<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY , 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
LEGACY BRANDS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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CALIFORNIA 2024 68-0323138
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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2424 PROFESSIONAL DRIVE, SUITE A
ROSEVILLE, CA 95661
(916) 782-2029
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
THOMAS E. KEES
CHIEF EXECUTIVE OFFICER
LEGACY BRANDS, INC.
2424 PROFESSIONAL DRIVE, SUITE A
ROSEVILLE, CA 95661
TELEPHONE (916) 782-2029
FACSIMILE (916) 782-4641
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE OF PROCESS)
COPIES TO:
HARVEY H. ROSEN, ESQ.
MARK H. EASTMAN, ESQ.
RESCH POLSTER ALPERT & BERGER LLP
10390 SANTA MONICA BLVD., FOURTH FLOOR
LOS ANGELES, CALIFORNIA 90025
TELEPHONE (310) 277-8300
FACSIMILE (310) 552-3209
DEBRA K. WEINER, ESQ.
GROVER T. WICKERSHAM, P.C.
430 CAMBRIDGE AVENUE, SUITE 100
PALO ALTO, CALIFORNIA 94306
TELEPHONE (650) 323-6400
FACSIMILE (650) 323-1108
APPROXIMATE DATE OF SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
(Calculation of Registration Fee on next page)
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE(1) FEE
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Units (2) each consisting of:..... 1,725,000 $5.00 $8,625,000 $2,544.38
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(i) one share of Common Stock;
and............................. 1,725,000 -- -- --
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(ii) one Warrant to purchase one
share of Common Stock........... 1,725,000 -- -- --
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Units issuable upon exercise of
the Representative's
Warrants(3), each consisting
of:............................. 150,000 $6.00 900,000 265.50
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(i) one share of Common Stock;
and............................. 150,000 -- -- --
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(ii) one Warrant to purchase one
share of Common Stock........... 150,000 -- -- --
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Common Stock issuable upon
exercise of Warrants, including
Warrants underlying
Representative's Warrants(4).... 1,875,000 7.50 14,062,500 4,148.43
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Total......................... $23,587,515 $6,958.32
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) promulgated under the Securities Act of 1933, as
amended (the "Securities Act").
(2) Includes 225,000 Units that Paulson Investment Company, Inc., the
representative of the several underwriters (the "Representative") has the
option to purchase to cover over-allotments, if any.
(3) In connection with the sale of the Units, the Registrant is granting to the
Representative warrants to purchase 150,000 Units (the "Representative's
Warrants").
(4) Pursuant to Rule 416, there are also being registered such additional shares
of Common Stock as may be issuable pursuant to the anti-dilution provisions
of the Warrants and the Representative's Warrants.
<PAGE> 3
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 JULY , 1998
1,500,000 UNITS
LEGACY BRANDS, INC.
[LOGO]
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE COMMON STOCK PURCHASE WARRANT
Legacy Brands, Inc., a California corporation (the "Company"), is hereby
offering 1,500,000 units (the "Units"), each Unit consisting of one share (the
"Shares") of the Company's common stock, no par value (the "Common Stock") and
one warrant to purchase one share of Common Stock (the "Warrants"). The Units
will trade for a period of 30 days or such shorter period as determined by
Paulson Investment Company, Inc. (the "Representative") and thereafter, the
Common Stock and the Warrants comprising the Units will trade as separate
securities. Each Warrant initially entitles the holder thereof to purchase one
share of Common Stock at an exercise price equal to $ (150% of the
initial public offering price of the Units), subject to certain adjustments. If
the Company's audited fiscal 2000 net income (adjusted to exclude any expenses
relating to the vesting of any employee options or warrants) before interest
expense and taxes ("FY 2000 Net Income") is equal to or greater than $1,000,000,
but less than $1,500,000, the Warrant exercise price shall be reduced to
$ (120% of the initial public offering price of the Units); and if such
FY 2000 Net Income is less than $1,000,000, the Warrant exercise price shall be
reduced to $ (85% of the initial offering price of the Units). Any
reduction which might be determined pursuant to the foregoing (the "Price
Reduction") shall be effective as of the date of the public announcement of the
audited results for the fiscal year 2000 (the "Announcement Date"). The final
Warrant exercise price reflecting such Price Reduction, if any, is referred to
herein as the "Final Warrant Exercise Price." The Warrants are exercisable at
any time after separation of the Units, unless previously redeemed, until the
fifth anniversary of the date of this Prospectus, subject to certain conditions.
The Company may redeem the outstanding Warrants, in whole or in part, at any
time upon at least 30 days' prior written notice to the registered holders
thereof, at a price of $0.25 per Warrant, provided that the closing bid price of
the Common Stock has been at least (i) $ (200% of the Final Warrant
Exercise Price, if there has been no Price Reduction; or (ii) $ (150% of
the Final Warrant Exercise Price, if there has been a Price Reduction) for at
least 20 consecutive trading days immediately preceding the date of the notice
of redemption. See "Description of Securities -- Warrants."
Prior to the Offering, there has been no public market for the Units, the
Common Stock or the Warrants and there can be no assurance that an active market
will develop upon the completion of the Offering. It is anticipated that the
initial public offering price of the Units will be between $4.50 and $5.00 per
Unit. The initial public offering price of the Units and the exercise price and
other terms of the Warrants have been determined by negotiation between the
Company and the Representative and are not necessarily related to the Company's
asset value, net worth, financial condition or any other established criteria
for value. See "Underwriting." Application has been made to list the Common
Stock and Warrants on the Nasdaq SmallCap Markets(SM) ("Nasdaq").
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING DISCOUNTS PROCEEDS TO THE
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY
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Per Unit............................. $ $ $
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Total(3)............................. $ $ $
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(1) Excludes a non-accountable expense allowance equal to 3% of the gross
proceeds of this Offering payable to the Representative, and the value of
five year warrants (the "Representative's Warrants") entitling the
Representative to purchase up to an aggregate of 150,000 Units at a price of
$ per Unit (120% of the initial public offering price of the Units).
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities of 1933, as amended
(the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company,
including the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Representative an option exercisable within
45 days after the date of this Prospectus to purchase up to 225,000
additional Units on the same terms and conditions as the Units offered
hereby, to cover over-allotments, if any (the "Over-Allotment Option"). If
such option is exercised in full, the total Price to the Public,
Underwriting Discount and Commissions and Proceeds to the Company will be
$ , $ and $ respectively. See "Underwriting."
The Units are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to their right
to reject orders in whole or in part and to certain other conditions. It is
expected that delivery of the Units will be made in New York, New York on or
about , 1998.
PAULSON INVESTMENT COMPANY, INC.
The date of this Prospectus is , 1998
<PAGE> 4
In the center portion of the page is a collage consisting of photographs of
the boxes of four of the Company's licensed products.
From left to right, the pictures show: 1 -- The box for Gumby Freeze Pops;
2 -- the box for Mrs. Fields 3-pack Cookie Ice Cream Sandwiches; 3 -- the box
for the 3-pack of the Mrs. Fields Ice Cream Cookie Pop and 4 -- the box for Mrs.
Fields 16 oz. Frozen Cookie Dough. Partially superimposed at the top is the
Company's logo.
COLOR PICTURES
The Mrs. Fields trademark is registered by the Mrs. Fields Development
Corporation ("Mrs. Fields") and used by the Company pursuant to a license. The
Gumby and Pokey trademarks are registered by AJM Marketing Enterprises, Inc.,
("AJM"), and used by the Company pursuant to a license. The Extreme Dinosaurs
trademark is registered by Mattel, Inc. ("Mattel") and licensed to BKN Kids
Network, Inc. ("BKN") and used by the Company pursuant to a license from BKN.
On February 25, 1998, the Company filed on Form 15 to deregister as a
reporting company under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The deregistration as a reporting company became fully
effective as of May 26, 1998. As of the date of the filing of Form 15, the
Company was no longer subject to the reporting requirements of the Exchange Act.
Upon completion of the Offering, the Company intends to register the Common
Stock and Warrants offered hereby under Section 12 of the Exchange Act and
furnish to its security holders annual reports containing audited financial
statements, quarterly unaudited reports and such other reports as it deems
appropriate.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE UNITS, COMMON
STOCK OR THE WARRANTS OF THE COMPANY INCLUDING ENTERING STABILIZING BIDS OR
IMPOSING PENALTY BIDS. SEE "UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Except as otherwise indicated, all information in this
Prospectus: (i) reflects a 1-for-10 reverse stock split of the Common Stock in
October 1996 and a 1-for-3.2 reverse stock split effected prior to the
commencement of the Offering; and (ii) assumes no exercise of the Over-allotment
Option, the Warrants or the Representative's Warrants. Each investor is
encouraged to read this Prospectus in its entirety. Prospective investors should
carefully consider the information set forth under the heading "Risk Factors."
THE COMPANY
Legacy Brands, Inc. licenses and markets premium branded consumer food
products sold in supermarkets, club stores, convenience stores, drug stores and
mass merchandisers throughout the United States. The Company currently holds
three licenses for food products using names and trademarks held by Mrs. Fields,
Gumby and Mattel. The Company has developed and is currently marketing products
under the Mrs. Fields and Gumby licenses and intends to develop and market
products utilizing the Extreme Dinosaurs trademark held by Mattel. The Company
intends to build a portfolio of well-known premium brand products by continuing
to seek licensing opportunities for nationally recognized brand names,
increasing product offerings under current and new licenses, and further
developing distribution of the Company's existing products.
The Company holds an exclusive license to sell frozen cookie dough, frozen
baked goods and other frozen dessert products approved by Mrs. Fields and use
the Mrs. Fields trademarks and logo throughout North America, Hawaii, and Puerto
Rico, excluding Canada with respect to ice cream novelties. The license is
renewable by the Company at its sole discretion every five years for up to 30
years through 2024, but subject to certain termination rights by Mrs. Fields in
the period beginning December 2004. The Company began selling Mrs. Fields frozen
cookie dough products in late 1994. Mrs. Fields frozen cookie dough products are
sold through club stores including Costco Wholesale ("Costco"), BJ's Wholesale
Club, a division of Waban, Inc. ("BJ's") and Sam's Club, a division of WalMart
Stores, Co. ("Sam's Club"), as well as several thousand grocery stores
throughout the United States including certain locations of stores such as
Safeway, Inc. ("Safeway"), Lucky, a division of American Stores Co. ("Lucky"),
Publix Super Markets, Inc. ("Publix"), Kroger Co. ("Kroger"), Jewel, a division
of American Stores Co. ("Jewel"), Harris-Teeter, Inc. ("Harris-Teeter"), Ralphs
Grocery Co. ("Ralphs"), and Raley's ("Raley's). The Company recently introduced
Mrs. Fields ice cream novelties and began selling the Mrs. Fields Cookie Ice
Cream Sandwich and Mrs. Fields Ice Cream Cookie Pop in July 1997 and January
1998, respectively. In April 1998, Mrs. Fields approved both ice cream novelties
for distribution in all of the Mrs. Fields franchise and company-owned retail
stores, which will commence upon completion of Mrs. Fields' distribution
arrangements. In May 1998, the Company was approved to distribute its Mrs.
Fields Cookie Ice Cream Sandwich and Ice Cream Cookie Pop in military
commissaries throughout the United States. The Company is currently developing
other frozen food products to sell under the Mrs. Fields name.
The Company also holds a non-exclusive license to use certain names and
characters from the television show "Adventures of Gumby" in the design and
packaging of freeze pops, fruit coolers and certain types of candy. In mid-1997,
the Company began selling Gumby Freeze Pops through Lucky in Northern
California. In 1998, the Company has increased its marketing efforts for the
summer selling season so the product will be available on a national basis.
Lucky Northern California, Lucky Southern California, Jewel, Acme, Ralph's, and
Osco Drugs have approved Gumby Freeze Pops for distribution in certain of their
locations.
In April 1998, the Company acquired an exclusive license to use trademarks,
copyrights, plots, settings and artwork related to Mattel's Extreme Dinosaurs
for food products including freeze pops, gelatin snacks, fruit coolers, fruit
snacks, cookies and crackers. The Company is in the process of finalizing
certain details in the formal license agreement and identifying the best food
products to introduce for this brand and to date cannot make any representations
to the form or timing of such new products.
3
<PAGE> 6
The Company estimates that the national frozen cookie dough category
remains relatively small at approximately $10 million annually in sales when
compared to national sales for categories such as refrigerated cookie dough that
represent approximately $300 million annually in sales. For this reason the
Company has broadened its Mrs. Fields product offerings to include ice cream
novelties, which had annual sales of approximately $1.58 billion in 1997. The
Company expects sales of these products and Gumby Freeze Pops will diversify the
Company's product lines and reduce the historical seasonality of its revenues.
The Company has a management team with experience in direct retail and
marketing of food products to the retail food industry. The Company sells its
products through a combination of outside brokers and distributors throughout
the United States. The Company does not manufacture any of its products, but
contracts with outside suppliers. The Company believes the use of third-party
suppliers increases its flexibility, reduces production lead-times and costs,
and significantly reduces capital expenditures and associated overhead related
to manufacturing, all resulting in overall lower product costs to the Company.
The Company was incorporated in February 1994. The Company's principal
offices are located at 2424 Professional Drive, Suite A, Roseville, California
95661 and its telephone number is (916) 782-2029.
4
<PAGE> 7
THE OFFERING
Securities Offered............ 1,500,000 Units. Each Unit consists of one
share of Common Stock and one Warrant to
purchase one share of Common Stock. The Common
Stock and the Warrants will be separately
transferable 30 days following completion of
this Offering or such shorter period as
determined by the Representative. See
"Description of Securities."
Warrants
Exercise Price.............. $ per share of Common Stock (150% of the
initial public offering price of the Units),
subject to certain adjustments, including if
the Company's audited fiscal 2000 net income
(adjusted to exclude any expenses relating to
the vesting of employee options or warrants)
before interest expense and taxes ("FY2000 Net
Income")is equal to or greater than $1,000,000,
but less than $1,500,000, a one time downward
adjustment of the exercise price to $ per
share (120% of the initial public offering
price of the Units); and if such FY2000 Net
Income is less than $1,000,000, then the
exercise price shall be adjusted to $ per
share (85% of the initial public offering price
of the Units).
Exercise Period............. The period commencing on the date of the
separation of the Units and terminating five
years from the date of this Prospectus.
Redemption.................. The Company may redeem the Warrants at a price
of $0.25 per Warrant upon not less than 30
days' prior written notice, provided that the
closing bid price of the Common Stock has been
at least (i) 200% of the exercise price of the
Warrants if there has not been a Price
Reduction or (ii) 150% of the exercise price of
the Warrants if there has been a Price
Reduction, in either case for 20 consecutive
trading days immediately preceding the date of
the notice of redemption. See "Description of
Securities -- Warrants."
Common Stock Outstanding...... As of June 15, 1998: 1,041,730 shares(1)
Following the Offering: 2,541,730 shares(1)
Use of Proceeds............... The Company intends to use the net proceeds
from the Offering primarily to pay for
anticipated market expansion, product
development and acquisition of additional
licenses; to repay an outstanding related party
line of credit and notes issued by the Company
in connection with certain bridge financings;
and for other general corporate purposes. See
"Use of Proceeds."
Risk Factors.................. The Units offered hereby involve a high degree
of risk and should not be considered by
investors who cannot afford to lose their
entire investment and should be purchased only
after careful consideration of the significant
risk factors which may affect the Company and
its business. See "Risk Factors" for certain
factors to be considered by potential
investors.
(See
footnote on following page)
5
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Proposed Nasdaq SmallCap Symbols.......... Units: LEGCU
Common Stock: LEGC
Warrants: LEGCW
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(1) Based on shares of Common Stock outstanding as of June 15, 1998, including
20,343 shares of Common Stock issued to unrelated parties upon exercise of
certain warrants, pursuant to which the Company accepted the promissory note
of each of the purchasers. Excludes 387,063 shares of Common Stock issuable
upon exercise of outstanding warrants as of June 15, 1998, 120,625 PAG
Shares issuable following the closing of the Offering and 254,173 shares of
Common Stock to be reserved for issuance under the Company's Stock Option
Plan. See "Capitalization," "Management -- Stock Option Plan," "Certain
Transactions," "Description of Securities" and Note 8 of Notes to Financial
Statements.
6
<PAGE> 9
SUMMARY FINANCIAL INFORMATION
The following table summarizes selected financial information concerning
the Company for the periods indicated. The following financial data should be
read in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Financial Statements and notes
relating thereto and other financial information set forth elsewhere in this
Prospectus.
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<CAPTION>
FOR THE YEARS FOR THE THREE MONTHS
ENDED JANUARY 31, ENDED APRIL 30,
------------------- ---------------------
1997 1998 1997 1998
-------- -------- -------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Sales............................................. $ 4,825 $ 5,352 $ 1,249 $ 1,640
Cost of goods sold................................ 3,088 3,309 743 1,026
-------- -------- -------- ----------
Gross profit...................................... 1,737 2,043 506 614
Marketing, general and administrative expenses.... 1,847 2,577 478 690
Compensation related to forgiveness of employee
notes.......................................... -- 1,472 -- --
-------- -------- -------- ----------
Operating (loss) income........................... (110) (2,006) 28 (76)
Other income (expense) and taxes.................. (648) (915) (194) (67)
-------- -------- -------- ----------
Net loss.......................................... (758) (2,921) (166) (143)
-------- -------- -------- ----------
Net loss per share, basic and diluted(1).......... $ (1.16) $ (3.81) $ (0.24) $ (0.14)
======== ======== ======== ==========
Shares used in per share calculation.............. 651,162 767,613 701,022 1,041,730
======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1998
JANUARY 31, -------------------------
1998 ACTUAL AS ADJUSTED(2)
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Working capital (deficit).............................. $(2,462) $(2,807) $3,263
Total assets........................................... 2,733 3,120 8,220
Total liabilities...................................... 3,555 4,078 3,108
Long-term liabilities.................................. 716 708 708
Accumulated deficit.................................... 7,559 7,702 7,702
Shareholders' equity (deficit)......................... (822) (959) 5,111
</TABLE>
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(1) See Note 1 of Notes to Financial Statements for an explanation of the basis
used to calculate net loss per share.
(2) Adjusted to give effect to the sale by the Company of 1,500,000 Units at an
assumed offering price $5.00 per Unit, net of estimated underwriting
discounts and estimated expenses of the Offering and application of the
proceeds therefrom. See "Use of Proceeds," "Capitalization" and "Certain
Transactions."
7
<PAGE> 10
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk. In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following Risk Factors in
evaluating an investment. Purchase of the securities offered hereby should not
be considered by persons unable to afford the loss of their entire investment.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below and elsewhere in
the Prospectus.
HISTORY OF OPERATING LOSSES; FINANCIAL CONDITION. The Company has been in
existence since 1994 and has experienced ongoing operating losses, including the
first quarter of fiscal 1999, although it did achieve income from operations in
the first and third quarters of fiscal year 1998. As of January 31, 1998, the
Company had a negative net worth on a book value basis. For the fiscal years
ended January 31, 1997 and 1998, the Company experienced net losses of $757,703
and $2,921,413, respectively. For the three month period ended April 30, 1998,
the Company experienced a net loss of $142,836. At April 30, 1998, the Company
had a working capital deficit of $2,806,778 and a shareholders' deficit of
$958,534. There can be no assurance that the Company will achieve or sustain
profitability in the future. See "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Report of Independent Accountants."
ABILITY TO CONTINUE AS A GOING CONCERN. The Company's independent
accountants, in their report regarding the Company's fiscal 1998 and 1997
financial statements, have noted that the Company's recurring losses, negative
cash flows from operations, a license compliance confirmation by Mrs. Fields
effective through September 15, 1998, a note payable to the Representative due
on the earlier of the closing of the Offering or, if the Offering has not closed
by October 31, 1998, 30 days after demand for payment by the holder and
substantial negative working capital raise substantial doubt about the Company's
ability to continue as a going concern. The ability of the Company to continue
as a going concern is contingent upon its ability to complete the Offering or
otherwise secure additional financing. See "Report of Independent Accountants"
and Note 2 of Notes to Financial Statements.
DEPENDENCE UPON MRS. FIELDS LICENSE; NEED TO SATISFY MINIMUM VOLUME
REQUIREMENTS. The Company has entered into an exclusive licensing agreement with
Mrs. Fields (the "Mrs. Fields License") pursuant to which it has been granted
the right to manufacture, distribute and sell frozen cookie dough products,
frozen baked goods, and other related frozen dessert products using the Mrs.
