.
(c) NASDAQ. From the date hereof to the Closing
Date, trading in the Company's Common Stock shall not have been suspended by the
SEC or the NASDAQ Small Cap Market (except for any suspension of trading of
limited duration agreed to between the Company and the NASDAQ Small Cap Market
solely to permit dissemination of material information regarding the Company),
and trading in securities generally as reported by NASDAQ shall not have been
suspended or limited or minimum prices shall not have been established on
securities whose trades are reported by NASDAQ.
(d) No Injunction. No statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental authority
of competent jurisdiction which prohibits the consummation of any of the
transactions contemplated by this Agreement.
(e) Execution. The Company shall have executed
this Agreement and the related Funds Escrow Agreement and Shares Escrow
Agreements, and delivered such agreements to the Purchaser.
(f) Opinion of Counsel, Etc. The Purchaser
shall have received before or at the Closing an opinion of counsel to the
Company , in form and substance reasonably satisfactory to the Purchaser and its
counsel, and such other certificates and documents as the Purchaser or its
counsel shall reasonably require incident to the Closing.
Section 5.1 Legend on Stock. Each certificate representing the
Shares and, if necessary, Common Stock issued upon conversion thereof, shall be
stamped or otherwise imprinted with a legend substantially in the following
form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO
REGISTRATION UNDER THE ACT OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE ACT AND APPLICABLE STATE
SECURITIES LAWS
The Company agrees to reissue certificates
representing the Shares or, if applicable, the Common Stock issued upon
conversion thereof without the legend set forth above at such time as (a) the
holder thereof is permitted to dispose of such Shares (or securities issued upon
conversion thereof) pursuant to Rule 144(k) under the Act, (b) the securities
are sold to a purchaser or purchasers who (in the opinion of counsel to such
purchasers, in form and substance reasonably satisfactory to the Company and its
counsel) are able to dispose of such securities publicly without registration
under the Act, or (c) such securities are registered under the Act.
Section 6.1 Termination by Mutual Consent. This Agreement may be
terminated at any time prior to the Closing by the mutual written consent of the
Company and the Purchaser.
Section 6.2 Other Termination. This Agreement may be terminated
by action of the Board of Directors or other governing body of the Purchaser or
the Company at any time if the Closing shall not have been consummated by the
fifth (5th) business day following the date of this Agreement, provided that the
party seeking to terminate the
10
<PAGE>
Agreement is not in breach of the Agreement.
Section 6.3 Automatic Termination. This Agreement shall
automatically terminate without any further action of either party hereto if the
Closing shall not have occurred by the seventh (7th) business day following the
date of this Agreement, provided, however, that any such termination shall not
terminate the liability of any party which is then in breach of the Agreement.
Section 7.1 Fees and Expenses. Except as otherwise set forth in
Section 1.4 hereof with respect to the registration of Registrable Securities,
the Company shall pay the fees, commissions and expenses of its advisers,
brokers, finders, counsel, accountants and other experts, if any, and all other
expenses associated therewith.
Section 7.2 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of New York. The parties hereto hereby
waive trial by jury and consent to exclusive jurisdiction and venue in the State
of New York.
Section 7.3 Entire Agreement: Amendment. This Agreement contains
the entire understanding of the parties with respect to the matters covered
hereby and, except as specifically set forth herein, neither the Company nor the
Purchaser makes any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be waived or amended
other than by a written instrument signed by the party against whom enforcement
of any such amendment or waiver is sought.
Section 7.4 Notices. Any notice or other communication required
or permitted to be given hereunder shall be in writing and shall be effective
(a) upon hand delivery or delivery by telex (with correct answer back received),
telecopy or facsimile at the address or number designated below (if delivered on
a business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered other
than on a business day during normal business hours where such notice is to be
received) or (b) on the second (2nd) business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
to the Company: All American Food Group, Inc.
104 New Era
South Plainfield, New Jersey 07080
Attn: Andrew Thorburn, President and CEO
FAX (908)757-8857
to the Purchaser: At the address set forth at the foot of
this Agreement or as specified in writing
by Purchaser.
Any party hereto may from time to time change its address for notices by giving
at least ten (10) days' written notice of such changed address to the other
party hereto.
Section 7.5 Waivers. No waiver by either party of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
Section 7.6 Headings. The headings herein are for convenience
only, do not constitute a part of this Agreement and shall not be deemed to
limit or affect any of the provisions hereof.
Section 7.7 Governing Law. This Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York without regard to such state's principles of conflict of laws.
Section 7.8 Survival. The representations and warranties of the
Company and the Purchaser contained
11
<PAGE>
in herein and the agreements and covenants set forth in Sections 1.1 through 1.4
3.1 and 3.2, and 7.1 through 7.15 shall survive the Closing.
Section 7.9 NASDAQ. The term "NASDAQ" or "NASDAQ Small Cap
Market" herein refers to the principal market on which the Common Stock of the
Company is traded. If the Common Stock is listed on a securities exchange, or if
another market becomes the principal market on which the Common Stock is traded
or through which price quotations for the Common Stock are reported, the term
"NASDAQ" or "NASDAQ Small Cap Market" shall be deemed to refer to such exchange
or other principal market.
Section 7.10 Acceptance Execution and delivery of this Agreement
shall constitute an offer to purchase the Shares, which offer, unless previously
revoked by the Undersigned, may be accepted or rejected by the Company, in its
sole discretion for any cause or for no cause and without liability to the
Undersigned. The Company shall indicate acceptance of this Agreement by signing
as indicated on the signature page hereof.
Section 7.11 Binding Agreement Upon acceptance of this Agreement
by the Company, the Undersigned agrees that he may not cancel, terminate or
revoke any agreement of the Undersigned made hereunder, and that this Agreement
shall survive the death or disability of the Undersigned and shall be binding
upon heirs, successors, assigns, executors, administrators, guardians,
conservators or personal representatives of the Undersigned.
Section 7.12 Incorporation by Reference All information set forth
on the signature page is incorporated as integral terms of this Agreement.
Section 7.13 Counterparts. This Agreement may be signed in
multiple counterparts, which counterparts shall constitute one and the same
original instrument.
Section 7.14 Severability. If any portion of this Agreement shall
be held illegal, unenforceable, void or voidable by any court, each of the
remaining terms hereof shall nevertheless remain in full force and effect as a
separate contract. Nothing contained herein shall be deemed to establish or
require payment of a rate of interest or other charges in excess of the maximum
permitted applicable law. In the event that the rate of interest required to be
paid or other charges hereunder exceed the maximum permitted by such law, any
payments in excess of such maximum shall be credited against amounts owed by the
Borrower to the Holder and thus refunded to the Borrower.
Section 7.15 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
THIS SPACE HAS BEEN LEFT BLANK INTENTIONALLY.
THE SIGNATURE PAGE FOLLOWS.
12
<PAGE>
IN WITNESS WHEREOF, the Undersigned Purchaser has executed this Agreement on the
date set forth below.
For the purchase price of $100 per Share, the Purchaser tenders herewith the
full purchase price of:
$____________________ for ____________ Shares
The exact name(s) (Including correct, legible spelling) and the information
under which title to the Shares and Warrants will be taken is as follows (Please
print or type):
Address of Purchaser
_____________________________________________________
Social Security or IRS Employer Identification Number(s):
_______________________
Signature of Purchaser: __________________________
By:_______________________________________________ Dated: _____________________
Print Name: ________________________________________________
and Title (if applicable): _________________________________
Accepted by:
ALL AMERICAN FOOD GROUP, INC., a New Jersey corporation
By: ________________________________________________________
Name: ______________________________________________________
Title: _____________________________________________________
13
<PAGE>
SCHEDULE I
ALL AMERICAN FOOD GROUP, INC.
RESOLUTION ESTABLISHING RIGHTS AND
PREFERENCES FOR CLASS G CONVERTIBLE PREFERRED STOCK
RESOLVED, that there shall be a series of shares of the Corporation
designated "Class G Convertible Preferred Stock"; that the number of shares of
such series shall be 10,000 and that the rights and preferences of such series
(the "Class G Preferred") and the limitations or restrictions thereon, shall be
as set forth herein;
The following shall be adopted and incorporated by reference into the
foregoing resolutions as if fully set forth therein:
1. Dividends.
(a) The holders of the Class G Preferred shall be entitled to
receive out of any assets legally available therefor cumulative dividends at the
rate of $12 per share per annum, accrued daily and payable quarterly in arrears
on March 31, June 30, September 30 and December 31 of each year in preference
and priority to any payment of any dividend on the Common Stock or any other
series of the Corporation's Preferred Stock. Such dividends shall accrue on any
given share from the day of original issuance of such share and shall accrue
from day to day whether or not earned or declared. If at any time dividends on
the outstanding Class G Preferred at the rate set forth above shall not have
been paid or declared and set apart for payment with respect to all preceding
periods, the amount of the deficiency shall be fully paid or declared and set
apart for payment, but without interest, before any distribution, whether by way
of dividend or otherwise, shall be declared or paid upon or set apart for the
Common Stock or any other series of the Preferred Stock of the Corporation.
(b) Any dividend payable on a dividend payment date may be
paid, at the option of the Corporation, either (i) in cash or (ii) in shares of
Common Stock, if the Common Stock issuable upon conversion of such shares has
been registered for resale under the Securities Act of 1933, as amended (the
"Act"), and the registration statement including a current prospectus with
respect thereto remains in effect at the date of delivery of such shares or an
exemption from such registration is available under the Act.
(c) Nothing contained herein shall be deemed to establish or
require payment of a rate of interest or other charges in excess of the maximum
permitted applicable law. In the event that the rate of interest required to be
paid or other charges hereunder exceed the maximum permitted by such law, any
payments in excess of such maximum shall be credited against amounts owed by the
Borrower to the Holder and thus refunded to the Borrower.
2. Liquidation Preference; Redemption.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, the holders of the Class G
Preferred shall be entitled to receive, prior and in preference to any
distribution of any assets of the Corporation to the holders of the Common
Stock, the amount of $10 per share plus any and all accrued but unpaid dividends
(the "Liquidation Preference").
(b) A consolidation or merger of the Corporation with or into
any other corporation or corporations, or a sale of all or substantially all of
the assets of the Corporation (other than a sale or transfer to a wholly owned
subsidiary of the Corporation), shall, at the option of the holders of the Class
G Preferred, be deemed a liquidation, dissolution or winding up within the
meaning of this Section 2 if the shares of stock of the Corporation outstanding
immediately prior to such transaction represent immediately after such
transaction less than a majority of the voting power of the surviving
corporation (or of the acquirer of the Corporation's assets in the case of a
sale of assets). Such option may be exercised by the vote or written consent of
holders of a majority of the Class G Preferred at any time within thirty (30)
1
<PAGE>
days after written notice (which shall be given promptly) of the essential terms
of such transaction shall have been given to the holders of the Class G
Preferred in the manner provided by law for the giving of notice of meetings of
shareholders.