Fields brand and related trademarks. The Mrs. Fields License has a 30 year
duration, including option periods. The initial term of the Mrs. Fields License
expires December 31, 1999 (the "Initial Term"), with the Company having an
option to extend, at its sole discretion, the Mrs. Fields License for five five
year periods (the "Option Periods") through December 31, 2024. Mrs. Fields may
terminate the Mrs. Fields License at the end of any Option Period subsequent to
the Initial Term by providing written notice to the Company of its intent to do
so not earlier than 12 months nor later than 90 days from the end of such Option
Period. Thus, assuming the Company remains in compliance, the Mrs. Fields
License may not be terminated any earlier than December 2004. In the event Mrs.
Fields exercises its right to terminate the Mrs. Fields License, it must pay to
the Company an amount equal to three times the average gross margin for sales of
Mrs. Fields products reported by the Company for the last three years of the
Option Period in which such notice of termination is given. The amount
determined to be due shall be payable over three years in twelve equal quarterly
payments.
In the event the Company does not meet the Minimum Volume Commitment
required by the Mrs. Fields License, it must pay the royalty which would
otherwise have been payable on the amount of such shortfall in order to keep the
Mrs. Fields License in effect. While the Minimum Volume Commitment amounts
exceed the amounts shipped by the Company during any preceding calendar year,
the Company expects to meet these Minimum Volume Commitment in calendar year
1998 and thereafter and to comply with the other provisions of the Mrs. Fields
License. However, no assurance can be given that it will, in fact, meet such
requirements during calendar year 1998 and continue to do so thereafter. The
cancellation of the
8
<PAGE> 11
Mrs. Fields License would have a material adverse effect on the Company. See
"Licensing Agreements -- Mrs. Fields."
NEED FOR ADDITIONAL FINANCING; UNCERTAINTY OF ACCESS TO CAPITAL. The
Company has never reported significant positive cash flow from operations and
has been dependent on obtaining debt and equity financing for the continuation
and expansion of its operations. The Company has also relied upon the financing
of the production of the Mrs. Fields cookie dough products by the manufacturer,
Pennant Foods ("Pennant Foods"), formerly known as Van den Bergh Foods. These
financing arrangements will not be available for other Mrs. Fields products or
products bearing other brand names, and there can be no assurance that the
existing arrangements will continue indefinitely for Mrs. Fields cookie dough.
Moreover, it is unlikely that other manufacturing financing will be obtained in
the event such arrangement is no longer available for Mrs. Fields cookie dough.
The Company believes the proceeds from the Offering, together with its
anticipated future cash flow from operations, will be sufficient to meet the
Company's capital requirements for at least the next 12 months. There can be no
assurance, however, that the Company will not require additional capital. The
sale of additional equity or convertible debt securities, if required, may
result in additional dilution to the holders of the Common Stock. There can be
no assurance that additional financing will be available on terms and conditions
acceptable to the Company, if at all. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and
"Business -- Manufacturing."
OBLIGATIONS ARISING OUT OF DISCARDED INVENTORY. In 1994, prior to the time
current management assumed control of the operations of the Company, former
management over-ordered cookie dough from Pennant, the Company's primary
supplier of frozen cookie dough. This excess cookie dough was either discarded
by Pennant due to obsolescence or reworked and sold, resulting in a claimed
original loss of approximately $2,500,000 (the "Pennant Obligation"). Although
the business activities of Van den Bergh have been spun off to Pennant by Van
den Bergh's parent company, Unilever, PLC, and the Pennant Obligation remains
due and owing to Unilever, the Company and Pennant have agreed to continue the
arrangement which has been followed since March 1995, whereby Pennant is
deducting from the Pennant Obligation $2.00 per case delivered on behalf of the
Company and such payments are being used to reduce the amount owing under the
Pennant Obligation now held by Unilever. Pennant has informally indicated that
Unilever would accept a cash payment equal to 66.67% of the remaining $973,307
due as of April 30, 1998. The Company is continuing its discussions in this
regard with management of Pennant, who have represented to the Company that they
have the authority to deal with the Pennant Obligation matters. However, none of
these arrangements have yet been reduced to a formal written agreement. No
assurance can be given that Pennant or Unilever will agree to a discounted
payoff or continue the arrangement for periodic reductions in the amount claimed
to be owing through deductions for cases delivered on behalf of the Company. The
Company may use a portion of the net proceeds of this offering to repay all or a
portion of the Pennant Obligation. See "Use of Proceeds" and Note 6 of Notes to
Financial Statements.
COMPETITION. The Company's Mrs. Fields frozen cookie dough products compete
directly with one national brand, Otis Spunkmeyer, which manufactures and
distributes frozen cookie dough to club stores, supermarkets and convenience
stores nationwide. Otis Spunkmeyer's frozen cookie dough has been in
distribution longer than Mrs. Fields frozen cookie dough products. The Company
also competes directly with regional frozen cookie dough products and indirectly
with refrigerated dough and ready to eat cookies. These broader cookie
categories have a number of larger competitors that have greater financial
resources, more established products, lower production cost, and more extensive
marketing campaigns than the Company. Therefore, there can be no assurance that
the Company will be able to effectively compete or generate sufficient revenues
to warrant continued distribution of the Mrs. Fields frozen cookie dough
products.
Mrs. Fields ice cream novelties compete in a large food product category
that has a number of competitors with greater financial resources, more
established products, lower production costs, and more extensive marketing
campaigns than the Company. There can be no assurance that the Company will be
able to successfully compete and develop distribution and sales of the Mrs.
Fields ice cream novelties that would warrant continuing the product line.
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<PAGE> 12
With respect to the marketing and distribution of the Gumby products, the
Company competes with national manufacturers such as Jel Sert, Inc. ("Jel Sert")
and Kraft Foods in the freeze pop category. No assurance can be given that the
Company will be able to differentiate its Gumby products substantially from such
competitors or obtain sufficient distribution and customer acceptance to
establish a successful Gumby product line.
The food industry, in general, is highly competitive. The Company competes
with numerous food item producers and distributors, many of which are larger,
have greater resources, enjoy greater economies of scale, and offer a wider
selection of food items with a higher degree of consumer acceptance than the
Company. The Company will compete with other food producers and distributors not
only for consumer acceptance, but also for shelf space in retail outlets and for
marketing attention. There can be no assurance that the Company will compete
successfully against the existing competition or that additional competitors
will not enter the market. See "Business -- Competition."
RISKS ASSOCIATED WITH EXPANSION STRATEGY. The expansion strategy of the
Company depends upon identifying and acquiring additional nationally recognized
brands that are underutilized in the food category and may be available for
acquisition or licensing by the Company. Such opportunities may be unavailable
or available only on terms not acceptable to the Company. In addition,
manufacturing sources for products designated under acquired licenses may not be
available or available on acceptable terms to the Company.
The success and rate of the Company's expansion into new products and
geographical markets will be dependent on a number of factors, including general
economic and business conditions affecting the food industry, competition, the
availability of sufficient capital, the identification and successful
negotiation of acceptable licensing arrangements for brand names the Company
believes have commercial value, the identification and contracting for suitable
manufacturing facilities on acceptable terms, and the ability to attract and
retain qualified personnel and operate efficiently in activities in which the
Company may have had no prior experience. As a result, there can be no assurance
that the Company will be able to achieve its planned expansion strategy on a
timely or profitable basis. See "Business."
RELIANCE ON KEY PERSONNEL. The success of the Company depends upon its
ability to attract and retain key management personnel to conduct its current
and future operations. The loss of the services of such key personnel could have
an adverse effect on the Company. The Company depends upon the abilities of
certain employees, particularly Thomas E. Kees, Chairman, President and Chief
Executive Officer, and Michael E. Banks, Senior Vice President of Marketing and
Sales. Messrs. Kees and Banks serve the Company under employment agreements that
expire in September 1999. Both contracts provide for an automatic one year
extension unless otherwise elected by either party. The Company does not
currently maintain key-man insurance with respect to its key personnel but
intends to obtain such insurance in the future. Absent such insurance there
would not be any source of compensation to the Company should the services of
any such key management personnel be lost.
LIMITED MANAGEMENT RESOURCES; MANAGEMENT OF POTENTIAL GROWTH. The Company's
recent expansion into new product areas and financial difficulties have placed a
significant strain on the Company's managerial and operational resources.
Although all of the Company's management have worked together for the past two
years, it is anticipated that, if the Company is able to effect its business
strategy and expand its operations, the Company may need to retain and integrate
new personnel at all levels of its operations. There can be no assurance that
the Company will be able to effectively implement or manage its expansion
strategy or obtain and integrate such additional personnel. See "Management."
PRODUCT LIABILITY. The marketing and sale of food products entails an
inherent risk of product liability. Although the Company is not directly engaged
in the testing or manufacturing of the food products it sells, there can be no
assurance that product liability claims will not be asserted against the
Company. While the Company endeavors to take appropriate precautions, there can
be no assurance that it will avoid significant product liability exposure. The
Company maintains product liability insurance and has the benefit of insurance
maintained by Pennant, in an aggregate amount of $4,000,000 which is adequate to
satisfy existing Mrs. Fields licensing requirements. Additionally the Company is
insured on the policies maintained by its other suppliers in amounts ranging
between $2,000,000 and $5,000,000. While management believes these levels of
insurance
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<PAGE> 13
are adequate for its current level of operations, there can be no assurance that
such insurance coverage will be adequate, or that a product liability claim,
even one without merit, would not materially and adversely affect the business
or financial condition of the Company.
DEPENDENCE ON LIMITED NUMBER OF SOURCES FOR MANUFACTURING. The Company
currently meets its manufacturing needs by contracting with third party sources
because it has made the strategic decision to have no manufacturing capabilities
of its own. As of April 30, 1998, approximately 76% of the products sold by the
Company, as measured by revenues, were manufactured by Pennant. The relationship
with Pennant is advantageous for the Company for several reasons. Because of
Pennant's relationship with Mrs. Fields, the Company believes that it is charged
a lower price for product ingredients than it could obtain elsewhere. Moreover,
the Company generally is not required to pay for product manufacturing prior to
sale with respect to the cookie dough products and packaging. If the
relationship with Pennant should end, the Company could lose these benefits.
With respect to other products already introduced or anticipated to be
introduced in the near future, the Company relies or is expected to rely upon a
single manufacturing source for each such product. In the event that: (i)
Pennant or any of the other manufacturing sources used by the Company terminates
its relationship with the Company without notice, or (ii) the Company is
compelled to do the same, or (iii) other circumstances require Pennant or such
other sources to cease operations temporarily, the Company's operations would be
adversely affected, particularly if such events affected Pennant.
PRODUCT CONCENTRATION RISK. In fiscal 1998, approximately 89% of the
Company's revenues were derived from sales of Mrs. Fields cookie dough products
and as of April 30, 1998, such sales accounted for approximately 76% of the
Company's revenues for the fiscal quarter then ended. The Company anticipates
that these products will continue to account for most of its sales for the
foreseeable future. A decline in the demand for this product line, coupled with
a failure to acquire or develop other product lines, whether as a result of
competition or other factors, would have a material adverse effect on the
Company's results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Industry Background" and "Business -- Competition."
SEASONAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's Mrs.
Fields frozen cookie dough sales, which have accounted for most of the Company's
revenues, have been seasonal with reduced sales in the second and third quarters
of each fiscal year. Additionally, while the Company has not yet had material
sales of the Mrs. Fields ice cream-based products or Gumby Freeze Pops, it can
be anticipated that the sales of such products will also be seasonal with
increased sales likely in the warm weather of the second and third fiscal
quarters and reduced sales in the colder months of the first and fourth fiscal
quarters. To the extent that it is not possible to increase sales of Gumby or
ice cream-based products to offset the seasonal patterns of the Mrs. Fields
cookie dough-based products, the Company may experience greater quarterly losses
or lower profits in the second and third fiscal quarters and its results from
operations for any particular fiscal quarter may not necessarily be indicative
of net income or loss that may be expected for any other fiscal quarter or for
the entire fiscal year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS. The Company's
management will have broad discretion to allocate the proceeds of the Offering
and the amounts actually expended for each use may depend on a number of factors
including its ability to settle the Pennant Obligation for less than the full
amount due, the continuation of favorable financing arrangements for the
manufacture of certain cookie dough products by Pennant, future revenue growth,
the progress of the Company's marketing efforts, and the amount of cash
generated or used by the Company's operations. See "Use of Proceeds."
USE OF PROCEEDS TO REPAY DEBT. The Company expects to use approximately
$1,470,000 of the net proceeds of the Offering to repay the remaining principal
amount of $650,000 on the DayStar Credit Facility, to repay a $103,500 loan from
Larry Wells Company Inc., an affiliate of a director of the Company, to repay a
loan made by the Representative in the principal amount of $200,000, a debt
obligation in the principal amount of $40,000, plus additional fees of $10,000,
for a total repayment obligation of $50,000 from a third party lender and any
additional amounts which might be advanced from such lender up to an estimated
gross principal amount of $385,000 and repayment of accrued interest for these
credit facilities in the approximate
11
<PAGE> 14
amount of $120,000, thereby reducing the amount of net proceeds available to the
Company to expand its business. See "Use of Proceeds."
CONTROL BY EXISTING SHAREHOLDERS. There are no voting agreements among
shareholders, however certain existing shareholders, holding approximately 44%
of the issued and outstanding Common Stock of the Company prior to the Offering,
and warrants with respect to an additional approximately 24%, if acting
together, could be in a position to significantly influence the affairs of the
Company and certain matters requiring a shareholder vote including the election
of directors, the amendment of the Company's charter documents, the merger or
dissolution of the Company, and the sale of all or substantially all of the
Company's assets. The Company has no information which would indicate that any
of such shareholders are acting, or intend to act, together for such purposes.
See "Business -- Legal Proceedings" "Principal Shareholders," and "Description
of Securities -- Common Stock."
ABSENCE OF PUBLIC MARKET/TRADING HISTORY; STOCK PRICE VOLATILITY. Prior to
the Offering, there has been no public market for the Company's Units, Common
Stock or Warrants. Consequently, the initial public offering price of the Units,
and the exercise price and other terms of the Warrants were determined by
negotiations between the Company and the Representative. There can be no
assurance that an active public market for the Company's Units, Common Stock or
Warrants will develop or be sustained after the Offering. The trading price of
the Company's securities could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of new products by the
Company or its competitors, changes in earnings estimates by analysts, or other
events or factors. In addition, the stock market has experienced wide price and
volume fluctuations which have been at times unrelated to the operating
performance of the companies whose securities are traded. These broad market
fluctuations may adversely affect the market price of the Units, Common Stock or
Warrants.
DILUTION. Purchasers of shares of Common Stock included in the Units
offered hereby will incur immediate and substantial net tangible value dilution
of $3.97 per share or approximately 79% ($3.70) per share, assuming a $5.00
offering price and no exercise of issuable options, or outstanding warrants,
including those included in the Units. To the extent that issuable options or
outstanding warrants to purchase the Company's Common Stock are exercised at
prices below the Unit offering price, there will be further dilution to
purchasers of the Units offered hereby. See "Dilution."
SPECULATIVE NATURE OF WARRANTS; POSSIBLE REDEMPTION OF WARRANTS. The
Warrants do not confer any rights of Common Stock ownership on their holders,
such as voting rights or the right to receive dividends, but merely represent
the right to acquire shares of Common Stock, as the case may be, at a specified
price for a limited period of time. Following the completion of the Offering,
the market value for the Warrants will be uncertain and there can be no
assurance that the market value of the Warrants will meet or exceed their
initial public offering price. There can be no assurance that the market price
of the Common Stock will ever equal or exceed the exercise price of the Warrants
and consequently, whether it will ever be profitable for holders of the Warrants
to exercise their Warrants.
The Warrants will be subject to redemption by the Company at $0.25 per
Warrant on 30 days' prior notice to the warrant holders, provided that the
closing bid price of the Common Stock for 20 consecutive trading days
immediately preceding the notice of redemption equals or exceeds 200% of the
Final Warrant Exercise Price if there has been no Price Reduction or 150% of the
Final Warrant Exercise Price if there has been a Price Reduction. In the event
that warrant holders decide not to exercise their Warrants upon notice of
redemption, the unexercised Warrants will be redeemed prior to exercise, and the
holders thereof will lose the benefit of the appreciated market price of the
Warrants, if any, and/or the difference between the market price of the
underlying Common Stock as of such date and the exercise price of such Warrants,
as well as any possible future price appreciation in the Common Stock. See
"Description of Securities -- Warrants."
GOVERNMENT REGULATION. The production and marketing of the Company's
products are subject to rules and regulations of various federal, state and
local health and environmental agencies. While the Company believes that its
products and operations are in substantial compliance with the rules and
regulations of all federal, state and local health and environmental agencies,
any substantial violation of the rules and
12
<PAGE> 15
regulations pertaining to the Company's operations or products could result in
civil fines and penalties and even the temporary suspension of the Company's
operations or product shipment.
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus available covering the Common Stock issuable
upon the exercise of the Warrants and such shares have been registered,
qualified or deemed to be exempt under the securities or "blue sky" laws of the
state of residence of the exercising holder of the Warrants. Although the
Company has undertaken to use its reasonable efforts to have all of the Common
Stock issuable upon the exercise of the Warrants registered or qualified on or
before the exercise date and to maintain a current prospectus relating thereto
until the expiration of the Warrants, there is no assurance that it will be able
to do so. The value of the Warrants may be greatly reduced if a current
prospectus covering the Common Stock issuable upon the exercise of the Warrants
is not kept effective or if such Common Stock is not qualified or exempt from
qualification in the states in which the holders of the Warrants reside. The
Common Stock and Warrants contained in the Units will become separately
transferable 30 days following completion of this Offering or such shorter
period as determined by the Representative. Although the Units will not be
knowingly sold to purchasers in jurisdictions in which the Units are not
registered or otherwise qualified for sale, investors residing in such
jurisdictions may purchase the Warrants in the secondary market or investors may
move to a jurisdiction in which the Common Stock underlying the Warrants are not
registered or qualified during the period that the Warrants are exercisable. In
such event, the Company will be unable to issue shares to those persons desiring
to exercise their Warrants unless and until the Common Stock is qualified for
sale in jurisdictions in which the purchasers reside or an exemption from such
qualification exists in such jurisdictions, and holders of the Warrants would
have no choice but to attempt to sell the Warrants in a jurisdiction where such
sale is permissible or allow them to expire unexercised. See "Description of
Securities -- Warrants."
SUBSTANTIAL AMOUNTS OF SHARES ELIGIBLE FOR FUTURE SALE. Sales of
substantial amounts of Common Stock in the public market could adversely affect
the market price of the Units, Common Stock, and Warrants after the Offering.
Such sales might also make it more difficult for the Company to sell equity
securities or equity related securities in the future at a time and price that
the Company deems appropriate. In addition to the Units offered hereby,
following this Offering, there will be 1,041,730 shares of Common Stock
outstanding, all of which are "restricted stock," as that term is defined in
Rule 144 promulgated under the Securities Act. It is anticipated that holders of
approximately 446,000 shares will be subject to lock-up agreements with the
Representative under which such holders will have agreed to not sell or
otherwise transfer their shares for one year from the date of this Prospectus
without the prior consent of the Representative. Of the restricted stock, as of
the date of this Prospectus, approximately 178,250 shares will have been held
less than one year (of which it is anticipated 60,375 shares will be subject to
the lock-up agreement), approximately 30,000 shares will have been held at least
one year but less than two years (of which no shares will be subject to the
lock-up agreement) and approximately 834,000 shares will have been held at least
two years (of which it is anticipated 438,000 shares will be subject to the
lock-up agreement). Holders of restricted stock not otherwise subject to a
lockup agreement will be able to sell their shares in the public market under
Rule 144, if held for at least one year commencing 90 days after the effective
date of this Prospectus, Shareholders not subject to a lockup agreement who have
held their restricted stock for more than two years will be eligible to sell the
shares under Rule 144(k) following this Offering. Holders of warrants with
respect to 284,000 shares of the Common Stock have been granted "piggy-back"
registration rights. In addition, holders of warrants with respect to 145,312
shares of the Common Stock have been granted "demand registration rights."
Holders of 59,375 shares of the Common Stock have been granted "piggy-back"
registration rights and hold such rights with respect to up to an additional
120,625 shares of Common Stock to be issued after the closing of this Offering.
Sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of the Common Stock and Warrants, and
following conversion, the Common Stock. See "Certain Transactions" and "Shares
Eligible for Future Sale."