(c) The Corporation, at its option, may cause all outstanding
shares of the Class G Preferred to be redeemed at any time beginning two (2)
years after the Closing Date, provided the Corporation has given notice of its
intention to redeem to the holders of the Class G Preferred at least twenty (20)
days prior to the redemption date. On the redemption date, the Corporation shall
pay such holders by cashier's check or wire transfer in immediately available
funds the amount of $13.50 per share, plus all accrued but unpaid dividends and
any amounts due under Section 1 hereof. Promptly thereafter, the holders shall
surrender the certificate or certificates representing the Class G Preferred,
duly endorsed, at the office of the Corporation or of any transfer agent for
such shares, or at such other place designated by the Corporation.
3. Class G Preferred - Optional Conversion. The holders of the
Class G Preferred shall have optional conversion rights as follows:
(a) Right to Convert. Shares of Class G Preferred shall be
convertible, at the option of the holder thereof, into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing (x) the
Liquidation Preference of the Class G Preferred determined pursuant to Section 2
hereof on the date the notice of conversion is given, by (y) the Conversion
Price determined as hereinafter provided in effect on the applicable conversion
date.
(b) Mechanics of Conversion. To convert shares of Class G
Preferred into shares of Common Stock under Section 3(a), the holder shall give
written notice to the Corporation (which notice may be given by facsimile
transmission) that such holder elects (with the right to revoke) to convert the
shares and shall state therein date of the conversion, the number of shares to
be converted and the name or names in which such holder wishes the certificate
or certificates for shares of Common Stock to be issued. Promptly thereafter,
the holder shall surrender the certificate or certificates representing the
shares to be converted, duly endorsed, at the office of the Corporation or of
any transfer agent for such shares, or at such other place designated by the
Corporation; provided, that the holder shall not be required to deliver the
certificates representing such shares if the holder is waiting to receive all or
part of such certificates from the Corporation. The Corporation shall
immediately issue and deliver to or upon the order of such holder, against
delivery of the certificates representing the shares which have been converted,
a certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled. The Corporation shall cause such issuance to be
effected within five (5) business days and shall transmit the certificates by
messenger or overnight delivery service to reach the address designated by such
holder within five (5) business days after the receipt of such notice. The
notice of conversion may be given by a holder at any time during the day up to
5:00 p.m. South Plainfield, New Jersey time and such conversion shall be deemed
to have been made immediately prior to the close of business on the date such
notice of conversion is given. The person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock at the
close of business on such date.
(c) Conversion Required. The Corporation acknowledges and
understands that a delay in the issuance of the Common Stock pursuant to the
provisions hereof could result in economic loss to the holders of the Class G
Preferred. As compensation to the holder for such loss, the Company agrees to
pay as liquidated damages to the holder for late issuance of Shares upon
conversion in accordance with the following schedule (where "No. Business Days
Late" is defined as the number of business days beyond ten (10) business days
from the date of receipt by the Company and the transfer agent of a Notice of
Conversion of all necessary documentation duly executed and in proper form
required for conversion, including the original Class G Preferred to be
converted, all in accordance with the Class G Preferred, Subscription Agreement
and the requirements of the transfer agent):
Liquidated Damages per
2
<PAGE>
No. Business Days Late $100,000 of Class G Preferred
---------------------- -----------------------------
1 $ 500
2 $1,000
3 $1,500
4 $2,000
5 $2,500
6 $3,000
7 $3,500
8 $4,000
9 $4,500
10 $5,000
10 $5,000 + $1,000 each
Business Day Late beyond 10 days
The Company shall pay the holder any liquidated
damages incurred under this Section by check upon the earlier to occur of (i)
issuance of the Shares to the holder or (ii) each monthly anniversary of the
receipt of the Company of such holder's Notice of Conversion.
The Company shall at all times reserve and have
available all Common Stock necessary to meet conversion of the Class G Preferred
by all holder of the entire amount of Class G Preferred then outstanding. If, at
any time holder submits a Notice of Conversion and the Company does not have
sufficient authorized but unissued shares of Common Stock available to effect,
in full, a conversion of the Class G Preferred (a "Conversion Default", the date
of such default being referred to herein as the "Conversion Default Date"), the
Company shall issue to the holder all of the shares of Common Stock which are
available, and the Notice of Conversion as to any Class G Preferred requested to
be converted but not converted (the "Unconverted Class G Preferred"), upon
holder's sole option, may be deemed null and void. The Company shall provide
notice of such Conversion Default ("Notice of Conversion Default") to all
existing holders of outstanding Class G Preferred, by facsimile, within one (1)
business day of such default (with the original delivered by overnight or two
day courier), and the holder shall give notice to the Company by facsimile
within five business days of receipt of the original Notice of Conversion
Default (with the original delivered by overnight or two day courier) of its
election to either nullify or confirm the Notice of Conversion.
The Company agrees to pay to all holder of
outstanding Class G Preferred, as liquidated damages, payments for a Conversion
Default ("Conversion Default Payments") in the amount of (N/365) x (.24) x the
initial issuance price of the outstanding and/or tendered but not converted
Class G Preferred held by each holder where N = the number of days from the
Conversion Default Date to the date (the "Authorization Date") that the Company
authorizes a sufficient number of shares of Common Stock to effect conversion of
all remaining Class G Preferred. The Company shall send notice ("Authorization
Notice") to each holder of outstanding Class G Preferred that additional shares
of Common Stock have been authorized, the Authorization Date and the amount of
holder's accrued Conversion Default Payments. The accrued Conversion Default
shall be paid in cash or shall be convertible into Common Stock at the
Conversion Rate, at the holder's option, payable as follows: (i) in the event
holder elects to take such payment in cash, cash payments shall be made to such
holder of outstanding Class G Preferred by the fifth day of the following
calendar month, or (ii) in the event holder elects to take such payment in
stock, the holder may convert such payment amount into Common Stock at the
conversion rate set forth in Section 4(a) at anytime after the 5th day of the
calendar month following the month in which the Authorization Notice was
received, until the maturity date. Nothing herein shall limit the holder's right
to pursue actual damages for the Company's failure to issue and deliver shares
of Common Stock to the holder in accordance to the terms of the Class G
Preferred.
(d) Determination of Conversion Price.
(i) The "Conversion Price" shall be equal to the
lower of: (a) sixty -five percent (65%) of the average of the closing bid prices
of the Common Stock as reported by NASDAQ during the five (5) consecutive
trading days preceding the conversion date (but not including such date) or (b)
seventy-five percent (75%) of the average
3
<PAGE>
of the closing bid prices of the Common Stock for the five (5) consecutive
trading days prior to the Closing Date.
(ii) The "closing bid price" of the Common Stock on a
trading day shall be the closing bid price of the Common Stock on NASDAQ or any
other principal securities price quotation system or market on which prices of
the Common Stock are reported. The term "trading day" means a day on which
trading is reported on the principal quotation system or market on which prices
of the Common Stock are reported.
(iii) If, during the period of consecutive trading
days provided for above, the Corporation shall declare or pay any dividend on
the Common Stock payable in Common Stock or in rights to acquire Common Stock,
or shall effect a stock split or reverse stock split, or a combination,
consolidation or reclassification of the Common Stock, the Conversion Price
shall be proportionately decreased or increased, as appropriate, to give effect
to such event.
(e) Distributions. If the Corporation shall at any time or
from time to time make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other distribution
payable in securities of the Corporation or any of its subsidiaries other than
additional shares of Common Stock, then in each such event provision shall be
made so that the holders of Class G Preferred shall receive, upon the conversion
thereof, the securities of the Corporation which they would have received had
they been the owners on the date of such event of the number of shares of Common
Stock issuable to them upon conversion.
(f) Certificates as to Adjustments. Upon the occurrence of any
adjustment or readjustment of the Conversion Price pursuant to this Section 3,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and cause the independent
public accountants regularly employed to audit the financial statements of the
Corporation to verify such computation and prepare and furnish to each holder of
Class G Preferred a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The Corporation shall, upon the reasonable written request at any time of
any holder of Class G Preferred, furnish or cause to be furnished to such holder
a like certificate prepared by the Corporation setting forth (i) such
adjustments and readjustments, and (ii) the number of other securities and the
amount, if any, of other property which at the time would be received upon the
conversion of Class G Preferred with respect to each share of Common Stock
received upon such conversion.
(g) Notice of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any security or
right convertible into or entitling the holder thereof to receive additional
shares of Common Stock, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property, or
to receive any other right, the Corporation shall mail to each holder of Class G
Preferred at least ten (10) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution, security or right and the amount and character of
such dividend, distribution, security or right.
(h) Issue Taxes. The Corporation shall pay any and all issue
and other taxes, excluding any income, franchise or similar taxes, that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of shares of Class G Preferred pursuant hereto; provided, however,
that the Corporation shall not be obligated to pay any transfer taxes resulting
from any transfer requested by any holder in connection with any such
conversion.
(i) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Class G Preferred, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Class G Preferred, and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding
4
<PAGE>
shares of the Class G Preferred, the Corporation will take such corporate action
as may be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose,
including, without limitation, engaging in best efforts to obtain any requisite
shareholder approval.
(j) Fractional Shares. No fractional shares shall be issued
upon the conversion of any share or shares of Class G Preferred. All shares of
Common Stock (including fractions thereof) issuable upon conversion of more than
one share of Class G Preferred by a holder thereof shall be aggregated for
purposes of determining whether the conversion would result in the issuance of
any fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of a fraction of a share of Common Stock, the
Corporation shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the fair market value
of such fraction on the date of conversion (as determined in good faith by the
Board of Directors of the Corporation or an authorized Committee thereof).
(k) Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be effective (a)
upon hand delivery or delivery by telex (with correct answer back received),
telecopy or facsimile at the address or number designated below (if delivered on
a business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered other
than on a business day during normal business hours where such notice is to be
received) or (b) on the second (2nd) business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
to the Company: All American Food Group, Inc.
104 New Era
South Plainfield, New Jersey 07080
Attn: Andrew Thorburn, President and CEO
FAX (908)757-8857
to the Holder: At the address set forth on the books and
recoirds of the Company or as specified in
writing by Holder.
Any party hereto may from time to time change its address for notices by giving
at least ten (10) days' written notice of such changed address to the other
party hereto.
(l) Reorganization or Merger. In case of any reorganization or
any reclassification of the capital stock of the Corporation or any
consolidation or merger of the Corporation with or into any other corporation or
corporations or a sale of all or substantially all of the assets of the
Corporation to any other person (other than a sale or transfer to a wholly-owned
subsidiary of the Corporation), and the holders of Class G Preferred do not
elect to treat such transaction as a liquidation, dissolution or winding up as
provided in Section 2 hereof, then, as part of such reorganization,
consolidation, merger or sale, provision shall be made so that each share of
Class G Preferred shall thereafter be convertible into the number of shares of
stock or other securities or property (including cash) to which a holder of the
number of shares of Common Stock deliverable upon conversion of such share of
Class G Preferred would have been entitled upon the record date of (or date of,
if no record date is fixed) such event and, in any case, appropriate adjustment
(as determined by the Board of Directors) shall be made in the application of
the provisions herein set forth with respect to the rights and interests
thereafter of the holders of the Class G Preferred, to the end that the
provisions set forth herein shall thereafter be applicable, as nearly as
equivalent as is practicable, in relation to any shares of stock or the
securities or property (including cash) thereafter deliverable upon the
conversion of the shares of Class G Preferred.