ARBITRARY DETERMINATION OF OFFERING PRICE. The offering price of the Units
and the exercise price and other terms of the Warrants will be determined
through negotiations between the Company and the Representative of the
Underwriters. Among the factors to be considered in determining the price are
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<PAGE> 16
prevailing market conditions, the general economic environment, an estimate of
the prospects of the Company, the background and contributions of management and
current conditions in the frozen food industry. There is, however, no
relationship between the offering price of the Units and the Company's assets,
book value, historical earnings or any other objective criteria of value. See
"Underwriting."
IMPACT OF POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM; RISKS OF LOW
PRICED STOCKS. While the Units, Common Stock and the Warrants are expected
initially to be included on Nasdaq SmallCap Market, the Company will be required
to continue to meet Nasdaq's maintenance requirements in the future which have
recently been revised to include more stringent standards for continued listing.
If it is unable to satisfy such requirements, its securities may be delisted. In
such event trading, if any, in the Units, Common Stock, and Warrants would be
affected and consequently, the liquidity of the Company's securities could be
impaired, not only in the number of securities which could be bought and sold,
but also through delays in the timing of the transactions, reduction in
securities analysts' and news media's coverage of the Company, and lower prices
for the Company's securities than might otherwise be the case. As a consequence,
an investor could find it more difficult to sell, or to obtain accurate
quotations as to the price of the Common Stock and Warrants.
PENNY STOCK LIMITATIONS. The Securities Enforcement and Penny Stock Reform
Act of 1990 requires additional disclosure in connection with trades in any
stock defined as a "penny stock." The Securities and Exchange Commission (the
"Commission") has adopted regulations that generally define a penny stock to be
any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Such exceptions include any equity security
listed on Nasdaq and any equity security issued by an issuer that has: (i) net
tangible assets of at least $2,000,000 if such issuer has been in continuous
operation for more than three years, (ii) net tangible assets of at least
$5,000,000 if such issuer has been in continuous operation for less than three
years, or (iii) average annual revenue of at least $6,000,000 if such issuer has
been in continuous operation for less than three years. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith.
In addition, if the Company's securities are not quoted on Nasdaq or the
Company does not have $2,000,000 in net tangible assets, trading in the
Company's securities would be covered by Rules 15g1 through 15g6 promulgated
under the Exchange Act for non-Nasdaq and non-exchange listed securities. Under
such rules, broker/dealers who recommend such securities to persons other than
established customers and accredited investors must make a special written
suitability determination and obtain the purchaser's written consent prior to
sale. Securities are exempt from these rules if the market price of the security
is at least $5.00 per share.
Although the Company's Common Stock will be outside the scope of the
definition for a penny stock if it is listed as anticipated on Nasdaq, in the
event the Common Stock were subsequently characterized as a penny stock the
market liquidity for the Company's securities could be severely affected. In
such event, the regulations on penny stocks could limit the ability of
broker/dealers to sell the Company's securities and thus the ability of
purchasers of the Company's securities to sell their securities in the secondary
market.
LIMITATION ON USE OF NET OPERATING LOSS CARRYOVER. Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code") imposes certain
limitations on the ability of a "loss corporation" to use its net operation
losses ("NOLs") to offset its future taxable income in taxable years following
an "ownership change" (including an ownership change resulting from the issuance
of stock). In general, an ownership change occurs if the percentage (as measured
by value) of the loss corporation's stock (other than certain Common Stock)
which is owned, directly or indirectly, by one or more 5% shareholders (or
certain groups of shareholders collectively treated as a 5% shareholder) is
increased by more than 50 percentage points over the lowest percentage of stock
owned by such 5% shareholders at any time during the applicable "testing period"
of three years or less. In the event of an ownership change, the amount of
pre-change NOLs that the loss corporation can use to offset its taxable income
in a post-change taxable year will generally be limited to an amount equal to
the product of the "long-term tax-exempt rate" in effect on the date of the
ownership change and the value of the loss corporation's stock immediately prior
to the ownership change (without taking into
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<PAGE> 17
account for such valuation purposes certain capital contributions received by
the loss corporation during the two-year period preceding the ownership change).
The long-term tax-exempt rate is an interest rate based upon certain U.S.
Treasury debt obligations adjusted for differences between rates on taxable and
tax-exempt obligations and announced on a monthly basis by the Internal Revenue
Service. In addition, if the loss corporation does not continue its historic
business or continue to use a substantial portion of its historic assets in its
business for a two-year period following an ownership change, the effect would
be that no portion of the pre-change NOLs would be available to offset future
taxable income (except in certain very limited circumstances).
DIVIDENDS. The Company has never paid any dividends on its Common Stock and
does not anticipate that cash dividends will be paid in the foreseeable future,
as it intends to follow a policy of retaining earnings, if any, to finance
future growth. Applicable law may also restrict the ability of the Company to
pay cash dividends. See "Dividend Policy."
CORPORATE HISTORY
The Company was incorporated in February 1994 under the name of Greg
Plunkett, Inc. The Company commenced business with an initial strategy of
focusing on products generally based upon local or regional brands and
distribution exclusively through direct store delivery. In August 1994, the
Company entered into a long-term licensing agreement with Mrs. Fields, which
provides for the exclusive development by the Company of Mrs. Fields frozen
cookie dough, frozen baked goods, and other frozen dessert products to be
produced and marketed throughout North America, Hawaii, and Puerto Rico
(excluding Canada with respect to ice cream novelties) by the Company in retail
store locations. Largely as a result of the excess production of inventory and
these prior strategies, the Company incurred losses of approximately $3,900,000
through January 1996. The Company, under new management, then redirected its
efforts toward licensing primarily well-known national brands to be sold by
direct store delivery, brokers, and distributors. Since then, the Company's
sales have increased every year and the Company currently has products sold
nationally.
DIVIDEND POLICY
The Company has never declared or paid dividends on its Common Stock. The
Company currently intends to retain all available funds for use in its business
and therefore does not anticipate paying any cash or other dividends in the
foreseeable future. Future cash dividends, if any, will be determined by the
Board of Directors and will be based upon the Company's earnings, capital
requirements, financial condition and other factors deemed relevant by the Board
of Directors. Additionally, under current circumstances, the Company would not
be able to pay cash dividends pursuant to applicable California law.
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<PAGE> 18
USE OF PROCEEDS
The estimated net proceeds to be received by the Company from the sale of
the Units in the Offering, after deducting the underwriting commissions and the
Representative's nonaccountable expense allowance and other offering expenses,
will be approximately $6,070,000 ($7,048,750 if the Representative's Over-
allotment Option is exercised in full), based on an assumed public offering
price of $5.00 for each Unit. The Company anticipates that the net proceeds will
be used as follows:
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT PERCENTAGE OF NET
ANTICIPATED APPLICATION OF NET PROCEEDS PROCEEDS
----------------------- ------------------ -----------------
<S> <C> <C>
Market Expansion(1)................................. $1,700,000 28.0%
Product Development(1).............................. $1,500,000 24.7%
Repayment of Bridge Notes and Other Debt(2)......... $1,470,000 24.2%
Acquisition of Licenses(1).......................... $ 800,000 13.2%
General Corporate Purposes, including working
capital, selling, marketing and administrative
expenses(1)....................................... $ 600,000 9.9%
----------
TOTAL..................................... $6,070,000
==========
</TABLE>
- ---------------
(1) Marketing expansion includes costs associated with expanding product
distribution such as slotting fees, advertising, and other promotions.
Product development includes research and development of new items under
current licenses and new items under future licenses. Acquisition of
licenses will support costs of purchasing rights to produce products under
additional brand names. Other general corporate purposes will be used to
assist with capital requirements to finance inventory and other costs.
Management intends to use as large a portion of the net proceeds from the
Offering as possible to implement its expansion strategy, including product
development, and acquisition of licenses in other food categories.
(2) The repayment of bridge notes and other debt include the principal amounts
of $650,000 to DayStar maturing at the earlier of September 1, 1998 or five
days following the closing of the Offering with interest for the period
subsequent to January 31, 1998 until maturity capped at $39,100. The initial
advance under such DayStar facility was used for working capital purposes,
with an initial interest rate of 12% per annum on the principal amount
advanced of $440,000, increased to 15% effective February 1, 1998. The
additional $440,000 was utilized to repay a portion of $595,000 in notes
which matured on June 30, 1997, and was intended to be a very short-term
loan to be repaid from the private placement in mid-1997 and therefore bore
interest at the rate of 1% per week until repaid from the proceeds of the
private placement. As the proceeds were insufficient for this purpose,
interest was thereafter capped at $39,100 for the period subsequent to
January 31, 1998. Also to be repaid are (i) $200,000 to the Representative
bearing 10% simple interest due and payable on the earlier of the closing of
this Offering or, if the Offering has not closed by October 31, 1998, 30
days following the Representative's demand for payment, (ii) $40,000 to a
third party lender, and any additional amounts which might be advanced by
such lender up to an estimated gross amount of $385,000, bearing interest at
12% per annum plus origination and due diligence costs, due at the earlier
of (a) August 31, 1998 or (b) in four equal quarterly payments if the loan
is not paid from the proceeds of the Offering in which instance the interest
rate will increase to 15% per annum; (iii) $103,500 advanced on July 6,
1998, by Larry Wells Company, Inc., an affiliate of a director of the
Company, plus $11,500 in fees if paid prior to October 31, 1998, plus
$30,000 if paid after October 31, 1998 and $1,500 each additional month
thereafter until paid; and (iv) approximately $120,000 of accrued interest
on these loans.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of the Offering based upon the current status of its business
operations, its current plans and current economic conditions. Future events,
including problems, delays, expenses and complications as well as changes in
competitive conditions affecting the Company's business and the success or lack
thereof of the Company's marketing efforts, may make shifts in the allocation of
funds necessary or desirable. A change in the use of such proceeds or timing of
such use will be at the Company's discretion. It may use a portion of the
proceeds to retire all or a portion of the Pennant Obligation, but is not
obligated to do so. Any net proceeds not immediately required for the purposes
described will be invested by the Company in investment grade, short term,
interest bearing investments.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company at April
30, 1998, and as adjusted to reflect the estimated net proceeds from the sale of
1,500,000 Units offered hereby at an initial assumed public offering price of
$5.00 per Unit and the application of the estimated net proceeds of $6,070,000.
See "Use of Proceeds."
<TABLE>
<CAPTION>
APRIL 30, 1998
-------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Notes payable, current:
Related parties and others................................ $ 850 $ 0
------- -------
Total notes payable......................................... 850 0
Shareholders' equity (deficit):
Preferred Stock, no par value; 10,000,000 shares
authorized; none issued and outstanding, actual and as
adjusted(2)............................................ -- 0
Common Stock, no par value: 30,000,000 shares authorized;
1,041,730 shares issued and outstanding; 2,541,730
shares as adjusted(2)(3)............................... 6,253 12,323
Contributed capital....................................... 559 559
Notes receivable from shareholders........................ (69) (69)
Accumulated deficit....................................... (7,701) (7,701)
------- -------
Total shareholders' equity (deficit).............. (958) 5,112
------- -------
Total capitalization.............................. $ (108) $ 5,112
======= =======
</TABLE>
- ---------------
(1) Adjusted to give effect to (i) the sale by the Company of 1,500,000 Units at
an assumed offering price $5.00 per Unit, net of estimated underwriting
discounts and estimated expenses of the Offering and application of the
proceeds therefrom. See "Use of Proceeds" and "Certain Transactions."
(2) Reflects amendments to the Company's Articles of Incorporation effective
prior to the commencement of the Offering (i) authorizing the issuance of up
to 10,000,000 shares of Preferred Stock and (ii) effecting a 1-for-3.2
reverse split of the Company's Common Stock.
(3) Excludes (i) 387,063 shares of Common Stock issuable upon exercise of
warrants outstanding as of April 30, 1998, (ii) the 120,625 PAG Shares
issuable following the closing of the Offering and (iii) 254,173 shares of
Common Stock reserved for issuance under the Company's stock option plan.
See "Management -- Stock Option Plan," "Certain Transactions" and "Shares
Eligible for Future Sale."
17
<PAGE> 20
DILUTION
As of April 30, 1998, the Company had a negative net tangible book value of
$(3,445,848) or $(3.31) per share. "Net tangible book value" per share
represents the amount of total tangible assets less total liabilities divided by
the number of shares of Common Stock issued and outstanding. After giving effect
to the sale of the 1,500,000 Units offered hereby based on an assumed price to
the public of $5.00 per Unit, attributing no value to the Warrant component of
the Unit, and assuming no other changes in the net tangible book value after
April 30, 1998, the Company's net tangible book value (after deduction of
estimated underwriting discounts and commissions and estimated offering
expenses) at April 30, 1998 would have been $2,624,152 or $1.03 per share. These
figures represent an immediate increase in net tangible book value of $4.34 per
share to existing shareholders and an immediate dilution to new investors of
$3.97 per share. Dilution is determined by subtracting net tangible book value
per share after the Offering from the amount of cash paid by a new investor for
a share of Common Stock. Common Stock equal to 20,343 shares has been deemed to
be outstanding for the purposes of this determination which relates to
promissory notes issued as payment for the exercise of certain warrants ("Note
Shares"). However, pursuant to California law, such Note Shares may not be
issued or deemed outstanding for any other purpose until such promissory notes
are paid. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per Unit...................... $5.00
Net tangible book value per share at April 30, 1998....... $(3.31)
Increase per share attributable to new investors.......... 4.34
------
Net tangible book value per share after the Offering........ 1.03
-----
Dilution per share to new investors......................... $3.97
=====
</TABLE>
The following table summarizes, on an as adjusted basis as of April 30,
1998, the difference between the number of Units purchased from the Company, the
total consideration paid and the average price per share paid by existing
shareholders and to be paid by new investors purchasing Units offered hereby.
The calculation in this table assumes an initial public offering price of $5.00
per Unit (before deducting the underwriting discounts and commissions and other
estimated expenses of the Offering, including the Representative's non-
accountable expense allowance, payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED(1)(2) TOTAL CONSIDERATION
---------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(3)............ 1,041,730 41% $ 6,812,557 48% $6.54
New investors....................... 1,500,000 59% $ 7,500,000 52% $5.00
--------- ---- ----------- ----
Total..................... 2,541,730 100% $14,312,557 100%
========= ==== =========== ====
</TABLE>
- ---------------
(1) Includes the 20,343 Note Shares.
(2) Excludes 387,063 shares of Common Stock issuable upon exercise of warrants
outstanding as of April 30, 1998 and the 120,625 PAG shares issuable
following the close of the Offering.
(3) Represents cash and services paid for shares of Common Stock as per the
April 30, 1998 Common Stock account in the amount of $6,253,057 and gives
effect to contributed capital as shown on the April 30, 1998 balance sheet
in the amount of $559,500. The existing shares of Common Stock outstanding
includes shares of Common Stock issued for cash and services provided to the
Company.
18
<PAGE> 21
SELECTED FINANCIAL DATA
The selected financial data shown in this section with respect to the
Company's statement of operations data for the years ended January 31, 1997 and
1998, respectively and balance sheet data as of January 31, 1998 are derived
from the audited financial statements of the Company included elsewhere in this
Prospectus. These statements have been audited by PricewaterhouseCoopers LLP,
independent accountants, as indicated in their report, which includes an
explanatory paragraph that expresses substantial doubt about the Company's
ability to continue as a going concern as described in the notes to such
financial statements. The selected financial data shown in this section with
respect to the Company's statement of operations data for three months ended
April 30, 1997 and 1998, respectively, and balance sheet data as of April 30,
1998, were prepared by the Company and are unaudited. In the opinion of
management of the Company, such unaudited financial statements have been
prepared on a basis consistent with the audited financial information and
include all adjustments, consisting of normal recurring entries, necessary for a
fair presentation of the results of such periods. The results of operations for
the three month period ended April 30, 1998 are not necessarily indicative of
the results of operations for the year ending January 31, 1999. The data
displayed below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and Notes related thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE MONTHS ENDED
JANUARY 31, APRIL 30,
-------------------- --------------------------
1997 1998 1997 1998
-------- -------- ---------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales....................................... $ 4,825 $ 5,352 $ 1,249 $ 1,640
Cost of goods sold.......................... 3,088 3,309 743 1,026
-------- -------- -------- ----------
Gross profit................................ 1,737 2,043 506 614
Marketing, general & administrative
expenses................................. 1,847 2,577 478 690
Compensation related to forgiveness of
employee notes........................... -- 1,472 -- --
-------- -------- -------- ----------
Operating loss.............................. (110) (2,006) 28 (76)
Interest and other expense.................. (647) ( 914) (193) (66)
-------- -------- -------- ----------
Loss before income taxes.................... (757) (2,920) (165) (142)
Income taxes................................ 1 1 1 1
Net loss.................................... $ (758) $ (2,921) $ (166) $ (143)
======== ======== ======== ==========
Net loss per common share, basic and
diluted(1)............................... $ (1.16) $ (3.81) $ (0.24) $ (0.14)
======== ======== ======== ==========
Weighted average number of common shares
outstanding.............................. 651,162 768,613 701,022 1,041,730
======== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
1998 APRIL 30, 1998
----------- ------------------------
ACTUAL ACTUAL AS ADJUSTED(2)
----------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................. $(2,462) $(2,807) 3,263
Total assets.............................................. 2,733 3,120 8,220
Total liabilities......................................... 3,555 4,078 3,108
Long-term liabilities..................................... 716 708 708
Accumulated deficit....................................... 7,559 7,702 7,702
Shareholders' equity (deficit)............................ (822) (959) 5,111
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the basis
used to calculate net loss per share.
(2) Adjusted to give effect to (i) the sale by the Company of 1,500,000 Units at
an assumed offering price $5.00 per Unit, net of estimated underwriting
discounts and estimated expenses of the Offering and the application of the
net proceeds therefrom. See "Use of Proceeds," "Capitalization" and "Certain
Transactions."
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Management's discussion and analysis of financial condition and results of
operations is designed to provide a better understanding of significant changes
and trends related to the Company's financial condition, results of operations,
liquidity, and capital resources. The discussion should be read in conjunction
with, and is qualified in its entirety by, the financial statements of the
Company and notes thereto included elsewhere herein. The Company's fiscal year
ends on January 31st of each year. The ability of the Company to continue as a
going concern is contingent upon its ability to complete the Offering or to
obtain other sources of financing.
BACKGROUND
The Company licenses and markets premium branded consumer food products
sold in supermarkets, club stores, convenience stores, drug stores and mass
merchandisers throughout the United States. The Company currently holds three
licenses for food products using names and trademarks held by Mrs. Fields, Gumby
and Mattel. The Company has developed and is currently marketing products under
the Mrs. Fields and Gumby licenses and intends to develop and market products
utilizing the Extreme Dinosaurs trademark held by Mattel. The Company intends to
build a portfolio of well-known premium brand products by continuing to seek
licensing opportunities for nationally recognized brand names, increasing
product offerings under current and new licenses, and further developing
distribution of the Company's existing products.
The Company has a management team with experience in direct retail sales
and marketing of food products to the retail food industry. The Company sells
its products through a combination of outside brokers and distributors
throughout the United States. The Company does not manufacture any of its
products, but contracts use of outside suppliers. The Company believes the use
of third-party suppliers increases its flexibility, reduces production
lead-times and costs, and significantly reduces capital expenditures and
associated overhead related to manufacturing, all resulting in overall lower
product costs to the Company.
SEASONALITY
Sales of Mrs. Fields cookie dough have been seasonal, with higher sales
during the traditional baking months of September to March. Therefore, sales
tend to be higher during the first and fourth quarters of each fiscal year. As a
result, fixed overhead, primarily general and administrative expenses, has
represented a disproportionate percentage of revenues during the second and
third quarters of each fiscal year. The Company has added products, such as the
Mrs. Fields ice cream novelties, which it believes should reduce the impact of
the seasonality of the sales of any its cookie dough products. Sales of ice
cream products totaled $454,656 from their introduction in July 1997 to January
31, 1998. Sales of ice cream products totaled $393,618 for the quarter ended
April 30, 1998.