4. Re-issuance of Certificates. In the event of a conversion (or, if
applicable, redemption) of Class G Preferred in which less than all of the
shares of Class G Preferred of a particular certificate are converted or
redeemed, as the case may be, the Corporation shall promptly cause to be issued
and delivered to the holder of such certificate, a certificate representing the
remaining shares of Class G Preferred which have not been so converted or
redeemed.
5. Other Provisions. For all purposes of this Resolution, the term
"date of issuance" and the terms
5
<PAGE>
"Closing" or "Closing Date" shall mean the day on which Shares are first issued
by the Corporation. Any provision herein which conflicts with or violates any
applicable usury law shall be deemed modified to the extent necessary to avoid
such conflict or violation. The term "NASDAQ" herein refers to the principal
market on which the Common Stock of the Corporation is traded. If the Common
Stock is listed on a securities exchange, or if another market becomes the
principal market on which the Common Stock is traded or through which price
quotations for the Common Stock are reported, the term "NASDAQ" shall be deemed
to refer to such exchange or other principal market. The term "conversion date"
shall mean the date on which the notice of conversion is received by the
Corporation.
6. Voting Rights. The Class G Preferred shall have the right to vote on
all matters with the holders of the Common Stock (and not as a separate class)
on an "as converted" basis, based on the number of shares of Common Stock into
which the Class G Preferred are convertible on the record date of any such
action.
7. Attorneys' Fees. Any holder of Class G Preferred shall be entitled
to recover from the Corporation the reasonable attorneys' fees and expenses
incurred by such holder in connection with enforcement by such holder of any
obligation of the Corporation hereunder.
8. No Adverse Actions. The Corporation shall not in any manner, whether
by amendment of the Certificate of Incorporation (including, without limitation,
any Certificate of Designation), merger, reorganization, recapitalization,
consolidation, sales of assets, sale of stock, tender offer, dissolution or
otherwise, take any action, or permit any action to be taken, solely or
primarily for the purpose of increasing the value of any class of stock of the
Corporation if the effect of such action is to reduce the value or security of
the Class G Preferred.
9. Anti-Dilution Previsions.
(a) The Conversion Rate shall also be subject to adjustment
from time to time as follows:
(i) In case of any merger of the Corporation with or
into any other corporation (other than a merger in which the Corporation
is the surviving or continuing corporation and which does not result in any
reclassification, conversion, or change of the outstanding shares of common
stock) then as part of such merger lawful provision shall be made so that
holders of Class G Preferred Stock shall thereafter have the right to convert
each share of Class G Preferred Stock into the kind and amount of shares of
stock and/or other securities or property receivable upon such merger by a
holder of the number of shares of common stock into which such shares of Class G
Preferred Stock might have been converted immediately prior to such
consolidation or merger. Such provision shall also provide for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for elsewhere in these resolutions. The foregoing provisions of this paragraph
shall similarly apply to successive mergers.
(ii) In case of any sale or conveyance to another
person or entity of the property of the Corporation as an entirety, or
substantially as an entirety, in connection with which shares or other
securities or cash or other property shall be issuable, distributable, payable,
or deliverable for outstanding shares of common stock, then unless the right to
convert such shares shall have terminated, lawful provision shall be made so
that the holders of Class G Preferred Stock shall thereafter have the right to
convert each share of the Class G Preferred Stock into the kind and amount of
shares of stock or other securities or property that shall be issuable,
distributable, payable, or deliverable upon such sale or conveyance with respect
to each share of common stock immediately prior to such conveyance."
(b) Subject to the provisions of this section, if the
Corporation at any time shall issue any shares of common stock prior to the
conversion for the entire Liquidation Preference Amount of the Class G Preferred
Stock (otherwise than as: (i) provided in Paragraphs (i) and (ii) of this
Section 9(b); or (ii) pursuant to options, warrants, or other obligations to
issue shares, outstanding on the date hereof as described in public filings made
by the Corporation prior to the date hereof with the Securities and Exchange
Commission ("SEC") including all shares reserved for issuance pursuant to the
Corporation's existing option and stock plans (i) and (ii) above, are
hereinafter referred to as the "Existing
6
<PAGE>
Option Obligations" for a consideration less than the Conversion Price that
would be in effect at the time of such issue, then, and thereafter successively
upon each such issue, the Conversion Price shall be reduced as follows: (i) the
number of shares of common stock outstanding immediately prior to such issue
shall be multiplied by the Conversion Price in effect at the time of such issue
and the product shall be added to the aggregate consideration, if any, received
by the Corporation upon such issue of additional shares of common stock; and
(ii) the sum so obtained shall be divided by the number of shares of common
stock outstanding immediately after such issue. Except for the Existing Option
Obligations and options that may be issued under any employee incentive stock
option and/or any qualified stock option plan adopted by the Corporation, for
purposes of this adjustment, the issuance of any security of the Corporation
carrying the right to convert such security into shares of common stock or of
any warrant, right or option to purchase common stock shall result in an
adjustment to the Conversion Price upon the issuance of shares of common stock
upon exercise of such conversion or purchase rights."
10. Events of Default. The occurrence of any of the following events of
default ("Event of Default") shall cause the dividend rate of 12% described in
Paragraph 1 hereof to become 16% from and after the occurrence of such event,
and at the option of the Holder, the Class G Preferred Stock shall be redeemed
by the Corporation at $13.50 per share and accrued but unpaid dividends and any
amounts due under Section 1 hereof to be paid within ten (10) days of the
occurrence of the Event of Default. Additionally, the Holder may rescind any
unfilled Notice of Conversion:
(a) The Corporation fails to pay any dividend payment required
to be paid pursuant to the terms of Paragraph 1 hereof and such failure
continues for a period of ten (10) days.
(b) The Corporation breaches any covenant or other term or
condition of the Subscription Agreement entered into between the Corporation and
Holder relating to Class G Preferred Stock (the "Subscription Agreement") or in
this Resolution Establishing Rights, and such breach continues for a period of
seven (7) days after written notice to the Corporation from the Holder.
(c) Any representation or warranty of the Corporation made in
the Subscription Agreement, or in any agreement, statement or certificate given
in writing pursuant thereto shall be false or misleading.
(d) The Corporation shall make an assignment for the benefit
of creditors, or apply for or consent to the appointment of a receiver or
trustee for it or for a substantial part of its property or business; or such a
receiver or trustee shall otherwise be appointed.
(e) Any money judgment, writ or similar process shall be
entered or filed against the Corporation or any of its property or other assets
for more than $50,000, and shall remain unvacated, unbonded or unstayed for a
period of forty-five (45) days.
(f) Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Corporation.
(g) The delisting of the common stock from the NASDAQ SmallCap
Market or such other principal exchange on which the common stock is listed for
trading.
(h) A concession by the Company of a default under any one or
more obligations in an aggregate monetary amount in excess of $50,000.
(i) An SEC stop trade order or NASDAQ trading suspension,
if either applies for a period of ten (10) days or longer.
(j) The Corporation's failure to timely deliver common stock
to the holder pursuant to Paragraph 3 hereof or failure of the Company to timely
abide by the covenant to register set forth in Section 1.4 of the Subscription
Agreement.
7
<PAGE>
11. Additional Restrictions. For as long as any shares of the Class G
Preferred Stock are outstanding, the Corporation will not issue any preferred
stock that is senior to the Class G Preferred Stock, and will not amend the
terms of the Class G Preferred Stock without the consent of the holders of the
Class G Preferred Stock.
8
<PAGE>
SUBSCRIPTION AGREEMENT
ALL AMERICAN FOOD GROUP, INC.
THE SECURITIES WHICH ARE THE SUBJECT OF THIS SUBSCRIPTION AGREEMENT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") OR UNDER THE APPLICABLE SECURITIES LAWS OF ANY STATE AND
WILL BE OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE
REGISTRATION REQUIREMENTS OF THESE LAWS BY VIRTUE OF THE ALL AMERICAN
FOOD GROUP, INC.'S INTENDED COMPLIANCE WITH SECTIONS 3(b), 4(2) AND
4(6) OF THE ACT, THE PROVISIONS OF REGULATION D UNDER SUCH ACT AND
SIMILAR EXEMPTIONS UNDER STATE LAW. THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
("SEC"), ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY
AUTHORITY. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The undersigned purchasers (hereafter "the undersigned" or "the
purchaser") hereby offers to purchase certain shares (defined herein) of All
American Food Group, Inc. (the "Company"), a publicly held corporation formed
under the laws of the State of New Jersey. This offer to purchase may, for any
reason whatsoever, be revoked by the undersigned or rejected by the Company
prior to acceptance of this offer by the Company.
Section 1.1 Purchase and Sale of Shares. Upon the following
terms and conditions, the Company shall issue and sell to the Purchasers, and
the Purchasers shall purchase from the Company, the number of shares of Class H
Preferred Stock of the Company (the "Shares") set forth opposite their name
below, having the rights, designations and preferences set forth in Schedule I
hereto.
Section 1.2 Purchase Price. The purchase price for the Shares
(the "Purchase Price") shall be $10 per Share.
Section 1.3 The Closing.
(a) The closing of the purchase and sale of the Shares (the "Closing"),
shall take place at the offices of Lehman & Eilen, 50 Charles Lindbergh
Boulevard -- Suite 505, Uniondale, New York 11553, at 5 p.m., local time on the
later of the following: (i) the date on which the last to be fulfilled or waived
of the conditions set forth in Section 4.1 and 4.2 hereof and applicable to the
Closing shall be fulfilled or waived in accordance herewith, or (ii) such other
time and place and/or on such other date as the Purchaser and the Company may
agree. The date on which the Closing occurs is referred to herein as the
"Closing Date."
(b) On the Closing Date, the Company shall deliver to the Purchaser
certificates representing the Shares to Grushko & Mittman, as Escrow Agent,
under that certain Funds Escrow Agreement, dated as of April 30, 1998, by and
between the Company and Purchaser, and Grushko & Mittman (the "Escrow Agent")
shall deliver to the Company the Purchase Price for all the Shares by cashier's
check or wire transfer in immediately available funds to such account as shall
be designated in writing by the Company. The Company shall also deliver to the
Escrow Agent, prior to the Closing Date 28,000 shares of Common Stock of the
Company for each $10,000 of Shares subscribed for, (the "Escrowed Shares") to be
held in escrow. While held in escrow, the Escrowed Shares and any additional
shares of Common Stock which may be later delivered by the Company to be held in
escrow as set forth below shall not be deemed issued and outstanding for any
purpose nor shall any holder of the Shares have any voting or dispositive rights
thereto. The certificate representing the Escrowed Shares shall be as described
in Section 5.1 of this Agreement. The terms and conditions of escrow shall be
set forth in an escrow agreement in the form annexed as an exhibit hereto (the
"Escrow Agreement"). The Company shall deliver to the Escrow Agent, from time to
time, at the request of the subscriber, within seven (7) business days after
notice of the Company of such request, such additional Common Shares in the form
described in Section 5.1 of this Agreement, as would be necessary to allow
conversion of all the Shares at the then applicable Conversion Price, as defined
in the Resolution annexed hereto. In addition, each party shall deliver all
documents, instruments and writings required to be delivered by such party
pursuant to this Agreement at or prior to the Closing.