20
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data of the
Company expressed as a percentage of sales for the years and periods indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
----------------------------------------------------
FOR THE FISCAL FOR THE FISCAL
YEARS ENDED QUARTERS ENDED
JANUARY 31, APRIL 30,
-------------------------- ----------------------
1997 1998 1997 1998
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales........................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.............................. 64.0 61.8 59.5 62.6
----- ----- ----- -----
Gross profit.................................... 36.0 38.2 40.5 37.4
Operating expenses:
Marketing expenses........................... 20.6 24.9 20.9 23.5
Compensation related to forgiveness of
employee notes............................. -- 27.5 -- --
General and administrative expenses.......... 17.7 23.3 17.3 18.5
----- ----- ----- -----
Operating (loss), income........................ (2.3) (37.5) 2.3 (4.6)
Interest expense............................. (12.9) (8.8) (14.7) (4.0)
Other (expense) income, net.................. (0.5) (8.3) (0.9) (0.1)
----- ----- ----- -----
Net loss........................................ (15.7) (54.6) (13.3) (8.7)
===== ===== ===== =====
</TABLE>
COMPARISON OF QUARTER ENDED APRIL 30, 1998 TO QUARTER ENDED APRIL 30, 1997
Revenues. Total revenues for the quarter ended April 30, 1998 (the "1998
Period") were $1,640,728 compared to $1,249,340 for the quarter ended April 30,
1997 (the "1997 Period"). This increase represents sales growth of 31.2% for the
quarter ended April 30, 1998, compared to the 1997 Period. The increase in 1998
is mainly attributable to the introduction of the Mrs. Fields ice cream
novelties to supermarkets and club stores in the 1998 Period. There were no
sales of these products in the comparable 1997 Period.
Cost of goods sold. Cost of goods sold for the quarter ended April 30, 1998
was $1,026,444 compared to $743,298 for quarter ended April 30, 1997. As a
percentage of sales, cost of goods was 62.6% for the 1998 quarter compared to
59.5% for the comparable 1997 Period. The increase for the quarter ended April
30, 1998 was primarily attributable to the higher cost of goods sold associated
with the Mrs. Fields ice cream novelties relative to the frozen cookie dough
products.
Gross profit. Gross profit for the quarter ended April 30, 1998 was
$614,284 compared to $506,042 for the quarter ended April 30, 1997. As a
percentage of sales, gross profit was 37.4% for the 1998 Period compared to
40.5% for the comparable 1997 Period. The decrease in gross profit for the 1998
Period was primarily a result of the lower margins associated with the Mrs.
Fields ice cream novelties as compared to those for cookie dough.
Marketing expenses. Marketing expenses for the quarter ended April 30, 1998
were $387,020 compared to $261,343 for the quarter ended April 30, 1997. As a
percentage of sales, marketing expenses were 23.5% for the 1998 Period compared
to 20.9% for the comparable 1997 Period. The increase in marketing expenses for
the 1998 Period was primarily attributable to approximately $109,000 of product
introduction costs associated with the Mrs. Fields ice cream novelties. These
expenditures allowed the Company to develop distribution in over 30 retail
accounts throughout the U.S. Marketing costs also increased $52,000 due to
higher royalties and commissions resulting from ice cream novelty sales.
General and administrative expenses. General and administrative expenses
for the quarter ended April 30, 1998 were $303,267 compared to $216,315 for the
quarter ended April 30, 1997. As a percentage of sales, general and
administrative expenses were 18.5% for the 1998 Period compared to 17.3% for the
comparable 1997 Period. The increase was primarily attributable to higher
accounting and legal expenses, amortization of licenses, rent, ice cream bill
processing fees, and directors and officers insurance premiums.
21
<PAGE> 24
Operating loss. The operating loss for the quarter ended April 30, 1998 was
$76,003 compared to an operating profit of $28,384 for the quarter ended April
30, 1997. As a percentage of sales, the operating loss was 4.6% for the 1998
Period compared to a 2.3% profit for the comparable 1997 Period. The decrease in
operating profit is mainly attributable to the product introduction expenses
associated with the Mrs. Fields ice cream novelties items and the increased
general and administrative costs noted above.
Interest expense. Interest expense for the quarter ended April 30, 1998 was
$66,033 compared to $184,014 for the quarter ended April 30, 1997. As a
percentage of sales, interest expense was 4.0% for the 1998 Period compared to
14.7% for the comparable 1997 Period. The decrease in interest expense is
primarily attributable to the conversion of $622,500 in debt to Common Stock in
the quarter ended January 31, 1998 and lower amortization of debt issuance
costs.
Net loss. The net loss for the quarter ended April 30, 1998 was $142,836
compared to $166,430 for the quarter ended April 30, 1997. As a percentage of
sales, net losses were 8.7% for the 1998 Period compared to 13.3% for the
comparable 1997 Period. The decrease in net loss was due to the lower interest
expense offset by the product introduction expenses associated with Mrs. Fields
ice cream novelties items and higher general and administrative expenses.
COMPARISON OF YEAR ENDED JANUARY 31, 1998 TO YEAR ENDED JANUARY 31, 1997
Revenues. Total revenues for the year ended January 31, 1998 were
$5,351,917 compared to $4,824,706 for year ended January 31, 1997. This increase
represents sales growth of 10.9% for year ended January 31, 1998, and is
attributable to the 1997 introductions of the Mrs. Fields ice cream sandwiches
and Gumby Freeze Pops. Cookie dough sales were approximately the same for both
years.
Cost of goods sold. Cost of goods sold for the year ended January 31, 1998
was $3,308,660 compared to $3,087,833 for year ended January 31, 1997. As a
percentage of sales, cost of goods was 61.8% for the year ended January 31,
1998, as compared to 64.0% for the year ended January 31, 1997. The 2.2%
decrease in cost of goods sold in fiscal year 1998 was primarily attributable to
an increase in sales of cookie dough products to club stores, which have higher
margins than other channels of distribution.
Gross profit. Gross profit for the year ended January 31, 1998 was
$2,043,257 compared to $1,736,873 for the year ended January 31, 1997. As a
percentage of sales, gross profit was 38.2% for the year ended January 31, 1998
as compared to 36.0% for the year ended January 31, 1997. The increase in gross
profit for fiscal year 1998 was a result of increased sales of cookie dough to
club stores which provide the Company with relatively higher profit margins.
Marketing expenses. Marketing expenses for the year ended January 31, 1998
were $1,332,934 compared to $992,258 for the year ended January 31, 1997. As a
percentage of sales, marketing expenses were 24.9% for the year ended January
31, 1998 as compared to 20.6% for the year ended January 31, 1997. The 4.3%
increase in marketing expenses was primarily attributable to approximately
$86,000 related to the introduction of the new ice cream novelty and freeze pop
items as well as the accrual of $120,000 to Mrs. Fields to repay a shortfall in
the payment of the minimum royalty under the Mrs. Fields license. In addition,
the Company incurred costs of approximately $128,000 in packaging design for new
ice cream products. Although the Company expects to incur costs for packaging
design for new products to be developed in the future, costs for redesign of
existing products is not likely to occur for a few years.
General and administrative expenses. General and administrative expenses
for the year ended January 31, 1998 were $1,244,551 compared to $854,433 for the
year ended January 31, 1997. As a percentage of sales, general and
administrative expenses were 23.3% for the year ended January 31, 1998 as
compared to 17.7% for the year ended January 31, 1997. The 5.6% increase was due
primarily to an increase in accounting and legal expenses related to costs
associated with a public offering which was not completed by a prior
underwriter, the registration of the Company's securities with the Commission
under the 1934 Act in July 1997 on Form 10-SB and related compliance costs
incurred between June and November 1997. In addition, the personnel expense of
the Company increased because two officers became full-time employees of the
Company during the year ended January 31, 1998.
22
<PAGE> 25
Compensation related to forgiveness of employee notes. Compensation related
to forgiveness of Employee Stock Purchase Notes receivable by the Company
totaled $1,472,009, or 27.5% of revenues, for the year ended January 31, 1998.
The amount forgiven included the aggregate principal amount of $1,450,000 and
accrued interest in the amount of $22,009. The notes had been received by the
Company pursuant to the issuance of stock to key employees in 1995 and 1996
pursuant to the Company's Employee Stock Purchase Plan and were forgiven, in
part, in consideration for the employees forgiving their rights to increases in
compensation and as an inducement to retain key management.
Operating loss. The operating loss for the year ended January 31, 1998 was
$2,006,237 compared to an operating loss of $109,818 for the year ended January
31, 1997. As a percentage of sales, operating loss was 37.5% for the year ended
January 31, 1998 as compared to 2.3% for the year ended January 31, 1997. The
35.2% increase in operating loss is mainly attributable to non-recurring general
and administrative expenses such as forgiveness of the Employee Stock Purchase
Notes and accounting and legal expenses related to a public offering which was
not completed by a prior underwriter.
Interest expense. Interest expense for the year ended January 31, 1998 was
$471,186 compared to $622,793 for the year ended January 31, 1997. As a
percentage of sales, interest expense was 8.8% for the year ended January 31,
1998 as compared to 12.9% for the year ended January 31, 1997. The amortization
of debt issuance costs associated with the value of stock and warrants paid to
various bridge loan providers decreased from $500,880 to $222,766 for the years
ended January 31, 1997 and 1998, respectively. As a percentage of revenues, the
amortization of debt issuance costs was 10.4% and 4.2% for the years ended
January 31, 1997 and 1998, respectively.
Other (expense) income, net. Other expense for the year ended January 31,
1998 was $443,190, or 8.3% of revenues. For fiscal year 1998, these expenses
consisted of costs related to the final settlement of agreements with prior
placement agents or advisors in the amount of $293,190 and a provision for
litigation costs in the amount of $150,000 pertaining to a pending lawsuit with
a founder of the Company. Other expense for the year ended January 31, 1997 was
$24,292, or 0.5% of revenues. The expense is primarily related to costs paid to
an unsuitable merger candidate.
Net loss. The net loss for the year ended January 31, 1998 was $2,921,413
as compared to $757,703 for the year ended January 31, 1997. As a percentage of
sales, net losses were 54.6% for the year ended January 31, 1998 as compared to
15.7% for the year ended January 31, 1997. The increase in the net loss was due
primarily to the forgiveness of the Employee Stock Purchase Notes, the cost
associated with the conclusion of investment banking agreements and amounts
payable to Mrs. Fields to meet the minimum royalty payment obligations under the
Mrs. Fields License. Because the Company does not expect these costs to recur in
the future, the amounts and percentages for the year ended January 31, 1998 are
likely to differ from that which might be expected in future years.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities since inception primarily through
private placements of Common Stock and the issuance of debt. The Company has
also financed the production of its Mrs. Fields cookie dough through Pennant.
The cumulative losses from the Company's inception through April 30, 1998
totaled $7,701,616 with a shareholders' deficit of $958,534.
The Company had a working capital deficit at April 30, 1998 of $2,806,778.
From January 31, 1998 to April 30, 1998, current assets increased by $186,864
and current liabilities increased by $531,698. The increase in current assets is
primarily attributable to the increase in accounts receivable and inventory
associated with the introduction of Mrs. Fields Ice Cream Sandwiches and Gumby
Freeze Pops. Changes in current liabilities from January 31, 1998 to April 30,
1998 are mainly attributable to: (i) the increase in accounts payable associated
primarily with the funding of inventory and accounts receivable, and (ii) a loan
from the Representative for working capital purposes in the amount of $200,000,
the principal and interest on which will be paid from the net proceeds of this
Offering.
23
<PAGE> 26
Long-term liabilities decreased from January 31, 1998 to April 30, 1998 by
$7,969 due to the repayment of $90,469 on the Pennant Obligation and the
additional liability of $82,500 incurred in connection with the Extreme
Dinosaurs licensing agreement.
Cash used in operating activities was $166,584 for the quarter ended April
30, 1998 compared to $164,620 for the quarter ended April 30, 1997, and $718,276
for the year ended January 31, 1998 compared to $577,885 for the year ended
January 31, 1997. The increases in cash used in operations are due to increases
in the net losses for the respective periods, net of noncash addbacks and
changes in operating assets and liabilities.
Cash used in investing activities was $28,693 for the quarter ended April
30, 1998 compared to $12,342 for the quarter ended April 30, 1997, and $86,741
for the year ended January 31, 1998 compared to $18,579 for the year ended
January 31, 1997. The increases in cash used in investing activities relate to
purchases of office equipment and payments toward the purchases of the Gumby and
Extreme Dinosaurs licenses.
Cash provided by financing activities was $200,000 for the quarter ended
April 30, 1998 compared to $155,015 for the quarter ended April 30, 1997. During
the quarter ended April 30, 1998, the Company's cash flows from financing
activities consisted entirely of the proceeds from the issuance of a note
payable to the Representative. During the quarter ended April 30, 1997, the
Company's cash flows from financing activities consisted of the proceeds from
draws on the DayStar line of credit, net of payments of debt issuance and
deferred offering costs.
Cash provided by financing activities was $792,810 for the year ended
January 31, 1998 compared to $537,142 for the year ended January 31, 1997.
During the year ended January 31, 1998, the Company's cash flows from financing
activities consisted of the proceeds from a private placement of common stock
and net borrowings on the DayStar line of credit, net of the repayment of the
PAG notes. During the year ended January 31, 1997, the Company's cash flows from
financing activities consisted of the proceeds from the issuance of notes
payable to PAG and the issuance of convertible notes payable to C. Brands, net
of the payment of debt issuance and deferred offering costs.
The Company expects to meet its short term capital requirements through
additional bridge financing. On May 15, 1998, a letter of intent to advance up
to $500,000 to the Company was obtained from an independent lender. The Company
currently does not intend to draw down more than $385,000 from this credit
facility. The Company has incurred a repayment obligation of $50,000 as of June
18, 1998, which amount will be repaid from the proceeds of the Offering. On July
6, 1998 the Company received a loan of $103,500 from Larry Wells Company, Inc.,
an affiliate of a director of the Company.
The Company expects its cash requirements to increase significantly in
future periods. The Company will require substantial funds to expand its present
distribution, develop new products, and acquire new licenses. The Company's cash
requirements may vary materially from those now planned depending upon the
success of its current products, changes in product lines, and other factors.
The Company believes that the net proceeds of this Offering, together with
anticipated cash flows from operations will be sufficient to satisfy the
Company's cash requirements for at least the 12 months following this Offering.
Impact of Inflation. The Company does not believe that inflation has had a
material adverse effect on sales or costs of production nor does management
believe that moderate increases in interest rates of commercial lenders or
moderate rates of inflation will have a significant impact upon future
operations.
Year 2000 Disclosure. The Year 2000 issue is the result of computer
programs using two digits rather than four to define the applicable year.
Programs that have time-sensitive software may recognize a date using "00" as
the calendar year 1900 rather than the calendar year 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company's internal computer systems are all newly installed
with Year 2000 compliant programs and operating systems. The Company presently
believes that it has no systems that may be adversely affected by a Year 2000
issue. The Company does not believe that any Year 2000 issue exists which will
adversely impact upon the services provided for the Company by its primary
manufacturers, including Pennant. The Company is considering bringing in-house,
after the Offering, all of the billing and invoicing activities currently being
provided for it by such manufacturers, which it believes will further minimize
the possibility of there being any Year 2000 issue.
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BUSINESS
OVERVIEW
The Company licenses and markets premium branded consumer food products
sold in supermarkets, club stores, convenience stores, drug stores and mass
merchandisers throughout the United States. The Company currently holds three
licenses for food products using names and trademarks of Mrs. Fields, Gumby and
Mattel's Extreme Dinosaurs. The Company has developed and is currently marketing
products under the Mrs. Fields and Gumby licenses. The Company intends to build
a portfolio of well-known premium brand products by continuing to seek licensing
opportunities for nationally recognized brand names, increasing product
offerings under current and new licenses, and further developing distribution of
the Company's existing products.
The Company holds an exclusive license to sell frozen cookie dough, frozen
baked goods and other frozen dessert products approved by Mrs. Fields and use
the Mrs. Fields trademarks and logo throughout North America, Hawaii, and Puerto
Rico, excluding Canada with respect to ice cream novelties. The license is
renewable by the Company at its sole discretion every five years for up to 30
years (through December 31, 2024) but subject to certain termination rights by
Mrs. Fields in the period beginning December 2004. The Company began selling
Mrs. Fields frozen cookie dough products in late 1994. Mrs. Fields frozen cookie
dough products are sold through club stores including Costco, BJ's and Sam's
Club, as well as several thousand grocery stores throughout the United States
including in certain locations of stores such as Safeway, Lucky, Publix, Kroger,
Jewel, Harris-Teeter, Ralphs and Raley's. The Company recently introduced Mrs.
Fields ice cream novelties and began selling the Mrs. Fields Cookie Ice Cream
Sandwich and Mrs. Fields Ice Cream Cookie Pop in July 1997 and January 1998,
respectively. In April 1998, Mrs. Fields approved both ice cream novelties for
sale in all of the Mrs. Fields franchise and company-owned retail stores. Such
sales will commence upon completion of certain Mrs. Fields' distribution
arrangements. The Company is currently developing other frozen food products to
sell under the Mrs. Fields name. In May 1998, the Company was approved to
distribute its Mrs. Fields Cookie Ice Cream Sandwich and Ice Cream Cookie Pop in
military commissaries throughout the United States.
The Company holds a non-exclusive license to use certain names and
characters from the television show "Adventures of Gumby" in the design and
packaging of freeze pops, fruit coolers and certain types of candy. In mid-1997,
the Company began selling Gumby Freeze Pops through Lucky in Northern
California. In 1998, the Company increased marketing for the summer selling
season so the Gumby Freeze Pops will be available on a national basis. Lucky
Northern California, Lucky Southern California, Jewel, Acme, Ralphs, and Osco
Drugs have approved the item for distribution.
In April 1998, the Company acquired an exclusive license to use trademarks,
copyrights, plots, settings and artwork related to Mattel's Extreme Dinosaurs
for food products including freeze pops, gelatin snacks, fruit coolers, fruit
snacks, cookies and crackers. The Company is in the process of finalizing
certain details in the formal license agreement and identifying the best food
products to introduce for this brand. As of the date of this Prospectus, the
Company cannot make any representations as to the form or timing of such new
products.
The Company has a management team with experience in direct retail sales
and marketing of food products to the retail food industry. The Company sells
its products through a combination of outside brokers and distributors
throughout the United States. The Company does not manufacture any of its
products, but contracts with outside suppliers. The Company believes the use of
third-party suppliers increases its flexibility, reduces production lead-times
and costs, and significantly reduces capital expenditures and associated
overhead related to manufacturing, all resulting in overall lower product costs
to the Company.
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INDUSTRY BACKGROUND
Cookie Dough
Sales of frozen baked goods in the U.S. were over $1.6 billion in 1996
according to Progressive Grocer magazine in its July 1997 annual Supermarket
Sales Report. The specific subcategory that includes cookie dough grew by 2.4%
in 1996, the second highest growth rate among all subcategories of frozen baked
goods. However, the Company estimates that the frozen cookie dough category will
remain relatively small with approximately $10 million annually in sales, when
compared to categories such as refrigerated cookie dough which represents
approximately $300 million annually in sales. Otis Spunkmeyer and the Company's
Mrs. Fields products together represented the majority of sales in the frozen
cookie dough category in 1997.
Ice Cream Novelties
Ice cream novelties represent a significantly larger market than frozen
cookie dough with $1.58 billion in U.S. sales for calendar year 1997, according
to Information Resources, Inc. ("IRI"), an independent market research firm that
provides information on the supermarket industry. A research study by A.C.
Nielsen, an independent market research firm, reported in the March 2, 1998,
issue of Supermarket News that 93% of all U.S. households buy ice cream and ice
cream novelties. The Supermarket News article also pointed out that shoppers who
buy ice cream products tend to spend more money on other items and that ice
cream sales are less seasonal than they were three years ago. Due to the large
size of the ice cream novelty category, this segment has numerous competitors
and product choices vying for consumer attention.
Shelf-stable freeze pops
The Company has been unable to find reliable market information on the
shelf stable freeze pops category. There are two large competitors, Kraft Foods
and Jel-Sert, and competition has traditionally been based on price.
BUSINESS STRATEGY
The Company's strategy for developing a portfolio of well-known, premium
branded food products includes the following:
- IDENTIFYING THE RIGHT PREMIUM BRANDS
The Company intends to seek out quality brand names such as Mrs. Fields
that have high national brand recognition with consumers. Mrs. Fields Cookies
has a 94% recognition rate among all U.S. consumers according to a 1994 survey
taken by an independent market research firm. The Gumby brand name has more than
40 years of exposure and is well recognized by children and adults. The Company
believes that brand name products often allow premium product pricing and are
less expensive to develop. By focusing on nationally recognized brands, the
Company believes product introductions will require less advertising and up-
front slotting fees. Slotting is an up-front fee paid to retailers to purchase
retail shelf space for the Company's products. The Company regularly evaluates
potential brand licensing opportunities to identify additional premium brands
that have the characteristics for successful product line introductions.