(c) Upon conversion of the Shares into common stock, without par value,
of the Company (the "Common
<PAGE>
Stock"), the Company agrees to issue to Purchaser three-year warrants, in the
form attached hereto as Exhibit 2, to purchase such number of shares of the
Company's Common Stock as shall equal of the Common Stock issued upon such
conversion, having an exercise price equal to 200% of the price at which the
Shares were converted into Common Stock (the "Warrants").
Section 1.4 Covenant to Register.
(a) For purposes of this Section, the following definitions shall
apply:
(i) The terms "register," "registered," and "registration"
refer to a registration under the Securities Act of 1933, as amended (the
"Act"), effected by preparing and filing a registration statement or similar
document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement, document or amendment thereto.
(ii) The term "Registrable Securities" means the shares of
common stock of the Company issuable upon conversion of the Shares or exercise
of the Warrants, or upon conversion of any stock issued in payment of dividends
on the Shares, and any securities of the Company or securities of any successor
corporation issued as or issuable upon the conversion or exercise of any
warrant, right or other security that is issued as a dividend or other
distribution with respect to, or in exchange for, or in replacement of, the
Shares.
(iii) The term "holder" or "holder of Registrable Securities"
means the Purchaser and any permitted assignee of registration rights pursuant
to Section 1.4(g).
(b) (i) The Company shall use its best efforts to prepare and file
a registration statement on Form S-3 as soon as practicable and cause such
registration statement to become effective as soon as possible, but no later
than ninety (90) days from the date of this Agreement.
(ii) The Company may suspend the effectiveness of any
registration effected pursuant to this Subsection (b) in the event and for such
period of time as, such a suspension is required by the rules and regulations of
the Securities and Exchange Commission ("SEC"). The Company will use its best
efforts to cause such suspension to terminate at the earliest possible date.
(iii) (A) If a registration statement covering all Registrable
Securities is not effective by ninety (90) days after the date of this Agreement
(the "Target Date"), the Company shall pay the holder as liquidated damages an
amount equal to three percent (3%) of the total Purchase Price of the Shares
held by such holder for each thirty (30) day period following the Target Date
until such time as the registration statement is declared effective. The payment
set forth above shall be pro-rated daily as to any period of less than thirty
(30) days. Such payment shall be made to the holder by cashier's check or wire
transfer in immediately available funds to such account as shall be designated
in writing by the holder and shall be paid irrespective of the amount of
Registrable Securities held by holder.
(B) If, following effectiveness of a registration,
either the effectiveness of the registration statement is suspended or a current
prospectus meeting the requirements of Section 10 of the Act is not available
for delivery by the holder (either referred to herein as a "suspension"), the
Company shall thereupon pay to such holder as liquidated damages an amount equal
to three percent (3%) of the Purchase Price of the Shares held by such holder
for each thirty (30) day period of the suspension. The payment set forth above
shall be pro-rated daily as to periods of less than thirty (30) days. Such
payment shall be made to the holder by cashier's check or wire transfer in
immediately available funds to such account as shall be designated in writing by
the holder, and shall be paid irrespective of the amount of Registrable
Securities held by holder on or after the date following the suspension.
(C) Whenever required under this Section 1.4 to
effect the registration of any Registrable
2
<PAGE>
Securities, the Company shall, as expeditiously as reasonably possible:
(i) Prepare and file with the SEC a
registration statement or amendment thereto with respect to such Registrable
Securities and use its best efforts to cause such registration to become
effective as provided in Section 1.4(b)(i) hereof, and keep such registration
statement effective for so long as any holder of Registrable Securities desires
to dispose of the securities covered by such registration statement; provided,
however, that in no event shall the Company be required to keep the Registration
statement effective for a period greater than three (3) years from the Closing
Date;
(ii) Prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Act with respect to the disposition of all
securities covered by such registration statement and notify the holders of the
filing and effectiveness of such Registration statement and any amendments or
supplements;
(iii) Furnish to each holder of Registrable
Securities such numbers of copies of a current prospectus, including a
preliminary prospectus, conforming with the requirements of the Act, copies of
the registration statement any amendment or supplement to any thereof and any
documents incorporated by reference therein, and such other documents as such
holder of Registrable Securities may reasonably require in order to facilitate
the disposition of Registrable Securities owned by such holder of Registrable
Securities;
(iv) Use its best efforts to register and
qualify the securities covered by such registration statement under such other
securities or "Blue Sky" laws of the State of New York and such jurisdictions as
shall be reasonably requested by the holder of Registrable Securities;
(v) Notify each holder of Registrable
Securities immediately of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances then existing, and use its best efforts to
promptly update and/or correct such prospectus;
(vi) Furnish, at the request of any holder
of Registrable Securities, (A) an opinion of counsel of the Company, dated the
effective date of the registration statement, in form and substance reasonably
satisfactory to the holder and its counsel and covering, without limitation,
such matters as the due authorization and issuance of the securities being
registered and (B) a "comfort" letter or letters of the Company's independent
public accountants provided at the Company's expense in form and substance
reasonably satisfactory to the holder and its counsel;
(vii) Use its best efforts to list the
Registrable Securities covered by such registration statement with any national
market or securities exchange on which such securities are then listed;
(viii) Make available for inspection by the
holder of Registrable Securities, upon request, all SEC Documents (as defined
below) filed subsequent to the Closing and require the Company's officers,
directors and employees to supply all information reasonably requested by any
holder of Registrable Securities in connection with such registration statement;
and
(viiii) Furnish to each holder of Registrable
Securities prompt notice of the commencement of any stop-order proceedings under
the Act, together with copies of all relevant documents in connection therewith,
and use its best efforts to obtain withdrawal of any such stop order as soon as
possible.
(d) Upon request of the Company, each holder of
Registrable Securities will furnish to the Company in connection with any
registration under this Section such information regarding itself, the
Registrable Securities and other securities of the Company held by it, and the
intended method of disposition of such securities as shall
3
<PAGE>
be reasonably required to effect the registration of the Registrable Securities
held by such holder of Registrable Securities.
(e) (i) To the fullest extent permitted by
law, the Company shall indemnify, defend and hold harmless each holder of
Registrable Securities which are included in a registration statement and each
of its officers, directors, employees, agents, partners or controlling persons
(within the meaning of the Act) (each, an "indemnified party") from and against,
and shall reimburse such indemnified party with respect to, any and all claims,
suits, demands, causes of action, losses, damages, liabilities, costs or
expenses ("Liabilities") to which such indemnified party may become subject
under the Act or otherwise, arising from or relating to (A) any untrue statement
or alleged untrue statement of any material fact contained in such registration
statement, any prospectus contained therein or any amendment or supplement
thereto, or (B) the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading; provided,
however, that the Company shall not be liable in any such case to the extent
that any such Liability arises out of or is based upon an untrue statement or
omission so made in strict conformity with information furnished by such
indemnified party in writing specifically for use in the registration statement.
(ii) In the event of any registration
under the Act of Registrable Securities, each holder of such Registrable
Securities hereby severally agrees to indemnity, defend and hold harmless the
Company, and its officers, directors, employees, agents, partners, or
controlling persons (within the meaning of the Act) (each, an "indemnified
party") from and against, and shall reimburse such indemnified party with
respect to, any and all Liabilities to which such indemnified party may become
subject under the Act or otherwise, arising from or relating to (A) any untrue
statement or alleged untrue statement of any material fact contained in such
registration statement, any prospectus contained therein or any amendment or
supplement thereto, or (B) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading;
provided, that such holders will be liable in any such case to the extent and
only to the extent, that any such Liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, prospectus or amendment or supplement
thereto in reliance upon and in conformity with written information furnished by
such holder specifically for use in the preparation thereof, and such Liability
may in no event exceed the value of the Registrable Securities so registered on
behalf of such holder.
(iii) Promptly after receipt by any
indemnified party of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against another party
(the "indemnifying party") hereunder, notify such party in writing thereof, but
the omission so to notify such party shall not relieve such party from any
Liability which it may have to the indemnified party other than under this
Section and shall only relieve it from any Liability which it may have to the
indemnified party under this Section if and to the extent an indemnifying party
is materially prejudiced by such omission. In case any such action shall be
brought against any indemnified party and such indemnified party shall notify an
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel reasonably satisfactory to such
indemnified party, and, after notice from the indemnifying party to the
indemnified party of its election so to assume and undertake the defense
thereof, the indemnifying party shall not be liable to the indemnified party
under this Section for any legal expenses subsequently incurred by the
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected; provided,
however, that if the defendants in any such action include both parties and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to them which are different from or additional to those
available to the indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified party shall have the right to select a separate counsel
and to assume such legal defenses and otherwise to participate in the defense of
such action, with the reasonable expenses and fees of one such separate counsel
and other reasonable expenses related to such participation to be reimbursed by
the indemnifying party as incurred.
4
<PAGE>
(f) (i) With respect to the inclusion of
Registrable Securities in a registration statement, all fees, costs and expenses
of and incidental to such registration, inclusion and public offering shall be
borne by the Company; provided, however, that any security holders participating
in such registration shall bear their pro-rata share of the underwriting
discounts and commissions, if any, incurred by them in connection with such
registration.
(ii) The fees, costs and expenses of
registration to be borne by the Company as provided in this Subsection (f) shall
include, without limitation, all registration, filing and NASD fees, printing
expenses, fees and disbursements of counsel and accountants for the Company, and
all legal fees and disbursements and other expenses of complying with state
securities or Blue Sky laws of any jurisdiction or jurisdictions in which
securities to be offered are to be registered and qualified. Subject to
appropriate agreements as to confidentiality, the Company shall make available
to the holders of Registrable Securities and their counsel its documents and
personnel for due diligence purposes, and will pay the reasonable fees and
expenses of counsel designated by a majority in interest of the holders of
Registrable Securities included in the registration statement, if such counsel
is so designated. Except as otherwise provided herein, fees and disbursements of
counsel and accountants for the selling security holders shall be borne by the
respective selling security holders.
(g) The rights to cause the Company to register
all or any portion of Registrable Securities pursuant to this Section l.4 may be
assigned by Purchaser to a proper transferee or assignee as described herein.
The Purchaser shall notify the Company of the name and address of such
transferee or assignee, and the securities with respect to which such
registration rights are being assigned. Such assignment shall be effective only
if, (i) the Purchaser agrees in writing with the transferee or assignee to
assign such rights, and a copy of such agreement is furnished to the Company
after such transfer or assignment (subject to the purchase price of the shares
being kept confidential by the Purchaser and such transferee or assignee, (ii)
the Company is after such transfer or assignment, furnished with written notice
of (A) the name and address of such transferee or assignee, (B) the Registrable
Securities with respect to which such registration rights are being assigned,
(iii) following such transfer or assignment, the further disposition of the
Registrable Securities by the transferee or assignee is restricted under the Act
and applicable state securities laws, (iv) the transferee or assignee agrees in
writing with the Company to be bound by all of the provisions contained herein,
(v) such transfer shall have been made in accordance with the applicable
requirements of the purchase agreement covering the transaction and (vi) such
transferee shall be an "accredited investor", as that term is defined in Rule
501 of Regulation D, promulgated under the Act.
Section 2.1 Representations and Warranties of the Purchaser. The
Purchaser makes the following representations and warranties to the Company.