- EXPANDING DISTRIBUTION AND CREATING NEW PRODUCT OFFERINGS
The Company plans to continue to expand distribution of its products and
has offered new items to grow sales. Sales growth is a result of introducing
additional items under a brand, taking brands to new markets, and penetrating
additional channels of distribution. For example, the Company initially sold
Mrs. Fields Frozen Cookie Dough in four varieties of one pound packages in
supermarkets in just a few cities. Sales have grown by adding a fifth variety,
introducing a three pound size for club stores, developing the Holiday Cookie
Kit and expanding distribution to 31 of the 64 IRI Infoscan markets, which
represent the majority of the largest U.S. markets. The addition of the Mrs.
Fields Cookie Ice Cream Sandwich and the Mrs. Fields Ice Cream Cookie Pop
further extends the Mrs. Fields brand in several markets and opens new markets
and channels of
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distribution such as convenience stores. When possible, the Company plans to
position brand name products in underdeveloped categories that lack a strong
brand representation.
- DIVERSIFYING BRAND LICENSES
The Company intends to create a portfolio of several brand licenses to
reduce the impact if one brand underperforms or fails. The Company intends to
continue diversifying its brand portfolio through both new licensing
opportunities or product acquisitions. The Company will also seek poorly managed
brands with strong market potential that can be acquired and improved.
- USING THIRD-PARTY SUPPLIERS AND CO-PACKERS
The Company currently does not manufacture any of its products internally
and plans to continue to out-source the manufacturing of all of its products
through third-party suppliers and co-packers. This increases the Company's
flexibility, reduces overhead, and allows the Company to benefit from competing
suppliers.
CURRENT PRODUCTS
The Company currently has three highly recognizable brand name product
licenses. The Company has an exclusive license to produce products under the
Mrs. Fields brand name including frozen cookie dough, frozen baked goods and
other related frozen food products. The Company also has a non-exclusive license
to use the names and likenesses of Gumby, Pokey and other characters and names
derived from the television series, "Adventures of Gumby" in conjunction with
products including freeze pops, beverage coolers and fruit forms. The Company
has an exclusive license to market, develop, and sell certain food products
using Mattel's Extreme Dinosaurs characters and theme, but is still in the
process of identifying what items to produce. These initial licenses are the
foundation upon which the Company plans to create new brand name products and
acquire new licenses to build a portfolio of well-known, premium brand products.
Cookie Dough
Mrs. Fields frozen cookie dough is a "super premium" quality product in
which the cookie dough is individually pre-formed and ready to bake. The recipe
used in making the frozen cookie dough is identical to the recipe used to bake
the cookies sold in Mrs. Fields Cookies retail stores. The frozen cookie dough
is sold nationally in 31 out of 64 IRI Infoscan markets through certain
locations of retailers such as Safeway, Lucky, Publix, Kroger, Jewel,
Harris-Teeter, Ralphs and Raleys, and club stores such as Costco, BJ's and Sam's
Club. Currently, there are five different varieties marketed by the Company in
various package sizes: Semi-Sweet Chocolate Chip, Semi-Sweet Chocolate Chip with
Walnuts, Triple Chocolate, White Chunk Macadamia Nut, and Oatmeal Raisin.
Supermarkets that offer Mrs. Fields products will typically carry two to four of
the one pound package size due to limited space in their frozen food sections.
Mrs. Fields frozen cookie dough is typically priced 30% higher than its nearest
premium competitive item due to its super premium designation. The Company began
selling this product in late 1994 and it serves consumers who seek the highest
quality cookie dough available and are willing to pay a premium for the product.
In addition, the Company offers a Mrs. Fields Holiday Cookie Baking Kit
which is marketed during the Christmas season. The kit includes frozen sugar
cookie dough, cookie cutters, frosting, and confectionary sprinkles.
Ice Cream Novelties
The Company currently sells a Mrs. Fields Cookie Ice Cream Sandwich and Ice
Cream Cookie Pop. The cookie ice cream sandwich consists of two Mrs. Fields
chocolate chip cookies with all-natural vanilla bean ice cream between the
cookies. The ice cream cookie pop consists of a single Mrs. Fields chocolate
chip cookie and vanilla bean ice cream hand-dipped in dark chocolate, served on
a stick. The packaging for the single serve ice cream cookie pop forms a unique
detachable drip tray. The Company began selling its Mrs. Fields Cookie Ice Cream
Sandwich in late summer 1997 and was sold exclusively through 7-Eleven stores
nationwide. In 1998, the Company is marketing both products nationwide to
convenience stores, club stores, and supermarkets. In April 1998, the Company
was approved by Mrs. Fields to begin selling its ice cream
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novelties nationwide in the Mrs. Fields retail stores which will commence upon
implementation by Mrs. Fields of appropriate means to transport ice cream
products to its retail outlets.
Gumby Freeze Pops
The Company began selling Gumby Freeze Pops in Lucky stores in Northern
California during the summer of 1997 and is currently marketing the product
nationally. The freeze pops are sold in a box of 18, 1.25 oz. plastic tubes,
which are eaten by tearing the top from the tube and squeezing the frozen liquid
gradually upward. Gumby Freeze Pops are shelf-stable and can be purchased at
room temperature and frozen before consumption, or can be sold frozen at the
store. In addition, shelf-stable pops do not require freezer space or frozen
storage transportation and can be sold anywhere in a store, which provides
retailers with more flexible display options.
NEW PRODUCTS
The Company both develops its own products and uses existing recipes from
its licensors for new items. The Mrs. Fields cookie dough is the same recipe
used in the Mrs. Fields franchise stores. When the Company develops new products
internally, the products will be either innovative items or brand items similar
to others in their food category. The Company believes innovative items get more
attention when introduced by brokers and distributors to food industry buyers
and often appeal to consumers seeking something new. The Mrs. Fields Ice Cream
Cookie Pop is an example of an innovative product both in its single serve
detachable tray packaging and its high profile combination of ingredients and
design. Gumby Freeze Pops are an example of the Company's alternative strategy
to launch a similar branded product into a "non-branded" category. This strategy
allows the Company to charge a higher price for its product in that category
than its competition because a portion of consumers will be willing to pay more
for the brand name product.
The Company plans to use a portion of the proceeds from the Offering to
develop new products and acquire new brand licenses. Several new Mrs. Fields
super premium products are being considered for introduction between late 1998
and 1999 including but not limited to cheesecakes, double fudge brownies,
muffins, waffles, and cinnamon rolls. The Company also plans to introduce
additional ice cream novelty varieties and a second product using the Gumby name
during 1999. Most products introduced by the Company are developed internally
and require pre-approval by the licensor before release. Some of the Mrs. Fields
products will use recipes from Mrs. Fields, thus saving the Company the time and
expense needed to develop new recipes. It is anticipated that cheesecakes,
double fudge brownies, cinnamon rolls, and muffins also will use existing
recipes from Mrs. Fields Development Corporation. The Company is in the process
of identifying the best food products to introduce under the Mattel's Extreme
Dinosaurs brand and as of the date of this Prospectus cannot make any
representations as to the form or timing of such new products. Although the
Company currently plans to introduce these various products on the approximate
schedule described, there is no assurance that the Company's plans will not
change, either with respect to the specific products or the timing of the
introduction into the market.
COMPETITION
The food industry, in general, is highly competitive. The Company competes
with numerous food item producers and distributors, many of which are larger,
have greater resources, enjoy greater economies of scale, and offer a wider
selection of food items with a higher degree of consumer acceptance than the
Company. The Company will compete with other food producers and distributors not
only for consumer acceptance, but also for shelf space in retail outlets and for
marketing attention. The Company believes that its strategy to market nationally
known name brands will allow the Company more opportunities to distinguish its
products from competitors without significant advertising to create product
awareness and acceptance.
Cookie Dough
Mrs. Fields and Otis Spunkmeyer are the leading brands of frozen cookie
dough in the U.S. The Company competes directly with Otis Spunkmeyer and a few
small regional frozen cookie dough manufactur-
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ers throughout the U.S. Otis Spunkmeyer markets frozen cookie dough with an
average 30% lower price point than the Company's cookie dough products. Other
indirect competition comes from refrigerated dough manufacturers including
Pillsbury and Nestle and a large variety of manufacturers who produce
ready-to-eat cookies. The price difference between Mrs. Fields frozen cookie
dough and Otis Spunkmeyer is comparable to the price difference between
ready-to-eat cookies such as Pepperidge Farms and Nabisco Chips Ahoy.
Ice Cream Novelties
There are several direct competitors to Mrs. Fields ice cream novelties in
the super premium category, including, but not limited to, Haagen Dazs, Ben &
Jerry's, and Dove Bar. Indirect competition comes from premium and non-premium
products, including, but not limited to Big Ed's, Chipwich, Good Humor,
Klondike, Biggie Iggy, It's It, and other regional products. Mrs. Fields is
priced comparably with other super premium items and offers equal quality.
Within the super premium category, Mrs. Fields is the only brand that offers a
cookie ice cream sandwich, and the Company believes Mrs. Fields Ice Cream Cookie
Pop does not have any directly similar competitors.
Gumby Freeze Pops
Gumby Freeze Pops competes with Kraft Foods, producer of Mr. Freeze,
Jel-Sert, Inc., producer of Fla-Vor-Ice and Otter Pops, and small regional
manufacturers. Gumby is positioned as a premium product and sells from
$0.10 - $0.50 more than its competitors when sold in comparable packages. The
Company believes price has traditionally been the key factor for purchasing
decisions among retail buyers. The Company believes a quality branded product
such as Gumby may be able to serve a niche of consumers willing to pay more for
the brand name product.
SALES AND MARKETING
The Company currently employs a network of food brokers and distributors to
expand sales in supermarkets, conveniences stores, club stores and other
channels. Since there are regional differences in the strength of distribution
channels across the U.S., using this network allows the Company to hire the best
source in each particular market. The Company regularly sponsors promotions
which are necessary to keep consumer, broker and distributor interest, increase
brand awareness, and gain entry into supermarkets and other channels. The
Company tries to limit up-front slotting payments in lieu of other discounts and
promotions that are based on sales volume. In the past the Company has sometimes
been able to reduce or eliminate slotting fees based on a product's brand
recognition or from relationships the Company's management has in the industry.
There is no assurance that future products will receive similar favorable
treatment.
The Company has found some promotions such as in-store demonstrations and
sampling are useful for creating product awareness and increasing sales. Mrs.
Fields Frozen Cookie Dough and Mrs. Fields Cookie Ice Cream Sandwich are
promoted through demonstrations and sampling in club stores and supermarkets.
The Company uses other forms of advertising that include radio advertising,
in-store coupons, in-store signs, stickers, floor ads, and event marketing such
as PTA meetings, "fun runs" and golf tournaments. The Company is planning to
begin promoting its products in the latter part of 1998 through the Internet by
use of links and a web site. Additionally, the Company participates in selected
trade shows, such as the Food Marketing Institute, to expand product awareness
among attending retailers.
MANUFACTURING
The Company does not manufacture any of its products directly, nor does the
Company intend to begin manufacturing any of its products in the future. The
Company believes that there are numerous third party manufacturers capable of
producing its food products. All of the Company's current suppliers have
sufficient capacity to support growth and none of the Company's current products
require the use of a sole source manufacturer.
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Mrs. Fields Cookie Dough
Manufacturing for Mrs. Fields cookie dough products is provided by Pennant
which the Company has been advised, also manufactures all of the cookie dough
products for Mrs. Fields franchise stores. Pennant manufactures these products
according to Mrs. Fields specifications. The Company has an informal arrangement
with Pennant that allows the Company to have its cookie dough products produced
pursuant to purchase orders placed for retailers by the food brokers or
distributors acting on behalf of the Company, without any advance payments to
Pennant for manufacturing or packing being required. Pennant distributes the
Company's cookie dough products directly from the co-packer to the Company's
customers' warehouses on a contract trucking basis.
Mrs. Fields Ice Cream Novelties
Mister Cookie Face ("MCF") manufactures the Company's Mrs. Fields Cookie
Ice Cream Sandwich and Mrs. Fields Ice Cream Cookie Pops. The Company purchases
the packaging and already baked cookies for these products in advance of sales
and holds such inventory at MCF. The cookies are prepared and baked by another
manufacturer, Cookie Kingdom. Normal lead time for production and delivery is 10
days. Most of the product is made to order to ensure freshness and reduce
inventory carrying costs. Since the products are handmade, there is minimum time
to change over from one product to another. The Company believes that capacity
can be quickly expanded to meet increased demand.
Gumby Products
Kisko Products ("Kisko") manufactures Gumby Freeze Pops in accordance with
the Company's specifications. Kisko sources and procures all of the components
of the product and the Company pays for product only after it has been shipped.
Upon shipment of the order, Kisko bills the Company for the finished product and
the Company is responsible for collection from the customer. Production lead
time is approximately 10 days and Kisko generally maintains between 5,000 and
10,000 cases of product in inventory during the active selling season, which
represents an estimated 15-day supply. After the end of the season, usually at
the end of September, the Company must pay Kisko for all unsold inventory.
Inventory has a 2 year shelf life. Kisko is a large food manufacturer and
maintains capacity far in excess of the Company's foreseeable requirements.
LICENSING AGREEMENTS
Mrs. Fields. In August 1994, the Company and Mrs. Fields entered into an
exclusive licensing agreement (the "Mrs. Fields License") whereby the Company
acquired, for a purchase price of $2,500,000, the exclusive right and license to
use the Mrs. Fields Cookies, Mrs. Fields Cookies and Brownies and Mrs. Fields
names and trademarks in any format (the License Names and Marks as defined by
the Mrs. Fields License) to market cookies, muffins, brownies, pound cakes,
baked goods, and frozen dessert items, including ice cream, containing Mrs.
Fields Cookie Dough (the "Royalty Bearing Products") throughout North America,
Hawaii, and Puerto Rico (the "Territory") relying on grocery stores,
supermarkets, convenience stores and club stores as distribution channels. The
license does not include the ice cream novelty markets for Canada. The Mrs.
Fields License has a 30 year duration, including option periods. The initial
term of the Mrs. Fields License expires December 31, 1999 (the "Initial Term"),
with the Company having an option to extend, at its sole discretion, the Mrs.
Fields License for five five year periods (the "Option Periods") through
December 31, 2024. Mrs. Fields may terminate the Mrs. Fields License at the end
of any Option Period subsequent to the Initial Term by providing written notice
to the Company of its intent to do so not earlier than 12 months nor later than
90 days from the end of such Option Period. Thus, assuming the Company remains
in compliance, the Mrs. Fields License may not be terminated any earlier than
December 2004. In a letter signed by Mrs. Fields on May 5, 1998, it was
confirmed that the Company was in compliance with the terms of the Mrs. Fields
License. In the event Mrs. Fields exercises its right to terminate the Mrs.
Fields License, it must pay to the Company an amount equal to three times the
average gross margin for sales of Mrs. Fields products reported by the Company
for the last three years of the Option Period in which
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such notice of termination is given. The amount determined to be due shall be
payable over three years in twelve equal quarterly payments.
The Company also has the right of first refusal to acquire the license to
sell in the Territory, except the Canadian market, all other frozen food
products, including ice cream, at an amount equal to 75% of the price and on the
terms set forth by any prospective licensee. The Company has the right to expand
the definition of Territory to include additional areas, at no additional cost,
upon receipt of the written or deemed consent (resulting from the passage of
time without objection) of Mrs. Fields.
The Company is obligated to pay a $1.00 royalty per twelve pound equivalent
of product sold and to sell a minimum number of cases of Royalty Bearing
Products during the Initial Term (the "Minimum Volume Commitments"), and, if the
license is extended, in each Option Period. Pursuant to the amendment to the
Mrs. Fields License entered into in March 1996, the Minimum Volume Commitment
beginning January 1, 1997 for the 1997 calendar year was 285,000 twelve pound
equivalent cases, for calendar year 1998 it is 350,000 twelve pound equivalent
cases, increasing over the life of the Mrs. Fields License to 583,434 twelve
pound equivalent cases in 2015 and continuing at that level for the remainder of
the Mrs. Fields License.
To the extent that the Company does not meet the Minimum Volume Commitment
to maintain the Mrs. Fields License it shall be required to pay the royalty
which would otherwise have been earned by Mrs. Fields on the amount of the
shortfall from the Minimum Volume Commitment for the relevant period. The
Company sold approximately 177,000 and 179,000 twelve pound equivalent cases
during the calendar years ended December 31, 1996 and 1997, respectively. As of
January 8, 1998, the Company and Mrs. Fields entered into a Second Amendment to
the Trademark Licensing Agreement, pursuant to which it was agreed that the
additional royalty payable of $100,000, plus a penalty of $20,000, with respect
to the shortfall of approximately 100,000 cases for 1997 would be paid by a
surcharge imposed upon royalties payable during 1998 until such time as the
$120,000 has been paid. While these Minimum Volume Commitment amounts exceed the
amounts shipped by the Company during all the preceding calendar years, the
Company expects to meet these Minimum Volume Commitment in 1998 and thereafter
and to comply with the other provisions of the Mrs. Fields License. However, no
assurance can be given that the Company will, in fact, meet such requirements
during 1998 and continue to do so thereafter. The loss of the Mrs. Fields
License would have a material adverse effect on the Company and the results of
operations.
In addition to complying with any and all applicable laws, the Company must
seek Mrs. Fields' approval before selling any Royalty Bearing Product, provide
Mrs. Fields with a written summary of customer complaints regarding the quality
of products and purchase ingredients from sources approved by Mrs. Fields. Mrs.
Fields also has the right to request samples of any Royalty Bearing Product
being sold by the Company free of charge. The Company has the duty to obtain and
keep in force product liability insurance in favor of Mrs. Fields and is
currently in compliance with this requirement.
Gumby. In September 1996, the Company entered into a licensing agreement
(the "Gumby License") with AJM Marketing Enterprises ("AJM") whereby the Company
was awarded the non-exclusive right and license to use certain Names and
Characters (Gumby, Pokey, and other characters derived from the television show
"Adventures of Gumby") to market freezer pops, beverage coolers and fruit forms
(the "Licensed Products") throughout the United States and its territories and
possessions (the "Gumby Territory").
Following the Company's initial payment of $12,500, the Company is
obligated to pay an additional minimum royalty of $112,500 which may be offset
against royalties equal to 5% of sales, by August 31, 1998, which is also the
date the license terminates unless renewed by the mutual consent of the parties
for an additional two year period.
The Company must seek written approval from AJM before selling any licensed
product. AJM has the right to request samples of the Licensed Products from the
Company free of charge. The Company has satisfied the requirement to maintain a
product and personal liability insurance policy in the amount of $1,000,000 in
favor of the Company and AJM.
Extreme Dinosaurs. In May 1997, the Company entered into a letter of intent
with BKN Kids Network, Inc. ("BKN"), under a sub-license from Mattel, Inc.,
pursuant to which the Company acquired the exclusive
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right and license to use the trademarks, copyrights, plots, environmental
settings and artwork as well as the characters, names and likenesses, all as
used in or emanating from the one half-hour television program currently
entitled "Extreme Dinosaurs." This license will permit the Company to develop,
market, and sell freeze pops, gelatin snacks, molded and generic coolers, baked
and shaped cookies and crackers, fruit snacks and candies to be distributed
throughout the United States (the "BKN License").
In April 1998 the parties reached substantive agreement pursuant to which
the term of the BKN License commenced on May 1, 1998 and continues through July
31, 2000 (the "Initial Term"). The Company has guaranteed a minimum payment of
$110,000, payable in increments to be agreed upon and allowed to be offset
against a 4% royalty payable on all net sales. The Company paid the required
first payment of $27,500. The Company holds an option to renew the license for a
period of two years if: (i) it is not in default, (ii) it has generated at least
$220,000 in royalties and (iii) it pays an additional $60,000 toward a renewal
guarantee payment of $125,000 in increments over the two year term of the option
period (the "Renewal Term"). The parties are still negotiating terms relating to
the timing with respect to: (i) when items shall be required to be brought to
market and (ii) royalty payments.
FACILITIES
The Company's headquarters are located at 2424 Professional Drive, Suite A,
Roseville, California 95661. This space is leased from an entity in which Mr.