(a) Accredited Investor. The Purchaser is an
"accredited investor", as such term is defined in Rule 501(a) of Regulation D,
promulgated under the Act.
(b) Speculative Investment. The Purchaser is
aware that an investment in the Shares is highly speculative and subject to
substantial risks. The Purchaser is capable of bearing the high degree of
economic risk and the burden of this venture, including, but not limited to, the
possibility of complete loss of the Purchaser's investment in the Shares and
underlying securities which make liquidation of this investment impossible for
the indefinite future.
(c) Disposition. The Purchaser understands that (i)
except as provided for in Section 1.4, the Shares, the Warrants and the
underlying common stock of the Company (the "Securities"), have not been and are
not being registered under the Securities Act or any applicable state securities
laws, and may not be transferred unless (A) subsequently registered thereunder,
or (B) sold or transferred pursuant to an exemption from securities registration
under the Securities Act and any applicable state securities laws and (ii) any
resale of such Securities under circumstances in which the seller (or the person
through whom the sale is made) may be deemed to be an underwriter (as that term
is defined in the Securities Act) may require compliance with another exemption
under the Securities Act or the rules of the SEC thereunder.
(d) Privately Offered. The offer to acquire the
Shares was directly communicated to the Purchaser in such manner that the
Purchaser and its advisors were able to ask questions of and receive what
Purchaser
5
<PAGE>
considers satisfactory answers concerning the terms and conditions of this
transaction. At no time was the Purchaser presented with or solicited by or
through any leaflet, public promotional meeting, television advertisement, or
any other form of general advertising.
(e) Purchase for Investment. The Securities are
being acquired solely for the Purchaser's own account, for investment, and are
not being purchased with view to the resale, distribution, subdivision or
fractionalization thereof without a valid registration with applicable
governmental authorities.
(f) Reliance on Exemptions. The Purchaser understands
that the Securities are being offered and sold to Purchaser in reliance upon
specific exemptions from the registration requirements of federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Purchaser's compliance with, the representations, warranties and
agreements of the Purchaser set forth herein in order to determine the
availability of such exemptions and the eligibility of the Purchaser to acquire
the Securities.
Section 2.2 Representations and Warranties of the Company. The
Company hereby makes the following representations and warranties to the
Purchaser:
(a) Organization and Qualification. The Company is a
corporation duly incorporated and existing in good standing under the laws of
the State of New Jersey and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Company and
each such subsidiary, if any, is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary other than those in which the failure so to qualify would not have a
Material Adverse Effect. "Material Adverse Effect" means any adverse effect on
the business, operations, properties or financial condition of the entity with
respect to which such term is used and which is material to such entity and
other entities controlled by such entity taken as a whole.
(b) Authorization; Enforcement. (i) The Company has
the requisite corporate power and authority to enter into and perform this
Agreement and to issue the Shares and the Warrants, in accordance with the terms
hereof, (ii) the execution and delivery of this Agreement by the Company and the
consummation by it of the transactions contemplated hereby have been duly
authorized by all necessary corporate action, and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required, (iii) this Agreement has been duly executed and delivered by the
Company, (iv) this Agreement constitutes a valid and binding obligation of the
Company enforceable against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application) and (v) prior to the Closing
Date, any necessary Certificate of Amendment to the Company's Charter
authorizing Company to issue all of the Shares, in accordance with Schedule I,
will have been filed with the New Jersey Secretary of State and will be in full
force and effect, enforceable against the Company in accordance with its terms.
(c) Capitalization. The authorized capital stock of
the Company consists of 20,000,000 shares of Common Stock and 4,000,000 shares
of Preferred Stock; there are 2,312,000 shares of Common Stock and 571,245
shares of Preferred Stock issued and outstanding; and, upon issuance of the
Shares in accordance with the terms hereof, there will be 2,312,000 shares of
Common Stock and a maximum of 606,245 shares of Preferred Stock issued and
outstanding.
All of the outstanding shares of the Company's Common
Stock have been validly issued and are fully paid and nonassessable. Except as
set forth in the Company's recent registration statement on Form SB-2, no shares
of Common Stock are entitled to registration rights and there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company, or contracts, commitments,
understandings, or arrangements by which the
6
<PAGE>
Company is or may become bound to issue additional shares of capital stock of
the Company or options, warrants, scrip, rights to subscribe to, or commitments
to purchase or acquire, any shares, or securities or rights convertible into
shares, of capital stock of the Company. The Company has furnished to the
Purchaser true and correct copies of the Company's Certificate of Incorporation
as in effect on the date hereof (the "Charter"), and the Company's By-Laws, as
in effect on the date hereof (the "By-Laws").
(d) Issuance of Shares. The issuance of the Shares
and the Warrants have been duly authorized and, when paid for and issued in
accordance with the terms hereof, the Shares shall be validly issued, fully paid
and non-assessable and entitled to the rights and preferences set forth in
Schedule I hereto, and the Warrants, when issued, will be validly issued. The
Common Stock issuable upon conversion of the Shares and exercise of the Warrants
will be duly authorized and reserved for issuance and, upon conversion, will be
validly issued, fully paid and non-assessable and the holders shall be entitled
to all rights and preferences accorded to a holder of Common Stock.
(e) No Conflicts. The execution, delivery and
performance of this Agreement by the Company and the consummation by the Company
of the transactions contemplated hereby do not and will not (i) result in a
violation of the Company's Charter or By-Laws or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, or result
in a violation of any federal, state, local or foreign law, rule, regulation,
order, judgment or decree (including Federal and state securities laws and
regulations) applicable to the Company or any of its subsidiaries or by which
any property or assets of the Company or any of its subsidiaries is bound or
affected (except for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect); provided that, for purposes of such
representation as to Federal, state, local or foreign law, rule or regulation,
no representation is made herein with respect to any of the same applicable
solely to the Purchaser and not to the Company. The business of the Company is
not being conducted in violation of any law, ordinance or regulations of any
governmental entity, except for violations which either singly or in the
aggregate do not and will not have a Material Adverse Effect. The Company is not
required under Federal, state or local law, rule or regulation in the United
States to obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under this Agreement or issue and sell
the Shares in accordance with the terms hereof (other than any SEC, NASD or
state securities filings which may be required to be made by the Company
subsequent to the Closing, and any registration statement which may be filed
pursuant hereto); provided that, for purposes of the representation made in this
sentence, the Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Purchaser herein; and, provided, further,
that under the Nasdaq's new corporate governance rules, the Company will seek
shareholder approval of the issuance of the Shares, or an exemption therefrom.
(f) SEC Documents, Financial Statements. The Common
Stock of the Company is registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the Company has filed
on a timely basis all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements
of the Exchange Act, including material filed pursuant to Section 13(a) or
15(d), in addition to one or more registration statements and amendments thereto
heretofore filed by the Company with the SEC under the Act (all of the foregoing
including filings incorporated by reference therein being referred to herein as
the "SEC Documents"). The Company, through its agent, has delivered to the
Purchaser true and complete copies of the SEC Documents (except for exhibits and
incorporated documents). The Company has not provided to the Purchaser any
information which, according to applicable law, rule or regulation, should have
been disclosed publicly by the Company but which has not been so disclosed,
other than with respect to the transactions contemplated by this Agreement.
As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Act or the
Exchange Act as the case may be and the rules and regulations of the SEC
promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such SEC Documents, and none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were
7
<PAGE>
made, not misleading. The financial statements of the Company included in the
SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company as of the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
(g) No Material Adverse Change. Since the date
through which the most recently filed SEC Documents, no Material Adverse Effect
has occurred or exists with respect to the Company or any of its subsidiaries.
(h) No Undisclosed Liabilities. The Company and its
subsidiaries have no material liabilities or obligations not disclosed in the
SEC Documents, including, without limitation, any litigation, other than those
incurred in the ordinary course of the Company's or any of its subsidiaries'
respective businesses since the date of the most recently filed SEC Documents
which, individually or in the aggregate, do not or would not have a Material
Adverse Effect on the Company or any of its subsidiaries.
(i) No Undisclosed Events or Circumstances. No event
or circumstance has occurred or exists with respect to the Company or any of its
subsidiaries or their respective businesses, properties, prospects, operations
or financial condition which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed.
(j) No General Solicitation. Neither the Company,
nor any of its affiliates, or, to its knowledge, any person acting on its or
their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the Act) in connection
with the offer or sale of the Shares or Warrants.
(k) No Integrated Offering. Neither the Company, nor
any of its affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales in any security or solicited any
offers to buy any security under circumstances that would require registration
of any of the Securities under the 1933 Act or cause the offering of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
NASDAQ SmallCap, as applicable, nor will the Company or any of its subsidiaries
take any action or steps that would require registration of the Securities under
the 1933 Act or cause the offering of the Securities to be integrated with other
offerings. The Company has not conducted and will not conduct any offering that
will be integrated with the issuance of the Securities solely for purposes of
Rule 4460(i) of the NASDAQ Stock Market, Inc.'s Marketplace Rules.
(l) S-3 Eligibility. The Company currently meets, and
will take all necessary action to continue to meet, the "registrant eligibility"
requirements set forth in the general instructions to Form S-3.
(m) Common Stock Listing. The Company's common stock
is quoted on, and is listed for trading n the NASDAQ SmallCap Market. The
Company has received no notice, either oral or written, other than those
heretofore provided to Purchaser or its counsel, with respect to the continued
eligibility of the common stock for such listing, and the Company has maintained
all requirements for the continuation of such listing.
Section 3.1 Securities Compliance. The Company shall notify the
SEC and NASD, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Shares and Warrants, and the
common stock of the Company issuable upon conversion thereof, to the Purchaser,
and promptly provide Purchaser with copies thereof.
8
<PAGE>
Section 3.2 Registration and Listing. Until at least two (2)
years after all Shares have been converted into Common Stock, the Company will
cause its Common Stock to continue to be registered under Sections 12(b) or
12(g) of the Exchange Act, will comply in all respects with its reporting and
filing obligations under such Exchange Act, will comply with all requirements
related to any registration statement filed pursuant to this Agreement and will
not take any action or file any document (whether or not permitted by the Act or
the Exchange Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under said Acts, except as permitted herein. Until at least two (2) years after
all Shares have been converted into Common Stock, the Company will take all
action within its power to continue the listing or trading of its Common Stock
on the NASDAQ Small Cap Market and will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the NASD and NASDAQ. The covenants set forth in this Section 3.2 shall not be
deemed to prohibit a merger, sale of all assets or other corporate
reorganization if the entity surviving or succeeding to the Company is bound by
this Agreement with respect to its securities issued in exchange for or in
replacement of the Shares or Common Stock. The Company and Purchaser agree that
until the Company either obtains shareholder approval of the issuance and
conversion of the Shares, or an exemption from Nasdaq's new corporate governance
rules as they may apply to the Shares, the Purchaser may not and will not
convert the Shares into more than 19.9% of the shares of Company's Common Stock
outstanding on the date hereof.
The Company undertakes to obtain the approval of its
shareholders required pursuant to the NASDAQ's corporate governance rules to
allow conversion of all the Shares and exercise of all the Warrants (as
described in Section 1.3(c)). The Company represents and warrants that the
Company is in possession of irrevocable proxies representing sufficient common
shares to obtain the aforedescribed shareholder approval. The Company covenants
to obtain the shareholder approval no later than 45 days from the Closing Date.