Kees and an affiliated party are the principals, pursuant to a month-to-month
arrangement. The Company believes the lease for these premises is on terms and
conditions which are no less favorable than those prevailing for similar
premises in the area. The Company has provided notice that it intends to
relocate to new nearby premises to be leased from an unrelated party. It is
anticipated that such relocation will occur in September 1998. The Company
considers that its 3,000 square feet portion of the current premises and the
estimated 3,000 square feet in the new premises will be adequate for its
purposes, as all manufacturing activities with respect to the products are
currently and are anticipated in the future to be performed off-site by third
party contractors. See "Certain Transactions."
EMPLOYEES
The Company has six full time employees. The Company's employees are not
represented by any collective bargaining organization, and the Company has never
experienced a work stoppage. The Company believes that its relations with its
employees are satisfactory.
LEGAL PROCEEDINGS
On November 19, 1997, an action was filed in the San Francisco Superior
Court by Gregory B. Plunkett, the founder of the Company ("Plunkett") and
currently a holder of in excess of 5% of the outstanding shares of Common Stock,
against the Company seeking: (i) the repayment of $112,500 plus interest thereon
at the rate of 8% from September 1, 1994, allegedly due with respect to a
promissory note claimed to have been issued by the Company in favor of Plunkett,
(ii) the payment of $99,084 in wages claimed to be due by the Company to
Plunkett and (iii) declaratory relief with respect to the agreement entered into
on August 8, 1995, between the Company, Plunkett, and various other parties with
respect to the reorganization of the Company at that time (the "August 1995
Agreement") seeking to determine that he not be required to relinquish 103,125
shares of the Common Stock to the various parties as set forth in the August
1995 Agreement (the "Plunkett Litigation"). The Company has filed a
cross-complaint against Plunkett. Although the matter is still in early stages
of the proceedings, the Company is of the view that the claims by Plunkett are
without merit and that it has substantial defenses and offsets to any amounts
which might ultimately be determined to be due, if any. However, as of January
31, 1998 and April 30, 1998, the Company has accrued $150,000 with respect to
its potential exposure in the Plunkett Litigation. The Company has agreed to
indemnify a related party, one of the recipients of stock from Plunkett, to the
extent that such related party might be required to relinquish to Plunkett any
shares of Common Stock to which it was entitled. See "Principal Shareholders"
and "Certain Transactions."
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<PAGE> 35
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding directors and
executive officers of the Company as of June 30, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Thomas E. Kees....................... 47 President, Chief Executive Officer, and Chairman of
the Board
Michael E. Banks..................... 50 Senior Vice-President of Marketing and Sales
Craig C. Connerty.................... 41 Chief Financial Officer, Treasurer and Secretary
Steven Riccardelli................... 33 Vice-President of Operations
Arthur L. Patch...................... 57 Director
Larry J. Wells....................... 55 Director
</TABLE>
THOMAS E. KEES, President, Chief Executive Officer, and Chairman of the Board of
Directors
Thomas E. Kees has served as the President, Chief Executive Officer and
Chairman since September 1, 1995. From April 1994 to August 1995 he was the
Senior Vice President of Retail Development at A.C. Nielsen where he founded and
chaired the Nielsen Retail Advisory Board. Mr. Kees served as Executive
Vice-President of Raleys Supermarkets and Drug Centers, a regional retailer with
85 stores in Northern California and Nevada, from June 1992 to March 1994. From
March 1990 to May 1992, he was Senior Vice-President of Apple Tree Markets. From
December 1966 to March 1990, Mr. Kees was employed by Lucky where his last
position held was Vice-President, Grocery Marketing. Mr. Kees serves on the
board of Monterey Pasta Company. Mr. Kees holds a Bachelor of Science in
Education from Oregon State University, a Master of Arts Degree from the
University of California at Berkeley, and a Masters in Business Administration
from St. Mary's College.
MICHAEL E. BANKS, Senior Vice-President of Marketing and Sales
Mr. Banks has served as Senior Vice-President of Marketing and Sales since
February 1996. From June 1994 to January 1996, he served as the President of
AdPix, a digital imaging and archiving firm. From May 1993 to May 1994, he was
the Vice President of Advertising for Raleys Supermarkets. From June 1987 to
April 1993, he was responsible for marketing the Checkout Coupon product for
Catalina Marketing. Mr. Banks has a Bachelor's degree in Marketing and
Advertising from the University of Kansas.
CRAIG C. CONNERTY, Chief Financial Officer, Treasurer and Secretary
Mr. Connerty became the Chief Financial Officer in February 1996. He is a
certified public accountant and was a partner of Douglas, Connerty & Company,
Certified Public Accountants, from January 1987 to October 1996. Mr. Connerty
holds a Bachelors of Arts degree in Psychology from the University of California
at Los Angeles.
STEVEN RICCARDELLI, Vice-President of Operations
Mr. Riccardelli has been with the Company since April 1994, serving as
Marketing Manager until October 1995, when he was promoted to Vice-President of
Operations. From November 1991 to March 1994, he was an Account Executive with
Goldberg Moser O'Neill Advertising in San Francisco. From April 1989 to June
1991, Mr. Riccardelli was an Account Executive and Media Planner with Jordan
McGrath Case & Taylor Advertising in New York. He holds a Bachelor of Arts
degree in Economics from Tulane University.
ARTHUR L. PATCH, Director
Mr. Patch was elected to the Board of Directors in October 1996. Mr. Patch
serves on the Compensation and Audit Committees. Since June 1992, Mr. Patch has
served as Vice President of Operations for Save Mart Supermarkets. From October
1989 to February 1992, Mr. Patch was President and Chief Executive Officer of
Apple Tree Markets in Houston. He has a Bachelor of Arts degree in Advertising
from California State University, San Jose.
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<PAGE> 36
LARRY J. WELLS, Director
Mr. Wells was elected to the Board of Directors in January 1998. Mr. Wells
serves on the Compensation Committee. Since June 1996, Mr. Wells has been the
President and sole owner of Larry Wells Company, Inc. which serves as the
General Partner of DayStar Partners LP and Manager of DayStar Fund II, L.L.C.
Since June 1995, the DayStar entities have specialized in making bridge loans to
companies planning their initial public offering. From July 1989 to December
1997, he was a General Manager of Anderson & Wells Company and the General
Manager of Sundance Venture Partners, SBIC. Mr. Wells serves on the board of
Cellegy Pharmaceuticals, Telegen Corporation, Identix, Inc. and Isonics Corp.
Mr. Wells holds a Bachelor's degree in Economics and a Masters of Business
Administration from Stanford University. See "Certain Transactions."
BOARD OF DIRECTORS
BOARD COMMITTEES
Audit Committee. The Audit Committee of the Board of Directors was
established in January 1998, and its responsibilities include: (i) review the
results and scope of the annual audit and other services provided by the
Company's independent auditors, (ii) review and evaluate the Company's internal
audit and control functions and (iii) monitor the transactions between the
Company and its employees, officers and directors. Arthur L. Patch is the sole
member of the Audit Committee.
Compensation Committee. The Compensation Committee of the Board of
Directors was established in January 1998 and is responsible for the
administration of the Company's stock option plan and to oversee the
establishment of compensation levels for the Company's officers and directors.
Arthur L. Patch and Larry J. Wells are the members of the Compensation
Committee.
DIRECTOR COMPENSATION
The Company may pay its non-employee directors a fee of $500 for each Board
meeting and meeting of committees attended and reimburses its directors for
travel and out-of-pocket expenses in connection with their attendance at such
meetings.
EXECUTIVE COMPENSATION
The following table sets forth the annual and other compensation for
service in all capacities for the Company for the two fiscal years ended January
31, 1998 of the Company's Chief Executive Officer and each of the other
executive officers whose total salary and bonus exceeded $100,000 for the
Company's fiscal year ended January 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------------------
FISCAL YEAR ENDED OTHER
NAME AND PRINCIPAL POSITION JANUARY 31,(1) SALARY BONUS COMPENSATION(2)
--------------------------- ----------------- -------- ------ ---------------
<S> <C> <C> <C> <C>
Thomas E. Kees............................ 1998 $200,000 $ 0 $1,010,193
Chairman of the Board, Chief Executive 1997 200,003 2,029 --
Officer and President
Michael E. Banks.......................... 1998 120,000 5,000(3) 153,360
Senior Vice-President, Marketing & Sales 1997 95,000 2,185 --
Craig C. Connerty......................... 1998 120,000 5,000(3) 153,360
Chief Financial Officer, Treasurer &
Secretary 1997 60,000(4) 2,166 11,330(4)
Steven Riccardelli........................ 1998 80,003 3,000 155,096
Vice-President, Operations 1997 68,543 2,029 --
</TABLE>
(See footnotes on next page)
34
<PAGE> 37
- ---------------
(1) Information with respect to fiscal year 1997 reflects only that portion of
the year that the designated employee was employed by the Company.
(2) The amounts shown in the column headed Other Compensation includes the
forgiveness by the Company of promissory notes issued by each named employee
with respect to the issuance of Stock Purchase Shares under the Employee
Stock Purchase Plan as follows: (i) Mr. Kees, $1,000,000 principal plus
$10,193 in accrued interest relating to 125,000 shares of Common Stock; (ii)
Mr. Banks, $150,000 principal plus $3,360 in accrued interest relating to
18,750 shares of Common Stock; (iii) Mr. Connerty, $150,000 principal plus
$3,360 in accrued interest relating to 18,750 shares of Common Stock; and
(iv) Mr. Riccardelli, $150,000 principal plus $5,096 in accrued interest
relating to 18,750 shares of Common Stock. Each of the named executives
forgave the contractual right to be paid increases in base salaries in the
respective amounts of $75,000, $37,000, $37,000 and $30,000, respectively.
See "-- Employee Stock Purchase Plan" and "-- Executive Employment
Agreements."
(3) Holiday bonus amount accrued but not paid during 1998 fiscal year.
(4) Reflects payment of salary for that portion of the fiscal year ended January
31, 1997 when Mr. Connerty was directly employed by the Company and $11,330
of accounting fees paid to Douglas, Connerty & Co., for accounting services
rendered to the Company. Mr. Connerty was a principal owner of such
accounting firm.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has entered into Employment Agreements ("Employment
Agreements") with Mr. Kees, Mr. Banks, Mr. Connerty and Mr. Riccardelli (the
"Executives"). The terms of these agreements, which are similar, are as follows:
The Employment Agreements, as amended as of February 28, 1997, and January
30, 1998, provide for employment by the Company for a term of three years from
September 1, 1996, for all of the Executives. Mr. Kees' annual base salary as of
September 1, 1996, was $200,000, which was to increase to $225,000 for 1997 and
$250,000 for 1998. Messrs. Banks and Connerty's annual base salary for the same
period was $120,000, which was to increase to $132,000 for 1997 and $145,000 for
1998. Mr. Riccardelli's annual base salary as of September 1, 1996, was $80,000
which was to increase to $90,000 for 1997 and $100,000 for 1998. The Employment
Agreements provide that the Board of Directors, with respect to Mr. Kees (and
the CEO with respect to all other employees) may, at their discretion, increase
the base amount of salary at any time during the contract period. An annual
target bonus is calculated based upon a comparison of actual profits with a
target profit amount. The target profit amount is a number approved by the CEO
which is calculated based upon a formula consisting of earnings from operations
before taxes, interest, depreciation and amortization. Each Executive was to be
offered an opportunity to participate in the Employee Stock Purchase Plan. The
Company is obligated to use its best efforts to procure and maintain a group
health insurance policy covering the Executives. Due to the Company's inability
to obtain satisfactory financing to implement its business plan, the Company did
not meet the targets established for the payment of bonuses and each Executive
has agreed to forgive the obligation in their respective contracts for the
payment of increases in base salary for 1997 and 1998 in the respective amounts
of $75,000 by Mr. Kees, $37,000 by Mr. Banks, $37,000 by Mr. Connerty and
$30,000 by Mr. Riccardelli. In recognition thereof and in order to induce the
Executives to continue working for the Company, the Board of Directors agreed to
forgive the principal and accrued interest due to the Company with respect to
promissory notes given by each Executive in connection with the acquisition of
Stock Purchase Shares under the Employee Stock Purchase Plan in the amounts of
$1,010,193 for Mr. Kees, $153,360 for each of Messrs. Banks and Connerty and
$155,096 for Mr. Riccardelli. The forgiveness by the Executives of their rights
to increased base salaries and the forgiveness of the promissory notes by the
Company were reflected in agreements entered into between the respective
Executive and the Company as of January 30, 1998. The Employment Agreements also
contain confidentiality covenants in the event of termination.
Mr. Kees' Employment Agreement includes the following additional benefits:
(i) disability insurance (so as to provide Mr. Kees with a monthly income equal
to the twelve months average immediately preceding the
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<PAGE> 38
disability and until Mr. Kees reaches the age of sixty-five), medical and dental
insurance (as determined by the Board of Directors from time to time), and
fringe benefits (which may be authorized and approved by the Board of
Directors); (ii) if Mr. Kees is terminated for cause he is entitled to receive
50% percent of the amount of annual base salary to which he would have been
entitled had he completed the full term of the Employment Agreement; and (iii)
Mr. Kees cannot be placed on administrative leave.
INCENTIVE COMPENSATION
The Company has instituted an incentive bonus plan for all of its
employees, including officers, based upon performance. A bonus shall be payable
based upon a comparison of the actual profit achieved by the Company to the
budgeted profit for such fiscal year. The bonus payable to each participant is
calculated based upon a pre-determined formula. The Company believes that this
practice is prevalent within its industry and is a necessary component to
attract and retain qualified persons. No such bonus has been paid.
STOCK OPTION PLAN
The Company's Board of Directors adopted a Stock Option Plan (the "Plan"),
effective October 18, 1996, and approved by the shareholders on October 31,
1996. Under the Plan, the Company has reserved an amount equal to 10% of the
outstanding shares of Common Stock for issuance pursuant to the exercise of
options. Options may be granted to selected employees, officers, directors,
consultants or advisors.
The Plan will be administered by the Board of Directors or by a committee
appointed by the Board of Directors to administer the Plan. Options may be
granted only to such employees, officers, directors, consultants and advisors of
the Company, as the committee shall select from time to time in its sole
discretion, provided, however, that only employees of the Company may be granted
incentive stock options ("ISOs").
Under the Plan, the Company may grant either ISOs or options which are not
qualified as incentive stock options ("NQSO"). The committee shall determine the
number of shares of Common Stock for which the option shall be granted, the
exercise price of the option, the periods during which the option may be
exercised, and all terms and conditions of the option. The exercise price of an
option shall not be less than 85% of the fair market value of the Common Stock
at the time the option is granted. The exercise price of any ISO granted to a
person owning more than 10% of the total combined voting power of all classes of
stock of the Company shall be equal to at least 110% of the fair market value of
the shares of Common Stock at the time of the grant. The term of these options
may not exceed ten years.
In the event that the number of outstanding shares of Common Stock of the
Company is changed by a stock dividend, stock split, reverse stock split,
combination, reclassification or similar change in the capital structure of the
Company without consideration, the number of shares of Common Stock available
under this Plan, the number of shares of Common Stock subject to outstanding
options, and the exercise price per share of such options shall be
proportionately adjusted, subject to any required action by the Board or
shareholders of the Company. Upon a change in control of the Company, the
committee shall be permitted to take any actions it deems appropriate with
regard to stock options outstanding under the Plan. Such actions may include,
without limitation, accelerating exercisability of the options and requiring the
optionee to surrender options held for certain consideration described in the
Plan. In the event of a recapitalization or reorganization after which the
Company is not the surviving corporation, the committee may adjust the number,
price or options to reflect the restructuring event. No options have been
granted under the Plan.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Board of Directors had adopted and ratified an Employee Stock
Purchase Plan (the "Plan") October 18, 1996, as amended in June 1997, pursuant
to which all employees of the Company were eligible to participate. Each
employee designated to participate (a "Participant") by the Board of Directors
was required to enter into a Restricted Stock Purchase Agreement, a recourse
promissory note (the "Purchase Note") and a Stock Pledge Agreement securing the
Purchase Note. The number of shares of Common Stock to be acquired by each
participant (the "Stock Purchase Shares"), the purchase price as well as the
period for repayment all were to be as determined by the Board of Directors. The
Participant's right to sell, transfer,
36
<PAGE> 39
pledge, hypothecate or otherwise dispose ("Disposition Rights") of the Stock
Purchase Shares vests in equal quarterly increments over a period of between
three and ten years ("Vesting") commencing at such time as the Board shall
determine (the "Commencement Date"), so long as the Participant meets all of its
obligations under the Restricted Stock Purchase Agreement, the Stock Pledge
Agreement and the Purchase Note. Interest on the Purchase Note would commence to
accrue consistent with the determination of Vesting at the applicable long term
federal rate.
The Board of Directors had granted to Messrs Kees, Banks, Riccardelli and
Connerty the right to purchase an aggregate of 181,250 Stock Purchase Shares at
a price per share of $8.00 as compared to the determined fair market value of
$6.08 per share at the time of the grant. Each Participant issued a Purchase
Note to the Company for the full purchase price, at the time of grant,
aggregating $1,450,000. Pursuant to action taken by the Board of Directors in
January 1998, all of the outstanding obligations to the Company of each of
Messrs Kees, Banks, Riccardelli and Connerty, in the respective amounts of
$1,010,193, $153,360, $155,096 and $153,360, including all accrued but unpaid
interest were deemed to be paid in full and no longer owing. The interests of
each of them in their respective Stock Purchase Shares were deemed to be fully
vested, in the respective amounts owned by each such Participant, without
restriction. Messrs' Kees, Banks, Riccardelli and Connerty agreed to waive their
rights to deferred compensation in the respective amounts of $75,000, $37,000,
$30,000 and $37,000.
No further stock is available to be granted under the Employee Stock
Purchase Plan.
LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
The Articles of Incorporation of the Company limit the liability of
directors for monetary damages to the fullest extent permitted under California
law. The effect of this provision is that the Company and shareholders, through
derivative suits, may not recover monetary damages against a director for any
alleged failure to discharge one's duties as a director, with certain
exceptions. Directors may still be liable for monetary damages for failure to
discharge such duties for: (i) acts or omissions that involve intentional
misconduct or a knowing and culpable violation of the law, (ii) acts and
omissions that a director believes to be contrary to the best interests of the
Company or its shareholders or that involve the absence of good faith on the
part of the director, (iii) any transaction from which a director derived an
improper personal benefit, (iv) acts or omissions that show a reckless disregard
for the director's duty to the Company or its shareholders in the circumstances
in which the director was aware, or should have been aware, in the ordinary
course of performing a director's duties, of a risk of a serious injury to the
Company or its shareholders, (v) acts or omissions that constitute an unexcused
pattern of inattention that amounts to an abdication of the director's duty to
the Company or its shareholders, (vi) any act or omission as an officer,
notwithstanding that the officer is also a director or that his or her actions,
if negligent or improper, have been ratified by the directors, (vii) contracts
or other transactions between corporations and directors having interrelated
directors in violation of Section 310 of the California Corporations Code, and
(vii) distributions, loans or guarantees made in violation of Section 316 of the
California Corporations Code.
The Articles of Incorporation also allow the Company to indemnify any
director, officer, employee, agent or other person serving at the request of the
Company (collectively known as "Agent") for breach of duty to the Company and
its shareholders to the fullest extent allowed by California law. Generally
speaking, the Company shall have the duty to indemnify any Agent who prevails on
the merits in defense of any action brought against him or her relating to
breach of the Agent's duty to the Company or its Shareholders. The Company may
provide indemnification where the Agent has acted in good faith and in a manner
that the Agent reasonably believed was in the best interests of the Company and
in the case of a criminal proceeding where the Agent had no reasonable cause to
believe that its conduct was unlawful. The Company shall not, with certain
exceptions, provide indemnification where it appears (i) that it would be
inconsistent with a provision of the articles, bylaws, a resolution of the
shareholders, or an agreement in effect at the time of the accrual of the
alleged cause of action asserted in the proceeding in which expenses were
incurred or other amounts were paid, which prohibits or otherwise limits
indemnification, or (ii) would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
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<PAGE> 40
At present there is no pending litigation or proceeding involving a
director or officer of the Company in which indemnification is required or
permitted, and the Company is not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification. The Company
believes that the indemnification provisions in its Articles of Incorporation
are necessary to attract and retain qualified persons as directors and officers.
The Company does not have any separate indemnification agreements with its
directors or officers.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to Company directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
CAPITOL BAY GROUP AND CAPITOL BAY SECURITIES, INC.