Failure to obtain shareholder approval on or before 45 days from the Closing
Date shall be deemed an Event of Default pursuant to Section 10 of the
Resolution Establishing Rights and Preferences for Class H Convertible Preferred
Stock.
Section 3.3 Listing. The Company shall promptly secure the
listing of the common stock issuable upon conversion of the Shares and exercise
of the Warrants upon each national securities exchange or automated quotation
system, if any, upon which shares of common stock are then listed (subject to
official notice of issuance) and shall maintain so long as any other shares of
common stock shall be so listed, such listing o all common stock from time to
time issuable upon conversion of the Shares or exercise of the Warrants. The
Company will obtain and maintain the listing and trading of its common stock on
NASDAQ SmallCap, and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the National
Association of Securities Dealers ("NASD") and such exchanges, as applicable.
The Company shall promptly provide to each Purchaser copies of any notices it
receives regarding the continued eligibility of the common stock for listing on
such exchanges or quotation systems, or any other exchange or quotation system
on which the common stock is then listed.
Section 4.1 Conditions Precedent to the Obligation of the
Company to Sell the Shares. The obligation hereunder of the Company to issue
and/or sell the Shares to the Purchaser is subject to the satisfaction, at or
before the Closing, of each of the conditions set forth below. These conditions
may be waived by the Company at any time in its sole discretion.
(a) Accuracy of the Purchaser's Representations and
Warranties. The representations and warranties of the Purchaser shall be true
and correct in all material respects as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a particular date).
(b) Performance by the Purchaser. The Purchaser shall have
performed all agreements and satisfied all conditions required to be performed
or satisfied by the Purchaser at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement.
(d) Legal action. No legal action, suit or proceeding
shall be pending or threatened which
9
<PAGE>
seeks to restrain or prohibit the transactions contemplated by this Agreement.
(e) Execution. The Purchaser shall have executed this
Agreement and the related Funds Escrow Agreement and Shares Escrow Agreements,
and delivered such agreements to the Company.
Section 4.2 Conditions Precedent to the Obligation of the
Purchaser to Purchase the Shares. The obligation hereunder of the Purchaser to
acquire and pay for the Shares is subject to the satisfaction, at or before the
Closing, of each of the conditions set forth below. These conditions may be
waived by the Purchaser at any time in its sole discretion.
(a) Accuracy of the Company's Representations and
Warranties. The representations and warranties of the Company shall be true and
correct in all material respects as of the date when made and as of the Closing
Date as though made at that time (except for representations and warranties that
speak as of a particular date).
(b) Performance by the Company. The Company shall have
performed all agreements and satisfied all conditions required to be performed
or satisfied by the Company at or prior to the Closing.
(c) NASDAQ. From the date hereof to the Closing Date,
trading in the Company's Common Stock shall not have been suspended by the SEC
or the NASDAQ Small Cap Market (except for any suspension of trading of limited
duration agreed to between the Company and the NASDAQ Small Cap Market solely to
permit dissemination of material information regarding the Company), and trading
in securities generally as reported by NASDAQ shall not have been suspended or
limited or minimum prices shall not have been established on securities whose
trades are reported by NASDAQ.
(d) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement.
(e) Execution. The Company shall have executed this
Agreement and the related Funds Escrow Agreement and Shares Escrow Agreements,
and delivered such agreements to the Purchaser.
(f) Opinion of Counsel, Etc. The Purchaser shall have
received before or at the Closing an opinion of counsel to the Company , in form
and substance reasonably satisfactory to the Purchaser and its counsel, and such
other certificates and documents as the Purchaser or its counsel shall
reasonably require incident to the Closing.
Section 5.1 Legend on Stock. Each certificate representing the
Shares and, if necessary, Common Stock issued upon conversion thereof, shall be
stamped or otherwise imprinted with a legend substantially in the following
form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO
REGISTRATION UNDER THE ACT OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE ACT AND APPLICABLE STATE
SECURITIES LAWS
The Company agrees to reissue certificates
representing the Shares or, if applicable, the Common Stock issued upon
conversion thereof without the legend set forth above at such time as (a) the
holder thereof is permitted to dispose of such Shares (or securities issued upon
conversion thereof) pursuant to Rule 144(k) under the Act, (b) the securities
are sold to a purchaser or purchasers who (in the opinion of counsel to such
purchasers, in form and substance reasonably satisfactory to the Company and its
counsel) are able to dispose of such securities publicly without registration
under the Act, or (c) such securities are registered under the Act.
Section 6.1 Termination by Mutual Consent. This Agreement may
be terminated at any time prior to
10
<PAGE>
the Closing by the mutual written consent of the Company and the Purchaser.
Section 6.2 Other Termination. This Agreement may be terminated
by action of the Board of Directors or other governing body of the Purchaser or
the Company at any time if the Closing shall not have been consummated by the
fifth (5th) business day following the date of this Agreement, provided that the
party seeking to terminate the Agreement is not in breach of the Agreement.
Section 6.3 Automatic Termination. This Agreement shall
automatically terminate without any further action of either party hereto if the
Closing shall not have occurred by the seventh (7th) business day following the
date of this Agreement, provided, however, that any such termination shall not
terminate the liability of any party which is then in breach of the Agreement.
Section 7.1 Fees and Expenses. Except as otherwise set forth in
Section 1.4 hereof with respect to the registration of Registrable Securities,
the Company shall pay the fees, commissions and expenses of its advisers,
brokers, finders, counsel, accountants and other experts, if any, and all other
expenses associated therewith.
Section 7.2 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of New York. The parties hereto hereby
waive trial by jury and consent to exclusive jurisdiction and venue in the State
of New York.
Section 7.3 Entire Agreement: Amendment. This Agreement contains
the entire understanding of the parties with respect to the matters covered
hereby and, except as specifically set forth herein, neither the Company nor the
Purchaser makes any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be waived or amended
other than by a written instrument signed by the party against whom enforcement
of any such amendment or waiver is sought.
Section 7.4 Notices. Any notice or other communication required
or permitted to be given hereunder shall be in writing and shall be effective
(a) upon hand delivery or delivery by telex (with correct answer back received),
telecopy or facsimile at the address or number designated below (if delivered on
a business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered other
than on a business day during normal business hours where such notice is to be
received) or (b) on the second (2nd) business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
to the Company: All American Food Group, Inc.
104 New Era
South Plainfield, New Jersey 07080
Attn: Andrew Thorburn, President and CEO
FAX (908)757-8857
to the Purchaser: At the address set forth at the foot of
this Agreement or as specified in writing
by Purchaser.
Any party hereto may from time to time change its address for notices by giving
at least ten (10) days' written notice of such changed address to the other
party hereto.
Section 7.5 Waivers. No waiver by either party of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
11
<PAGE>
Section 7.6 Headings. The headings herein are for convenience
only, do not constitute a part of this Agreement and shall not be deemed to
limit or affect any of the provisions hereof.
Section 7.7 Governing Law. This Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York without regard to such state's principles of conflict of laws.
Section 7.8 Survival. The representations and warranties of the
Company and the Purchaser contained in herein and the agreements and covenants
set forth in Sections 1.1 through 1.4 3.1 and 3.2, and 7.1 through 7.15 shall
survive the Closing.
Section 7.9 NASDAQ. The term "NASDAQ" or "NASDAQ Small Cap
Market" herein refers to the principal market on which the Common Stock of the
Company is traded. If the Common Stock is listed on a securities exchange, or if
another market becomes the principal market on which the Common Stock is traded
or through which price quotations for the Common Stock are reported, the term
"NASDAQ" or "NASDAQ Small Cap Market" shall be deemed to refer to such exchange
or other principal market.
Section 7.10 Acceptance Execution and delivery of this Agreement
shall constitute an offer to purchase the Shares, which offer, unless previously
revoked by the Undersigned, may be accepted or rejected by the Company, in its
sole discretion for any cause or for no cause and without liability to the
Undersigned. The Company shall indicate acceptance of this Agreement by signing
as indicated on the signature page hereof.
Section 7.11 Binding Agreement Upon acceptance of this Agreement
by the Company, the Undersigned agrees that he may not cancel, terminate or
revoke any agreement of the Undersigned made hereunder, and that this Agreement
shall survive the death or disability of the Undersigned and shall be binding
upon heirs, successors, assigns, executors, administrators, guardians,
conservators or personal representatives of the Undersigned.
Section 7.12 Incorporation by Reference All information set forth
on the signature page is incorporated as integral terms of this Agreement.
Section 7.13 Counterparts. This Agreement may be signed in
multiple counterparts, which counterparts shall constitute one and the same
original instrument.
Section 7.14 Severability. If any portion of this Agreement shall
be held illegal, unenforceable, void or voidable by any court, each of the
remaining terms hereof shall nevertheless remain in full force and effect as a
separate contract. Nothing contained herein shall be deemed to establish or
require payment of a rate of interest or other charges in excess of the maximum
permitted applicable law. In the event that the rate of interest required to be
paid or other charges hereunder exceed the maximum permitted by such law, any
payments in excess of such maximum shall be credited against amounts owed by the
Borrower to the Holder and thus refunded to the Borrower.
Section 7.15 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
THIS SPACE HAS BEEN LEFT BLANK INTENTIONALLY.
THE SIGNATURE PAGE FOLLOWS.
12
<PAGE>
IN WITNESS WHEREOF, the Undersigned Purchaser has executed this Agreement on the
date set forth below.
For the purchase price of $100 per Share, the Purchasers respectively tender
herewith the amounts indicated below:
- --------------------------------------------------------------------------------
$____________________ for ____________ Shares
Name: AUSTOST ANSTALT SCHAAN
Address:_____________________________________________________
Signature of Purchaser: __________________________
By:_______________________________________________ Dated as of : April 30, 1998
Print Name: ________________________________________________
and Title (if applicable): _________________________________
- --------------------------------------------------------------------------------
$____________________ for ____________ Shares
Name: BALMORE FUNDS, S.A.
Address:_____________________________________________________
Signature of Purchaser: __________________________
By:_______________________________________________ Dated as of : April 30, 1998
Print Name: ________________________________________________
and Title (if applicable): _________________________________
Accepted by:
ALL AMERICAN FOOD GROUP, INC., a New Jersey corporation
By: ________________________________________________________
Name: ______________________________________________________
Title: _____________________________________________________
13
<PAGE>
SCHEDULE I
ALL AMERICAN FOOD GROUP, INC.