C Brands Notes; Conversion of Notes into Common Stock-Indemnification
Agreement
Pursuant to Memorandum of Agreement, dated August 8, 1995, between the
Company, Gregory Plunkett ("Plunkett"), the founder of the Company and a holder
of in excess of 5% of the Common Stock of the Company, Capitol Bay Group and
various other shareholders of the Company (the "August 8, 1995 Agreement"),
Capitol Bay Group committed and undertook, through and on behalf of its
affiliated entity, Capitol Bay Securities, Inc. ("Capitol Bay"), to certain
actions therein, including raising financing for the Company. Capitol Bay
thereupon raised $622,500 through the sale of the Company's convertible
promissory notes to C Brands Management, L.L.C. ("C Brands"), in exchange for
funds provided in the amount of $215,000 in January 1996 (the "Initial Note"),
and a second convertible promissory note in the principal amount of $407,500
issued on October 31, 1996 (the "Supplemental Note" and collectively, the
"Notes"). Effective November 27, 1997, the entire principal and interest of
$736,000 owing to C Brands under the Notes was converted into 46,000 shares of
Common Stock. Stephen C. Kircher is a principal owner of Capitol Bay Group and
Capitol Bay and is the managing member of C Brands. Capitol Bay Group and C
Brands, collectively, are the beneficial owners of in excess of 5% of the
Company's Common Stock prior to the Offering.
The August 8, 1995 Agreement required that Plunkett transfer certain of his
shares of Common Stock to other parties to the August 8, 1995 Agreement in
settlement of various disputes. It further provided that Plunkett was to
transfer certain of his shares of Common Stock to Capitol Bay and to C Brands in
payment of certain obligations arising thereunder. Plunkett has initiated
litigation against the Company only, seeking, among other things, a judicial
determination that the conditions set forth in the August 8, 1995 Agreement have
not been satisfied and, therefore, that the transfer of his shares of Common
Stock as required thereunder be rescinded. Pursuant to a letter agreement as of
January 30, 1998, the Company has agreed to indemnify C Brands to the extent
that a court should order that the 31,250 shares of Common Stock transferred to
C Brands be returned to Plunkett. See "Business -- Legal Proceedings."
1997 Private Placement of Stock
In the period between June and November 1997, the Company sold 108,499
shares of Common Stock at a per share price of $8.00. The shares of Common Stock
were offered on a best efforts basis through Capitol Bay, which was acting as
the Company's Placement Agent. Pursuant to the provisions of a Placement Agent
Agreement as of June 25, 1997, the Company paid an aggregate of $102,080 in cash
compensation to Capitol Bay for the placement of the shares of Common Stock. By
way of final settlement of all of Capitol Bay's rights whether pursuant to the
Placement Agent Agreement or otherwise arising out of all transactions between
the parties since the August 8, 1995 Agreement, the Placement Agent Agreement
was amended as of January 30, 1998, and all rights thereunder and with respect
to any and all services previously provided by Capitol Bay Group or Capitol Bay
arising out of the reorganization of the Company, infusions of capital and the
retention of new management all pursuant to the August 8, 1995 Agreement with
the founder of the Company, Capitol
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<PAGE> 41
Bay was granted 14,375 shares of Common Stock and warrants, protected from
adjustment in the event of future reverse stock splits up to the time of the
closing of the Offering, to purchase 148,000 shares of Common Stock at $7.50 per
share, exercisable commencing January 30, 1999 through January 30, 2003.
Additionally, an over payment of commissions thereon in the amount of $72,975,
plus interest of $2,047, (in the aggregate, the "Commission Refund") was repaid
by Capitol Bay to the Company on April 18, 1998, in the form of an agreement to
offset against such Commission Refund due to the Company, an equal amount due by
the Company to certain unaffiliated individuals on whose behalf Capitol Bay was
authorized to act, in the principal amount of $60,000 plus interest thereon in
the amount of $26,737 arising out of loans made by such individuals to the
Company in early 1994. The net difference of $11,715 will be paid by the Company
to Capitol Bay from the proceeds of the Offering. See "Use of Proceeds."
OWNERSHIP OF PREMISES
Stephen C. Kircher and Thomas E. Kees are the members of Three Sons, L.L.C.
which is the owner of the building in which the Company currently maintains its
facilities. Capitol Bay is the master tenant of the building and is an occupant
of a portion of the building. The Company occupies its premises pursuant to a
month to month tenancy from Capitol Bay on terms and conditions which are
consistent with rentals for similar facilities in the area. The Company has
notified Capitol Bay that it intends to move to new premises in the area to be
leased from unaffiliated parties and will terminate the month to month tenancy
at that time. It is anticipated that the Company will relocate from the existing
premises in September 1998.
APRIL 1997 DAYSTAR CREDIT FACILITY AND RELATED WARRANTS
Throughout this document the term to DayStar ("DayStar") refers to three
entities: DayStar Fund II, L.L.C.; DayStar Partners, L.P. and Larry Wells
Company Inc. Both DayStar Partners L.P. and DayStar Fund II, L.L.C. are managed
by Larry Wells Company, Inc. and are interrelated. Mr. Larry Wells, who is an
affiliate of each of the DayStar entities, was elected to serve as a director of
the Company on January 30, 1998.
In April 1997, the Company entered into an agreement with DayStar pursuant
to which DayStar agreed to provide a credit facility to the Company in an amount
not to exceed $440,000 to be used for working capital purposes (the "Initial
Credit Facility"). The Company executed a seven-month revolving promissory note
providing for the payment of interest on amounts outstanding at the initial rate
of 12% per annum, payable at the maturity of the note. In July 1997, a
supplemental credit facility was provided by DayStar in the aggregate additional
amount of $408,000 the "Supplemental Credit Facility" and (collectively the
"DayStar Credit Facility"). In connection with the Supplemental Credit Facility,
the maturity of the entire DayStar Credit Facility was extended to thirteen
months from the date of the last advance (July 1997) and the initial 12%
interest rate on the Initial Credit Facility changed to 15% per annum, effective
January 1998, with interest on the Supplemental Credit Facility being incurred
at the rate of one percent per week. If the DayStar Credit Facility is not
repaid at the maturity of the note, the Company may repay the principal and
interest outstanding in monthly amounts of $20,000 with any unpaid amounts due
and payable at the expiration of 24 months. In consideration for the granting of
the DayStar Credit Facility, the Company initially granted to DayStar warrants
to purchase 62,500 shares of the Common Stock at $7.20 per share and warrants to
purchase 31,250 shares of the Common Stock at $16.00 per share, exercisable for
three-years commencing 90 days after the closing of an offering of securities by
the Company (the "Facility Warrants"). In addition certain "piggy-back"
registration rights were granted which are not triggered by this Offering. On
October 30, 1997, DayStar purchased 9,375 shares of the Common Stock of the
Company in the private placement at a price of $8.00 per share by converting
$75,000 due under the DayStar Credit Facility. As of March 31, 1998, an
aggregate of approximately $725,000 in principal and interest was due under the
DayStar Credit Facility. On April 17, 1998, DayStar agreed to fix the interest
payable under the Supplemental Credit Facility after January 1, 1998 at an
amount not to exceed $39,100, the amount which would accrue thereon from January
1, 1998 through May 31, 1998, plus any amounts accrued and unpaid with respect
to the period preceding January 1, 1998, with no further interest to accrue
thereafter and extended the maturity to September 1, 1998. In consideration
therefor, the Company agreed to revise the exercise price on the 31,250 Facility
Warrants originally exercisable at $16 per share to $7.20 per share, such that
all 93,750 of the Facility Warrants are now
39
<PAGE> 42
exercisable at $7.20 per share. Interest continues to accrue on the Initial
Credit Facility at the note rate of 15% per annum. It is the intent of the
Company to repay the DayStar Credit Facility from the proceeds of the Offering.
See "Use of Proceeds," "Management" and "Principal Shareholders."
PACIFIC ACQUISITION GROUP TRANSACTIONS
During the period commencing in November 1995 and ending in March 1996, the
Company engaged in a private placement pursuant to which it sold $300,000 of its
one year promissory notes (the "Bridge Notes"), bearing interest at a rate of
15% per annum and maturing on the anniversary of the date of issuance. In June
1996, the Company sold an additional $300,000 of the Bridge Notes, bearing
interest at a rate of 15% per annum. All of the Bridge Notes were paid in full
in June 1997 from the proceeds of the DayStar Credit Facility. Pacific
Acquisition Group, Inc. ("PAG") acted as placement agent in connection with
these private placements and was paid cash commissions of $90,000. Pursuant to
various amendments to the Bridge Loan and Consulting Agreement between the
parties, (the "Amended Agreement"), the Company has issued 59,375 shares of
Common Stock and had agreed to issue additional shares of Common Stock, up to a
maximum of 200,000, in the event the value of the Common Stock holdings of PAG
were less than an agreed $1,300,000 as measured 12 months following the
commencement of trading in the Common Stock (the "PAG Contingency"). Pursuant to
the Amended Agreement, the Company has granted certain "piggy-back" registration
rights to PAG (which are not triggered by this Offering) and Capitol Bay
Securities was granted a first right of refusal to purchase any of the Common
Stock subject to the Amended Agreement. Pursuant to a Supplement to the Second
Amended and Restated Bridge Loan and Consulting Agreement as of May 24, 1998
(the "Supplemental Agreement"), the parties agreed to deem the PAG Contingency
satisfied in consideration of the issuance of 120,625 shares of Common Stock to
be issued following the closing of the Offering. The Supplemental Agreement
included a full accord and satisfaction and mutual general releases between the
parties. The registration rights and first right of refusal in favor of Capitol
Bay Securities remain in effect. See "Management," "Principal Shareholders" and
"Shares Eligible for Future Sale."
SHANNON CONSULTING ARRANGEMENT
Douglas Shannon is the holder of 62,500 shares of the Common Stock, or
approximately 6% of the outstanding stock prior to the Offering. Pursuant to an
informal arrangement with the Company, he acts as a consultant and advisor in
connection with the marketing and sales activities of the Company and has acted
in this capacity since 1995. He is paid a monthly fee of $6,000. See "Principal
Shareholders."
LARRY WELLS COMPANY, INC., CREDIT FACILITY
On July 6, 1998, Larry Wells Company, Inc., loaned $103,500 to the Company.
Larry J. Wells, a director of the Company, is the president and sole owner of
Larry Wells Company, Inc. The amount due to be repaid shall be $115,000 if paid
any time prior to October 31, 1998, $145,000 if paid thereafter, the amount due
increasing by $1,500 per month thereafter until paid in full. See "Use of
Proceeds," "Management" and "Principal Shareholders."
40
<PAGE> 43
PRINCIPAL SHAREHOLDERS
The following sets forth certain information regarding beneficial ownership
of Common Stock as of June 30, 1998, as adjusted to reflect the sales of the
Units offered hereby by (i) each person who is known by the Company to
beneficially own more than five percent of the Common Stock, (ii) each of the
Company's directors, (iii) each Named Executive Officer and (iv) all executive
officers and directors as a group. Except as otherwise indicated, the persons
named in the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned, subject to community property laws
where applicable. All of the calculations below assume the 20,343 Note Shares
are outstanding. Except as otherwise indicated, the address of each of the
persons in this table is as follows: c/o Legacy Brands, Inc., 2424 Professional
Drive, Suite A, Roseville, California 95661.
<TABLE>
<CAPTION>
PERCENT OWNED
--------------------
NAME AND ADDRESS OF NUMBER OF BEFORE AFTER
BENEFICIAL OWNER(1) SHARES OFFERING OFFERING
------------------- --------- -------- --------
<S> <C> <C> <C>
Thomas E. Kees.............................................. 125,000 12.00% 4.92%
Gregory B. Plunkett(3)...................................... 125,000 12.00% 4.92%
c/o Tobin & Tobin
1 Montgomery Street, 15th floor
San Francisco, CA 94104
Capitol Bay Group(4)(6)..................................... 114,621 11.00% 4.51%
2424 Professional Drive
Roseville, CA 95661
BKP Partners(5)............................................. 88,205 8.47% 3.47%
Citicorp Center, Suite 3900
One Sansome Street
San Francisco, CA 94102
C Brands, L.L.C.(4)(6)...................................... 77,250 7.42% 3.04%
2424 Professional Drive
Roseville, CA 95661
Douglas Shannon............................................. 62,500 6.00% 2.46%
P.O. Box 1959
Aptos, CA 95001
CBG Partnership(7).......................................... 61,458 5.90% 2.42%
100 The Embarcadero, Penthouse
San Francisco, CA 94105
Pacific Acquisition Group, Inc.(8).......................... 59,375 5.70% 2.34%
21800 Burbank Blvd., Suite 100
Woodland Hills, CA 91367
Craig C. Connerty........................................... 18,750 1.80% *
Michael E. Banks............................................ 18,750 1.80% *
Steven Riccardelli.......................................... 18,750 1.80% *
Larry J. Wells(9)........................................... 9,375 * *
Arthur L. Patch............................................. 625 * *
All directors and executive officers as a group (6 191,250 18.36% 7.52%
persons)..................................................
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. In computing the number of
shares of Common Stock beneficially owned by a person and the percentage
ownership of that person, shares of Common Stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of June 30, 1998 are deemed outstanding.
(2) Based upon the total amount of Common Stock outstanding after the Offering.
(Footnotes continue on following page)
41
<PAGE> 44
(3) Does not include 103,125 shares of Common Stock claimed by Mr. Plunkett as
owed to him by C Brands, BKP Partners and CBG Partnership pursuant to an
action for declaratory relief filed against the Company (the "Plunkett
Lawsuit"). See "Business -- Legal Proceedings."
(4) Mr. Stephen C. Kircher is the manager of C Brands L.L.C., which is the owner
of 77,250 shares of Common Stock, and he is a principal owner of Capitol Bay
Group, which is the beneficial owner of 34,559 shares of Common Stock.
Capitol Bay Group is an affiliate of Capitol Bay Securities, which has acted
as a placement agent with respect to the sale of securities by the Company.
Mr. Kircher exercises voting and investment power over the shares of Common
Stock held by C Brands L.L.C. and Capitol Bay Group, but disclaims
beneficial ownership. Mr. Kircher beneficially owns 2,812 shares of Common
Stock. See "Certain Transactions."
(5) Includes 21,875 shares of Common Stock claimed by Plunkett pursuant to the
Plunkett Lawsuit.
(6) Includes 21,875 shares of Common Stock claimed by Plunkett pursuant to the
Plunkett Lawsuit. The Company has agreed to indemnify C Brands to replace
any shares of Common Stock which the court might award to Plunkett from C
Brands.
(7) Includes 7,292 shares of Common Stock held by Mr. Bruce Bercovich, a general
partner therein who exercises voting and investment power over the shares of
Common Stock held by this entity.
(8) Pacific Acquisition Group, Inc. ("PAG") disclaims beneficial ownership of
44,682 shares of Common Stock. Does not reflect 120,625 shares of Common
Stock issuable after the closing of the Offering of which PAG disclaims
beneficial ownership as to 90,468 shares of Common Stock. The Company has
been informed by PAG that the shares of Common Stock as to which PAG
disclaims beneficial ownership are held by PAG for the benefit of, and will
be distributed to, its investors which includes approximately 600
individuals or entities. See "Certain Transactions."
(9) Mr. Larry J. Wells is the manager of DayStar which owns 9,375 shares of
Common Stock. DayStar has provided a credit facility to the Company in the
original aggregate amount of $848,000 of which $650,000 remains outstanding
as of May 15, 1998. Mr. Wells exercises sole investment and voting power
with respect to the shares of Common Stock held by each of the DayStar
entities but disclaims beneficial ownership of the shares of Common Stock
held by DayStar Partners, L.P., and DayStar Fund II, L.L.C. Mr. Wells is
also the President and sole owner of Larry Wells Company, Inc., which has
provided a loan to the Company, on July 6, 1998, in the principal amount of
$103,500. See "Certain Transactions."
42
<PAGE> 45
DESCRIPTION OF SECURITIES
GENERAL
As of the date of the Prospectus, the Company is authorized to issue
30,000,000 shares of Common Stock, without par value (the "Common Stock") and
10,000,000 shares of Preferred Stock, without par value (the "Preferred Stock").
UNITS
Each Unit consists of one share of Common Stock and one Common Stock
Purchase Warrant. The Common Stock and the Warrants comprising the Units will
separate and trade as separate securities 30 days after the completion of the
Offering or such shorter period as determined by the Representative.
COMMON STOCK
As of June 15, 1998, 1,041,730 shares of Common Stock were issued and
outstanding. See "Capitalization."
Holders of Common Stock are entitled to cast one vote for each share held
of record for all matters submitted to a vote of the shareholders, including
election of directors. Every person entitled to vote at an election for
directors may cumulate votes, subject to providing proper notice. Shareholders
holding a majority of the voting power of the Common Stock issued and
outstanding and entitled to vote, represented in person or by proxy, are
necessary to constitute a quorum at any meeting of the Company's shareholders,
and the vote by the holders of a majority of such outstanding shares of the
Common Stock is required to effect certain fundamental corporate changes such as
liquidation, merger or amendment of the Company's Articles of Incorporation.
The Company has not made any provision for the payment of dividends with
respect to the Common Stock. Holders of Common Stock are not entitled to
preemptive or subscription or conversion rights, and there are no redemption or
sinking fund provisions applicable to the Common Stock. Upon liquidation,
dissolution or winding up of the Company, the assets legally available for
distribution to shareholders are distributable ratably among the holders of the
Common Stock outstanding at the time after payment of claims of creditors and
liquidation preferences of the holders of any outstanding Preferred Stock if
any. All outstanding shares of Common Stock are, and the Common Stock offered
hereby will be when issued, fully paid and non-assessable. The rights,
preferences and privileges of holders of Common Stock are subject to any series
of Preferred Stock which the Company may issue in the future.
WARRANTS
The following is a brief summary of certain provisions of the Warrants. For
a more complete description of the Warrants, reference is made to the actual
text of the Warrant Agreement between the Company and U. S. Stock Transfer, Inc.
(the "Warrant Agent"), a copy of which has been filed as an exhibit to the
Registration Statement of which the Prospectus is a part.
Exercise Price and Terms. Each Warrant initially entitles the holder to
purchase one share of Common Stock at an initial price of $ (150% of the
initial public offering price of the Units). The Warrants will be subject to
certain adjustments, including if the Company's audited fiscal 2000 net income
(adjusted to exclude any expenses relating to the vesting of employee options or
warrants) before interest expense and taxes ("FY2000 Net Income") is equal to or
greater than $1,000,000, but less than $1,500,000, a one time downward reduction
of the exercise price to $ per share (120% of the initial public offering
price of the Units); and if such FY2000 Net Income is less than $1,000,000, then
the exercise price shall be reduced to $ per share (85% of the initial
public offering price of the Units). Such reduction (the "Price Reduction") will
be effective as of the date of the public announcement of the audited results
for the fiscal year 2000. The final Warrant exercise price reflecting such Price
Reduction, if any, is referred to herein as the "Final Warrant Exercise Price."
No fractional shares will be issued upon the exercise of the Warrants herein
43
<PAGE> 46
described. The Warrants will be exercisable immediately upon separation of the
Units and will expire five years from the date of this Prospectus unless earlier
redeemed.
Adjustments. The exercise price and number of shares of the Common Stock
purchasable upon the exercise of the Warrants are subject to other adjustments
upon the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock. Additionally, an
adjustment would be made in the case of a reclassification or exchange of the
Common Stock, consolidation or merger of the Company with or into another
corporation (other than a consolidation or merger in which the Company is the
surviving corporation) or sale of all or substantially all other assets of the
Company, in order to enable the holder to acquire the kind and number of shares
of stock or the securities or property receivable upon such reorganization,
reclassification or other change by holders of the number of shares of Common
Stock into which the Warrants might have been exercised.
Redemption Provisions. The Company may redeem the outstanding Warrants at
any time, in whole or in part, at a price of $0.25 per Warrant upon not less
than 30 days' prior written notice to the registered holders thereof, provided
that the closing bid price of the Common Stock has been at least (i) 200% of the
Final Warrant Exercise Price, if there has been no Price Reduction, or (ii) 150%
of the Final Warrant Exercise Price, if there has been a Price Reduction, in
either case for at least 20 consecutive trading days immediately preceding the
date of the notice of redemption.
Transfer, Exchange and Exercise. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date five years from the date of this
Prospectus, at which time the Warrants will become wholly void and of no value.