RESOLUTION ESTABLISHING RIGHTS AND
PREFERENCES FOR CLASS H CONVERTIBLE PREFERRED STOCK
RESOLVED, that there shall be a series of shares of the Corporation
designated "Class H Convertible Preferred Stock"; that the number of shares of
such series shall be 35,000 and that the rights and preferences of such series
(the "Class H Preferred") and the limitations or restrictions thereon, shall be
as set forth herein;
The following shall be adopted and incorporated by reference into the
foregoing resolutions as if fully set forth therein:
1. Dividends.
(a) The holders of the Class H Preferred shall be entitled to
receive out of any assets legally available therefor cumulative dividends at the
rate of $12 per share per annum, accrued daily and payable quarterly in arrears
on March 31, June 30, September 30 and December 31 of each year in preference
and priority to any payment of any dividend on the Common Stock or any other
series of the Corporation's Preferred Stock. Such dividends shall accrue on any
given share from the day of original issuance of such share and shall accrue
from day to day whether or not earned or declared. If at any time dividends on
the outstanding Class H Preferred at the rate set forth above shall not have
been paid or declared and set apart for payment with respect to all preceding
periods, the amount of the deficiency shall be fully paid or declared and set
apart for payment, but without interest, before any distribution, whether by way
of dividend or otherwise, shall be declared or paid upon or set apart for the
Common Stock or any other series of the Preferred Stock of the Corporation.
(b) Any dividend payable on a dividend payment date may be
paid, at the option of the Corporation, either (i) in cash or (ii) in shares of
Common Stock, if the Common Stock issuable upon conversion of such shares has
been registered for resale under the Securities Act of 1933, as amended (the
"Act"), and the registration statement including a current prospectus with
respect thereto remains in effect at the date of delivery of such shares or an
exemption from such registration is available under the Act.
(c) Nothing contained herein shall be deemed to establish or
require any payment or other charges in excess of the maximum permitted by
applicable law. In the event that any payment required to be paid or other
charges hereunder exceed the maximum permitted by such law, any payments in
excess of such maximum shall be credited against amounts owed by the Company the
holder and thus refunded to the Company.
2. Liquidation Preference; Redemption.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, the holders of the Class H
Preferred shall be entitled to receive, prior and in preference to any
distribution of any assets of the Corporation to the holders of the Common
Stock, the amount of $10 per share plus any and all accrued but unpaid dividends
(the "Liquidation Preference").
(b) A consolidation or merger of the Corporation with or into
any other corporation or corporations, or a sale of all or substantially all of
the assets of the Corporation (other than a sale or transfer to a wholly owned
subsidiary of the Corporation), shall, at the option of the holders of the Class
H Preferred, be deemed a liquidation, dissolution or winding up within the
meaning of this Section 2 if the shares of stock of the Corporation outstanding
immediately prior to such transaction represent immediately after such
transaction less than a majority of the voting power of the surviving
corporation (or of the acquirer of the Corporation's assets in the case of a
sale of assets). Such option may be exercised by the vote or written consent of
holders of a majority of the Class H Preferred at any time within thirty (30)
days after written notice (which shall be given promptly) of the essential terms
of such transaction shall have been given to the holders of the Class H
Preferred in the manner provided by law for the giving of notice of meetings of
shareholders.
1
<PAGE>
(c) The Corporation, at its option, may cause all outstanding
shares of the Class H Preferred to be redeemed at any time beginning two (2)
years after the Closing Date, provided the Corporation has given notice of its
intention to redeem to the holders of the Class H Preferred at least twenty (20)
days prior to the redemption date. On the redemption date, the Corporation shall
pay such holders by cashier's check or wire transfer in immediately available
funds the amount of $13.50 per share, plus all accrued but unpaid dividends and
any amounts due under Section 1 hereof. Promptly thereafter, the holders shall
surrender the certificate or certificates representing the Class H Preferred,
duly endorsed, at the office of the Corporation or of any transfer agent for
such shares, or at such other place designated by the Corporation. The holder's
right to convert the Class H Preferred Stock shall continue until actual receipt
of the entire payment described herein.
3. Class H Preferred - Optional Conversion. The holders of the
Class H Preferred shall have optional conversion rights as follows:
(a) Right to Convert. Shares of Class H Preferred shall be
convertible, at the option of the holder thereof, into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing (x) the
Liquidation Preference of the Class H Preferred determined pursuant to Section 2
hereof on the date the notice of conversion is given, by (y) the Conversion
Price determined as hereinafter provided in effect on the applicable conversion
date.
(b) Mechanics of Conversion. To convert shares of Class H
Preferred into shares of Common Stock under Section 3(a), the holder shall give
written notice to the Corporation (which notice may be given by facsimile
transmission) that such holder elects (with the right to revoke) to convert the
shares and shall state therein date of the conversion, the number of shares to
be converted and the name or names in which such holder wishes the certificate
or certificates for shares of Common Stock to be issued. Promptly thereafter,
the holder shall surrender the certificate or certificates representing the
shares to be converted, duly endorsed, at the office of the Corporation or of
any transfer agent for such shares, or at such other place designated by the
Corporation; provided, that the holder shall not be required to deliver the
certificates representing such shares if the holder is waiting to receive all or
part of such certificates from the Corporation. The Corporation shall
immediately issue and deliver to or upon the order of such holder, against
delivery of the certificates representing the shares which have been converted,
a certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled. The Corporation shall cause such issuance to be
effected within five (5) business days and shall transmit the certificates by
messenger or overnight delivery service to reach the address designated by such
holder within five (5) business days after the receipt of such notice. The
notice of conversion may be given by a holder at any time during the day up to
5:00 p.m. South Plainfield, New Jersey time and such conversion shall be deemed
to have been made immediately prior to the close of business on the date such
notice of conversion is given. The person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock at the
close of business on such date.
(c) Conversion Required. The Corporation acknowledges and
understands that a delay in the issuance of the Common Stock pursuant to the
provisions hereof could result in economic loss to the holders of the Class H
Preferred. As compensation to the holder for such loss, the Company agrees to
pay as liquidated damages to the holder for late issuance of Shares upon
conversion in accordance with the following schedule (where "No. Business Days
Late" is defined as the number of business days beyond ten (10) business days
from the date of receipt by the Company and the transfer agent of a Notice of
Conversion of all necessary documentation duly executed and in proper form
required for conversion, including the original Class H Preferred to be
converted, all in accordance with the Class H Preferred, Subscription Agreement
and the requirements of the transfer agent):
2
<PAGE>
Liquidated Damages per
No. Business Days Late $100,000 of Class H Preferred
---------------------- -----------------------------
1 $ 500
2 $1,000
3 $1,500
4 $2,000
5 $2,500
6 $3,000
7 $3,500
8 $4,000
9 $4,500
10 $5,000
10 $5,000 + $1,000 each
Business Day Late beyond 10 days
The Company shall pay the holder any liquidated
damages incurred under this Section by check upon the earlier to occur of (i)
issuance of the Shares to the holder or (ii) each monthly anniversary of the
receipt of the Company of such holder's Notice of Conversion.
The Company shall at all times reserve and have
available all Common Stock necessary to meet conversion of the Class H Preferred
by all holder of the entire amount of Class H Preferred then outstanding. If, at
any time holder submits a Notice of Conversion and the Company does not have
sufficient authorized but unissued shares of Common Stock available to effect,
in full, a conversion of the Class H Preferred (a "Conversion Default", the date
of such default being referred to herein as the "Conversion Default Date"), the
Company shall issue to the holder all of the shares of Common Stock which are
available, and the Notice of Conversion as to any Class H Preferred requested to
be converted but not converted (the "Unconverted Class H Preferred"), upon
holder's sole option, may be deemed null and void. The Company shall provide
notice of such Conversion Default ("Notice of Conversion Default") to all
existing holders of outstanding Class H Preferred, by facsimile, within one (1)
business day of such default (with the original delivered by overnight or two
day courier), and the holder shall give notice to the Company by facsimile
within five business days of receipt of the original Notice of Conversion
Default (with the original delivered by overnight or two day courier) of its
election to either nullify or confirm the Notice of Conversion.
The Company agrees to pay to all holder of
outstanding Class H Preferred, as liquidated damages, payments for a Conversion
Default ("Conversion Default Payments") in the amount of (N/365) x (.24) x the
initial issuance price of the outstanding and/or tendered but not converted
Class H Preferred held by each holder where N = the number of days from the
Conversion Default Date to the date (the "Authorization Date") that the Company
authorizes a sufficient number of shares of Common Stock to effect conversion of
all remaining Class H Preferred. The Company shall send notice ("Authorization
Notice") to each holder of outstanding Class H Preferred that additional shares
of Common Stock have been authorized, the Authorization Date and the amount of
holder's accrued Conversion Default Payments. The accrued Conversion Default
shall be paid in cash or shall be convertible into Common Stock at the
Conversion Rate, at the holder's option, payable as follows: (i) in the event
holder elects to take such payment in cash, cash payments shall be made to such
holder of outstanding Class H Preferred by the fifth day of the following
calendar month, or (ii) in the event holder elects to take such payment in
stock, the holder may convert such payment amount into Common Stock at the
conversion rate set forth in Section 4(a) at anytime after the 5th day of the
calendar month following the month in which the Authorization Notice was
received, until the maturity date. Nothing herein shall limit the holder's right
to pursue actual damages for the Company's failure to issue and deliver shares
of Common Stock to the holder in accordance to the terms of the Class H
Preferred.
(d) Determination of Conversion Price.
(i) The "Conversion Price" shall be equal to the
lower of: (a) eighty percent (80%) of the average of the closing bid prices of
the Common Stock as reported by NASDAQ during the five (5) consecutive
3
<PAGE>
trading days preceding the conversion date (but not including such date) or (b)
eighty percent (80%) of the average of the closing bid prices of the Common
Stock for the five (5) consecutive trading days prior to the Closing Date.
(ii) The "closing bid price" of the Common Stock on a
trading day shall be the closing bid price of the Common Stock on NASDAQ or any
other principal securities price quotation system or market on which prices of
the Common Stock are reported. The term "trading day" means a day on which
trading is reported on the principal quotation system or market on which prices
of the Common Stock are reported.
(iii) If, during the period of consecutive trading
days provided for above, the Corporation shall declare or pay any dividend on
the Common Stock payable in Common Stock or in rights to acquire Common Stock,
or shall effect a stock split or reverse stock split, or a combination,
consolidation or reclassification of the Common Stock, the Conversion Price
shall be proportionately decreased or increased, as appropriate, to give effect
to such event.
(e) Distributions. If the Corporation shall at any time or
from time to time make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other distribution
payable in securities of the Corporation or any of its subsidiaries other than
additional shares of Common Stock, then in each such event provision shall be
made so that the holders of Class H Preferred shall receive, upon the conversion
thereof, the securities of the Corporation which they would have received had
they been the owners on the date of such event of the number of shares of Common
Stock issuable to them upon conversion.
(f) Certificates as to Adjustments. Upon the occurrence of any
adjustment or readjustment of the Conversion Price pursuant to this Section 3,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and cause the independent
public accountants regularly employed to audit the financial statements of the
Corporation to verify such computation and prepare and furnish to each holder of
Class H Preferred a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The Corporation shall, upon the reasonable written request at any time of
any holder of Class H Preferred, furnish or cause to be furnished to such holder
a like certificate prepared by the Corporation setting forth (i) such
adjustments and readjustments, and (ii) the number of other securities and the
amount, if any, of other property which at the time would be received upon the
conversion of Class H Preferred with respect to each share of Common Stock
received upon such conversion.
(g) Notice of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any security or
right convertible into or entitling the holder thereof to receive additional
shares of Common Stock, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property, or
to receive any other right, the Corporation shall mail to each holder of Class H
Preferred at least ten (10) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution, security or right and the amount and character of
such dividend, distribution, security or right.
(h) Issue Taxes. The Corporation shall pay any and all issue
and other taxes, excluding any income, franchise or similar taxes, that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of shares of Class H Preferred pursuant hereto; provided, however,
that the Corporation shall not be obligated to pay any transfer taxes resulting
from any transfer requested by any holder in connection with any such
conversion.
(i) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Class H Preferred, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Class H Preferred, and if at any time the
number of
4
<PAGE>
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Class H Preferred, the
Corporation will take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose, including, without limitation, engaging in best
efforts to obtain any requisite shareholder approval.
(j) Fractional Shares. No fractional shares shall be issued
upon the conversion of any share or shares of Class H Preferred. All shares of
Common Stock (including fractions thereof) issuable upon conversion of more than
one share of Class H Preferred by a holder thereof shall be aggregated for
purposes of determining whether the conversion would result in the issuance of
any fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of a fraction of a share of Common Stock, the
Corporation shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the fair market value
of such fraction on the date of conversion (as determined in good faith by the
Board of Directors of the Corporation or an authorized Committee thereof).
(k) Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be effective (a)
upon hand delivery or delivery by telex (with correct answer back received),
telecopy or facsimile at the address or number designated below (if delivered on
a business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered other
than on a business day during normal business hours where such notice is to be
received) or (b) on the second (2nd) business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
to the Company: All American Food Group, Inc.
104 New Era
South Plainfield, New Jersey 07080
Attn: Andrew Thorburn, President and CEO
FAX (908)757-8857
to the Holder: At the address set forth on the books and
recoirds of the Company or as specified in
writing by Holder.
Any party hereto may from time to time change its address for notices by giving
at least ten (10) days' written notice of such changed address to the other
party hereto.
(l) Reorganization or Merger. In case of any reorganization or
any reclassification of the capital stock of the Corporation or any
consolidation or merger of the Corporation with or into any other corporation or
corporations or a sale of all or substantially all of the assets of the
Corporation to any other person (other than a sale or transfer to a wholly-owned
subsidiary of the Corporation), and the holders of Class H Preferred do not
elect to treat such transaction as a liquidation, dissolution or winding up as
provided in Section 2 hereof, then, as part of such reorganization,
consolidation, merger or sale, provision shall be made so that each share of
Class H Preferred shall thereafter be convertible into the number of shares of
stock or other securities or property (including cash) to which a holder of the
number of shares of Common Stock deliverable upon conversion of such share of
Class H Preferred would have been entitled upon the record date of (or date of,
if no record date is fixed) such event and, in any case, appropriate adjustment
(as determined by the Board of Directors) shall be made in the application of
the provisions herein set forth with respect to the rights and interests
thereafter of the holders of the Class H Preferred, to the end that the
provisions set forth herein shall thereafter be applicable, as nearly as
equivalent as is practicable, in relation to any shares of stock or the
securities or property (including cash) thereafter deliverable upon the
conversion of the shares of Class H Preferred.
4. Re-issuance of Certificates. In the event of a conversion (or, if
applicable, redemption) of Class H Preferred in which less than all of the
shares of Class H Preferred of a particular certificate are converted or
redeemed, as the case may be, the Corporation shall promptly cause to be issued
and delivered to the holder of such certificate, a certificate representing the
remaining shares of Class H Preferred which have not been so converted or
redeemed.
5
<PAGE>
5. Other Provisions. For all purposes of this Resolution, the term
"date of issuance" and the terms "Closing" or "Closing Date" shall mean the day
on which Shares are first issued by the Corporation. Any provision herein which
conflicts with or violates any applicable usury law shall be deemed modified to
the extent necessary to avoid such conflict or violation. The term "NASDAQ"
herein refers to the principal market on which the Common Stock of the
Corporation is traded. If the Common Stock is listed on a securities exchange,
or if another market becomes the principal market on which the Common Stock is
traded or through which price quotations for the Common Stock are reported, the
term "NASDAQ" shall be deemed to refer to such exchange or other principal
market. The term "conversion date" shall mean the date on which the notice of
conversion is received by the Corporation.
6. Voting Rights. The Class H Preferred shall have the right to vote on
all matters with the holders of the Common Stock (and not as a separate class)
on an "as converted" basis, based on the number of shares of Common Stock into
which the Class H Preferred are convertible on the record date of any such
action.
7. Attorneys' Fees. Any holder of Class H Preferred shall be entitled
to recover from the Corporation the reasonable attorneys' fees and expenses
incurred by such holder in connection with enforcement by such holder of any
obligation of the Corporation hereunder.
8. No Adverse Actions. The Corporation shall not in any manner, whether
by amendment of the Certificate of Incorporation (including, without limitation,
any Certificate of Designation), merger, reorganization, recapitalization,
consolidation, sales of assets, sale of stock, tender offer, dissolution or
otherwise, take any action, or permit any action to be taken, solely or
primarily for the purpose of increasing the value of any class of stock of the
Corporation if the effect of such action is to reduce the value or security of
the Class H Preferred.
9. Anti-Dilution Previsions.
(a) The Conversion Rate shall also be subject to adjustment
from time to time as follows:
(i) In case of any merger of the Corporation
with or into any other corporation (other than a merger in which the Corporation
is the surviving or continuing corporation and which does not result in any
reclassification, conversion, or change of the outstanding shares of common
stock) then as part of such merger lawful provision shall be made so that
holders of Class H Preferred Stock shall thereafter have the right to convert
each share of Class H Preferred Stock into the kind and amount of shares of
stock and/or other securities or property receivable upon such merger by a
holder of the number of shares of common stock into which such shares of Class H
Preferred Stock might have been converted immediately prior to such
consolidation or merger. Such provision shall also provide for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for elsewhere in these resolutions. The foregoing provisions of this paragraph
shall similarly apply to successive mergers.
(ii) In case of any sale or conveyance to another
person or entity of the property of the Corporation as an entirety, or
substantially as an entirety, in connection with which shares or other
securities or cash or other property shall be issuable, distributable, payable,
or deliverable for outstanding shares of common stock, then unless the right to
convert such shares shall have terminated, lawful provision shall be made so
that the holders of Class H Preferred Stock shall thereafter have the right to
convert each share of the Class H Preferred Stock into the kind and amount of
shares of stock or other securities or property that shall be issuable,
distributable, payable, or deliverable upon such sale or conveyance with respect
to each share of common stock immediately prior to such conveyance."
(b) Subject to the provisions of this section, if the
Corporation at any time shall issue any shares of common stock prior to the
conversion for the entire Liquidation Preference Amount of the Class H Preferred
Stock (otherwise than as: (i) provided in Paragraphs (i) and (ii) of this
Section 9(b); or (ii) pursuant to options, warrants, or other obligations to
issue shares, outstanding on the date hereof as described in public filings made
by the Corporation prior to the date hereof with the Securities and Exchange
Commission ("SEC") including all shares reserved for issuance
6
<PAGE>
pursuant to the Corporation's existing option and stock plans (i) and (ii)
above, are hereinafter referred to as the "Existing Option Obligations" for a
consideration less than the Conversion Price that would be in effect at the time
of such issue, then, and thereafter successively upon each such issue, the
Conversion Price shall be reduced as follows: (i) the number of shares of common
stock outstanding immediately prior to such issue shall be multiplied by the
Conversion Price in effect at the time of such issue and the product shall be
added to the aggregate consideration, if any, received by the Corporation upon
such issue of additional shares of common stock; and (ii) the sum so obtained
shall be divided by the number of shares of common stock outstanding immediately
after such issue. Except for the Existing Option Obligations and options that
may be issued under any employee incentive stock option and/or any qualified
stock option plan adopted by the Corporation, for purposes of this adjustment,
the issuance of any security of the Corporation carrying the right to convert
such security into shares of common stock or of any warrant, right or option to
purchase common stock shall result in an adjustment to the Conversion Price upon
the issuance of shares of common stock upon exercise of such conversion or
purchase rights."
10. Events of Default. The occurrence of any of the following events of
default ("Event of Default") shall cause the dividend rate of 12% described in
Paragraph 1 hereof to become 16% from and after the occurrence of such event,
and at the option of the Holder, the Class H Preferred Stock shall be redeemed
by the Corporation at $13.50 per share and accrued but unpaid dividends and any
amounts due under Section 1 hereof to be paid within ten (10) days of the
occurrence of the Event of Default. Additionally, the Holder may rescind any
unfilled Notice of Conversion:
(a) The Corporation fails to pay any dividend payment required
to be paid pursuant to the terms of Paragraph 1 hereof and such failure
continues for a period of ten (10) days.
(b) The Corporation breaches any covenant or other term or
condition of the Subscription Agreement entered into between the Corporation and
Holder relating to Class H Preferred Stock (the "Subscription Agreement") or in
this Resolution Establishing Rights, and such breach continues for a period of
seven (7) days after written notice to the Corporation from the Holder.
(c) Any representation or warranty of the Corporation made in
the Subscription Agreement, or in any agreement, statement or certificate given
in writing pursuant thereto shall be false or misleading.
(d) The Corporation shall make an assignment for the benefit
of creditors, or apply for or consent to the appointment of a receiver or
trustee for it or for a substantial part of its property or business; or such a
receiver or trustee shall otherwise be appointed.
(e) Any money judgment, writ or similar process shall be
entered or filed against the Corporation or any of its property or other assets
for more than $50,000, and shall remain unvacated, unbonded or unstayed for a
period of forty-five (45) days.
(f) Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Corporation.
(g) The delisting of the common stock from the NASDAQ SmallCap
Market or such other principal exchange on which the common stock is listed for
trading.
(h) A concession by the Company of a default under any one or
more obligations in an aggregate monetary amount in excess of $50,000.
(i) An SEC stop trade order or NASDAQ trading suspension,
if either applies for a period of ten (10) days or longer.
(j) The Corporation's failure to timely deliver common stock
to the holder pursuant to Paragraph 3 hereof or failure of the Company to timely
abide by the covenant to register set forth in Section 1.4 of the Subscription
Agreement.
7
<PAGE>
11. Additional Restrictions. For as long as any shares of the Class H
Preferred Stock are outstanding, the Corporation will not issue any preferred
stock that is senior to the Class H Preferred Stock, and will not amend the
terms of the Class H Preferred Stock without the consent of the holders of the
Class H Preferred Stock.
8
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
<CASH> 71,894
<SECURITIES> 0
<RECEIVABLES> 413,100
<ALLOWANCES> 12,000
<INVENTORY> 105,406
<CURRENT-ASSETS> 1,608,979
<PP&E> 3,001,494
<DEPRECIATION> 417,362
<TOTAL-ASSETS> 5,244,343
<CURRENT-LIABILITIES> 2,395,821
<BONDS> 0
280,630
1,404,874
<COMMON> 12,455,397
<OTHER-SE> (11,849,419)
<TOTAL-LIABILITY-AND-EQUITY> 5,244,343
<SALES> 898,108
<TOTAL-REVENUES> 931,647
<CGS> 714,608
<TOTAL-COSTS> 1,445,481
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,865
<INCOME-PRETAX> (533,699)
<INCOME-TAX> 0
<INCOME-CONTINUING> (533,699)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (533,699)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.26)
</TABLE>