If a market for the Warrants develops, the holder may sell the Warrants instead
of exercising them. There can be no assurance, however, that an active market
for the Warrants will develop or continue.
Warrant Holder not a Shareholder. The Warrants do not confer upon holders
thereof any voting, dividends, or other rights as shareholders of the Company.
Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrant holders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than 30 days on not less than 30 days prior written notice to the warrant
holders and the Representative. Modification of the number of securities
purchasable upon the exercise of any Warrant, the exercise price (other than
lowering the exercise price as provided in the preceding sentence) and the
expiration date with respect to any Warrant requires the consent of two-thirds
of the warrant holders. No other modifications may be made to the Warrants,
without the consent of two-thirds of the warrant holders.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of the Common Stock
issuable upon exercise of the Warrants, and such shares have been registered,
qualified or deemed to be exempt under the securities or "blue sky" laws of the
state of residence of the exercising holder of the Warrants. Although the
Company has undertaken to use its reasonable best efforts to have all of the
shares of Common Stock issuable upon exercise of the Warrants registered or
qualified on or before the exercise date and to maintain a current prospectus
relating thereto until the expiration of the Warrants, there can be no assurance
that it will be able to do so.
Although the Warrants will not knowingly be sold to purchasers in
jurisdictions in which the underlying shares are not registered or otherwise
qualified for sale, investors in such jurisdictions may purchase Warrants in the
secondary market or investors may more to jurisdictions in which the shares
underlying the Warrants are not so registered or qualified during the period
that the Warrants are exercisable. In such event, the Company would be unable to
issue shares to those persons desiring to exercise their Warrants, and holders
of Warrants would have no choice but to attempt to sell Warrants in a
jurisdiction where such sale is permissible or allow them to expire unexercised.
The foregoing discussion of certain terms and provisions of the Warrants is
qualified in its entirety by reference to the detailed provisions of the Warrant
Agreement, the form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
44
<PAGE> 47
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market price of the Common Stock without assuming the
risk of ownership of the shares issuable upon exercise of the Warrants. The
Warrant holders may be expected to exercise their Warrants at a time when the
Company would, in all likelihood, be able to obtain any needed capital by an
offering of securities on terms more favorable than those provided for by the
Warrants. Furthermore, the terms on which the Company could obtain additional
capital during the life of the Warrants may be adversely affected.
PREFERRED STOCK
The Company's amended Articles of Incorporation will permit the Company's
Board of Directors, without further action or vote of the shareholders, to issue
up to 10,000,000 shares of Preferred Stock in one or more series and to
determine the designations, preferences, voting powers, qualifications and
special or relative rights or privileges of the shares of each such series,
including the dividend rights, dividend rate, conversion rights, voting rights,
terms of redemption (including sinking fund provisions), redemption price or
prices, liquidation preferences and the number of shares constituting any series
or the designations of such series. These rights and privileges could limit the
voting power of holders of Common Stock and restrict their rights to receive
dividends or liquidation proceeds. In addition, the issuance of Preferred Stock,
while providing the Company with financial flexibility in connection with
possible acquisitions and other corporate purposes, could, under certain
circumstances, make it more difficult for a third party to gain control of the
Company, discourage bids for the Common Stock at a premium, or otherwise
adversely affect the market price of the Common Stock. This amendment will
become effective upon filing of a Certificate of Amendment with the California
Secretary of State.
OTHER WARRANTS AND OPTIONS
Randy Haag and Michael Staskus (collectively referred to as "Haag") were
each granted warrants in March 1995 to purchase 18,750 shares of Common Stock,
each at a current exercise price of $3.20 per share. These warrants are
exercisable commencing 90 days following the completion of the Offering and
expire April 15, 1999. Similar warrants were granted to Thomas O'Stasic, Sr. and
Steve Jizmagian with respect to 1,562 and 6,250 shares of Common Stock,
respectively. These warrants are currently exercisable at $3.20 per share and
also expire on April 15, 1999. Certain registration rights have been provided to
the holders of these warrants as set forth therein. Haag was also granted
warrants in January 1998, to purchase 100,000 shares of Common Stock at $7.50
per share.
In November 1997, Capitol Bay Securities, Inc. acquired warrants to
purchase 148,000 shares of Common Stock, at an exercise price of $7.50,
exercisable from January 1, 1999 through January 30, 2003 and having protection
against further reverse stock splits until the closing of this Offering. Certain
piggy-back registration rights are provided to Capitol Bay as contained therein.
Pursuant to the provisions of the DayStar Credit Facility, DayStar acquired
warrants to purchase 62,500 shares of Common Stock at an exercise price of $7.20
per share and 31,250 shares of Common Stock at an exercise price of $16.00 per
share of Common Stock, exercisable commencing at the expiration of 90 days after
the closing of a public offering of the securities of the Company and continuing
for three years. On April 17, 1998, pursuant to an agreement with the Company
modifying and placing a limitation on the amount of interest which would be
payable by the Company pursuant to the DayStar Credit Facility, the exercise
price with respect to these warrants pertaining to 31,250 shares of the Common
Stock was amended to $7.20 per share. These warrants contain certain piggy-back
registration rights.
None of the registration rights are being exercised with respect to the
Offering.
TRANSFER AGENT
The Company has selected U.S. Stock Transfer, Inc. to act as transfer agent
and registrar for the Common Stock and as Warrant Agent for the Warrants.
45
<PAGE> 48
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Units,
Common Stock or Warrants. No prediction can be made of the effect, if any, that
future market sales of shares of Common Stock or the availability of such shares
for sale will have on the prevailing market price of the Common Stock.
Nevertheless, sales of substantial amounts of such shares in the open market
could adversely affect the then prevailing market price of the Common Stock.
Upon completion of the Offering, the Company will have 2,541,730
outstanding shares of Common Stock. See "Description of Securities." The
1,500,000 shares of Common Stock which are included in the Units and sold in the
Offering (plus any shares sold as a result of any exercise of the
Representative's Over-Allotment Option) and the shares of Common Stock issuable
upon exercise of the Warrants will, subject to any applicable state law
restrictions on secondary trading, be freely tradeable without restriction under
the Securities Act, except that any shares purchased by an "affiliate" of the
Company (as that term is defined in Rule 144 of the Securities Act) will be
subject to the resale restrictions of Rule 144.
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated) who has beneficially owned, for at least one year, shares of
Common Stock that have not been registered under the Securities Act or that were
acquired from an "affiliate" of the Company (in a transaction or chain of
transactions not involving a public offering) is entitled to sell within any
three month period a number of shares of such stock which does not exceed the
greater of 1% of the number of then outstanding shares (25,417 shares after the
Offering) or the average weekly reported trading volume during the four calendar
weeks preceding the sale. Sales under Rule 144 are also subject to certain
notice requirements and to the availability of current public information about
the Company and must be made in unsolicited brokers' transactions or to a market
maker. A person (or persons whose shares are aggregated) who is not an
"affiliate" of the Company under the Securities Act during the three months
preceding a sale and who has beneficially owned such shares for at least two
years is entitled to sell such shares under Rule 144(k) without regard to the
requirements discussed above, other than a requirement that such sales be made
in unsolicited brokers' transactions.
It is anticipated that except as described herein, all of the current
shareholders who own or beneficially hold 5% or more of the outstanding shares
of Common Stock of the Company and its officers and directors, aggregating
463,371 shares will have agreed that, for a period of 12 months after the
closing of the Offering, they will not offer, sell, grant any option for the
sale of or otherwise dispose of any equity securities of the Company without the
prior written consent of the Representative (the "Lock-Up"). Shareholders who
each own less than 5% of the outstanding Common Stock, comprising an aggregate
of 453,359 shares, are not subject to the Lock-Up, but are subject to the
provisions of Rule 144. The Company has not obtained such a Lock-Up from the
founder of the Company who is engaged in litigation with the Company regarding,
among other issues, the amount of Common Stock as to which he is the holder, nor
has it obtained a Lock-Up from PAG, as PAG disclaims beneficial ownership of all
but 14,693 shares of the 59,375 shares currently shown as beneficially held by
it. The Company's records reflect Gregory B. Plunkett is the holder of 125,000
shares of Common Stock or 12% of the outstanding Common Stock before the
Offering and 4.92% of the total outstanding Common Stock after the Offering is
completed. See "Business -- Legal Proceedings" and "Principal Shareholders."
Holders of warrants with respect to 248,000 shares of the Common Stock have
been granted "piggy-back" registration rights whereby they may be entitled to
include some or all of their shares in a subsequent registration statement being
filed by the Company with the Commission to sell its securities to the public.
In addition, holders of warrants with respect to 145,312 shares of the Common
Stock have been granted "demand registration rights," whereby under certain
circumstances they may require that the Company file a registration statement
with the Commission to register such shares for sale to the public, but only to
the extent that such shares of Common Stock may not otherwise be sold to the
public without restriction, such as pursuant to Rule 144. Holders of 59,375
shares of the Common Stock have been granted "piggy-back" registration rights
and hold such rights with respect to up to an additional 120,625 shares of
Common Stock to be issued after the closing of this Offering. See "Certain
Transactions."
46
<PAGE> 49
Any employee or consultant to the Company who purchased shares pursuant to
a written compensation plan or contract is entitled to rely on the resale
provisions of Rule 701, which permit non-affiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitations or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus. Approximately 181,250 shares of the outstanding Common Stock, of
which 162,500 shares are held by affiliates, will be eligible for sale under
Rule 701. All holders of such shares have agreed to the Lock-Up with respect to
such shares.
47
<PAGE> 50
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Paulson
Investment Company, Inc. is acting as Representative, have severally agreed,
pursuant to the terms and conditions of the Underwriting Agreement between the
Company and the several Underwriters (the "Underwriting Agreement"), to purchase
from the Company, and the Company has agreed to sell to the Underwriters, the
number of Units set forth in the table below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF UNITS
----------- ---------
<S> <C>
Paulson Investment Company, Inc.
---------
Total............................................. 1,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase such Units are subject to certain conditions. The
Underwriters are committed to purchase all of the 1,500,000 Units offered by
this Prospectus, but not the 225,000 Units subject to the Over-allotment Option
(described below), if any are purchased.
The Representative has advised the Company that the Underwriters propose to
offer the Units to the public at the initial public offering price set forth on
the cover page of this Prospectus and to selected dealers at such price less a
concession within the discretion of the Representative, and that the
Underwriters and such dealers may reallow a concession to other dealers,
including the Underwriters, within the discretion of the Representative. After
the initial public offering of the Units, the public offering price, the
concessions to selected dealers and the reallowance to other dealers may be
changed by the Representative. The Representative has informed the Company that
its does not expect the Underwriters to confirm sales of Units offered by this
Prospectus to any account over which they exercise discretionary authority.
The Company has granted the Representative an option, expiring at the close
of business 45 days after the date of this Prospectus, to purchase up to 225,000
additional Units from the Company on the same terms as apply to the sale of the
Units set forth above (the "Over-allotment Option"). The Representative may
exercise the option only to cover over-allotments, if any, incurred in the sale
of the Units.
The Company has agreed that if it elects to redeem the Warrants at any time
commencing one year after the date of this Prospectus, it will retain the
Representative as the Company's solicitation agent (the "Warrant Solicitation
Agent"). The Company has agreed to pay the Warrant Solicitation Agent for its
services a solicitation fee equal to no more than three percent of the total
amount paid by the holders of the Warrants who were solicited by the Warrant
Solicitation Agent to exercise the Warrants. The exercise of the Warrants will
be presumed to be unsolicited unless the customer states in writing that the
transaction was solicited by the Warrant Solicitation Agent and designates in
writing the registered representative at the Warrant Solicitation Agent entitled
to compensation for the exercise. The fee is not payable for the exercise of any
Warrant held by the Warrant Solicitation Agent in a discretionary account at the
time of exercise, unless the Warrant Solicitation Agent receives from the
customer prior specific written approval of such exercise. No member of the
National Association of Securities Dealers, Inc. ("NASD") or person associated
with a member of the NASD will receive a solicitation fee or any other
compensation or expense reimbursement in connection with the exercise of a
Warrant if the market price of the Common Stock received upon exercise of the
Warrant is lower than the exercise price of the Warrant.
The Underwriting Agreement provides for indemnification between the Company
and the Underwriters against certain liabilities, including liabilities under
the Securities Act and for contribution by the Company and the Underwriters to
payments that may be required to be made in respect thereof.
48
<PAGE> 51
The Company has agreed to pay the Representative a nonaccountable expense
allowance equal to three percent of the gross proceeds from the sale of Units
offered hereby. In the event this Offering is not consummated, any
nonaccountable portion of the advanced payment will be promptly returned to the
Company.
The Company has agreed to issue to the Representative the Representative's
Warrants, which entitle the holders to purchase up to an aggregate of 150,000
Units at an exercise price per Unit equal to $ (120% of the initial
public offering price of the Units). The Representative's Warrants are not
transferable for one year from the date of issuance, except to individuals who
are either a partner or an officer of an Underwriter, by will or by the laws of
descent and distribution. The Representative's Warrants are not redeemable by
the Company. The Company has agreed to maintain an effective registration
statement with respect to the issuance of the securities underlying the
Representative's Warrants (and, if necessary, to allow their public resale
without restriction) at all times during the period in which the
Representative's Warrants are exercisable, commencing one year after the date of
this Prospectus. Such securities are being registered on the Registration
Statement of which this Prospectus is a part.
The Company has agreed that, for a period of one year following the closing
of the Offering, it will not, subject to certain exceptions, offer, sell,
contract to sell, grant any option for the sale or otherwise dispose of any
securities of the Company without the consent of the Representative. The
Company's officers, directors and certain holders of 5% or more of the
outstanding Common Stock, aggregating a total of 463,371 shares, have agreed
that for a period of one year following the closing of this Offering, they will
not offer, sell, contract to sell, grant any option for the sale or otherwise
dispose of any Common Stock of the Company (other than intra-family transfers or
transfers to trusts for estate planning purposes) without the consent of the
Representative, and thereafter, will give the Representative prior notice of
sales under Rule 144 for five years from the date of this Prospectus.
Until the distribution of the Units is completed, rules of the Commission
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the securities. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize the
price of the Units, Common Stock and/or Warrants. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price of
the Units, Common Stock and/or Warrants. If the Underwriters create a short
position in the Units in connection with the Offering, i.e., if they sell more
Units than are set forth on the cover page of this Prospectus, the
Representative may reduce that short position by purchasing Units in the open
market. The Representative may also elect to reduce any short position by
exercising all or part of the Over-allotment Option described above.
The Representative may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representative purchases Units
in the open market to reduce the Underwriters' short position or to stabilize
the price of the Units, Common Stock and/or Warrants, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those securities as part of this Offering.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither the Company nor the Underwriters
makes any representation or predictions as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Units,
Common Stock and/or Warrants. In addition, neither the Company nor the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
Prior to this Offering, there has been no public market for the Company's
Units, Common Stock or Warrants. Accordingly, the initial public offering price
has been determined by negotiations between the Company and the Representative.
Among the factors considered in determining the initial public offering price of
the Units, and the exercise price and other terms of the Warrants were the
history and the prospects of the Company and the industry in which it operates,
the status and development prospects for the Company's
49
<PAGE> 52
products, the experience and qualifications of the Company's executive officers
and the general condition of the securities markets at the time of the Offering.
In March 1998, the Representative loaned the Company $200,000, evidenced by
a promissory note bearing 10% simple interest. The principal and accrued
interest is due and payable on the earlier of the closing of this Offering or,
if the Offering has not closed by October 31, 1998, 30 days following the
Representative's demand for payment. It is anticipated that the Company will use
a portion of the net proceeds of this Offering to pay the principal and accrued
interest. See "Use of Proceeds."
LEGAL MATTERS
The validity of the Units, Common Stock and Warrants offered hereby will be
passed upon for the Company by Resch Polster Alpert and Berger, A Limited
Liability Partnership, Los Angeles, California. Harvey H. Rosen, of counsel to
Resch Polster Alpert and Berger, beneficially owns 4,687 shares of the Common
Stock. Certain legal matters relating to the Offering will be passed upon for
the Representative by Grover T. Wickersham, P.C., Palo Alto, California.
EXPERTS
The balance sheet as of January 31, 1998, and the statements of operations,
changes in shareholders' equity (deficit) and cash flows each of the two years
in the period then ended, included in this Prospectus, have been included herein
in reliance on the report, which includes an explanatory paragraph that
expresses substantial doubt about the Company's ability to continue as a going
concern as described in notes to such financial statements, of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act with respect to the Units, Common Stock and
Warrants offered hereby. This Prospectus omits certain information contained in
the Registration Statement and the exhibits and schedules thereto, as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Units, Common Stock and Warrants being offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules thereto. Statements contained in the Prospectus as to the contents of
any contract or other document are not necessarily complete, and in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, and each such statement being qualified
in all respects by such reference. Copies of the Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of all or part thereof may be obtained from the Commission's principal
office in Washington, D.C. upon payment of fees prescribed by the Commission. In
addition, the Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other documents filed electronically with the Commission, including the
Registration Statement.
50
<PAGE> 53
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets at January 31, 1998 and April 30, 1998....... F-3
Statements of Operations for the years ended January 31,
1997 and January 31, 1998 and for the three month periods
ended April 30, 1997 and 1998............................. F-4
Statement of Changes in Shareholders' Equity (Deficit) for
the years ended January 31, 1997 and 1998 and for the
three month period ended April 30, 1998................... F-5
Statements of Cash Flows for the years ended January 31,
1997, and January 31, 1998 and for the three month periods
ended April 30, 1997 and 1998............................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 54
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Legacy Brands, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, changes in shareholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of Legacy Brands, Inc.
at January 31, 1998, and the results of its operations and its cash flows for
each of the two years in the period then ended, 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 in Note 2 to the financial statements, the Company has suffered
recurring losses and negative cash flows from operations, has a license
compliance confirmation expiring on September 15, 1998, has a note payable to an
underwriter due on the earlier of the closing of the planned initial public
offering (IPO), or, if the IPO has not closed by October 31, 1998, 30 days after
demand for payment by the holder, and must obtain additional financing or
complete its IPO to fund working capital requirements. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Sacramento, California
July 8, 1998
F-2
<PAGE> 55
LEGACY BRANDS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1998 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash...................................................... $ 10,039 $ 14,762
Trade accounts receivable................................. 179,570 251,672
Receivable from related party............................. 73,775 --
Inventory................................................. 87,100 256,146
Prepaid expenses.......................................... 26,641 41,409
---------- ----------
Total current assets.............................. 377,125 563,989
Office equipment, net....................................... 70,521 68,645
Debt issuance costs, net.................................... 7,250 6,250
Organization costs, net..................................... 1,000 750
Licenses, net............................................... 2,276,909 2,342,638
Deferred offering costs..................................... -- 137,676
---------- ----------
Total assets...................................... $2,732,805 $3,119,948
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Related party line of credit and accrued interest......... $ 699,235 $ 754,085
Accounts payable.......................................... 688,238 1,086,384
Accrued expenses and other liabilities.................... 1,018,287 967,368
Note payable to underwriter and accrued interest.......... -- 203,123
Notes payable to related parties and accrued interest..... 85,217 11,715
Liability to manufacturer, current........................ 348,092 348,092
---------- ----------
Total current liabilities......................... 2,839,069 3,370,767
Accrued expenses, noncurrent................................ -- 82,500
Liability to manufacturer, noncurrent....................... 715,684 625,215
---------- ----------
Total liabilities................................. 3,554,753 4,078,482
---------- ----------
Commitments and Contingencies (Notes 1, 5, 6, 11, 13 and 14)
Shareholders' equity (deficit):
Common stock, no par value; 30,000,000 shares authorized;
1,041,730 shares issued and outstanding................ 6,246,807 6,253,057
Contributed capital....................................... 559,500 559,500
Notes receivable from shareholders........................ (69,475) (69,475)
Accumulated deficit....................................... (7,558,780) (7,701,616)
---------- ----------
Total shareholders' equity (deficit).............. (821,948) (958,534)
---------- ----------
Total liabilities and shareholders' equity
(deficit)....................................... $2,732,805 $3,119,948
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 56
LEGACY BRANDS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, THREE MONTHS ENDED APRIL 30,
------------------------- ----------------------------
1997 1998 1997 1998
---------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Sales.................................... $4,824,706 $ 5,351,917 $1,249,340 $1,640,728
Cost of goods sold....................... 3,087,833 3,308,660 743,298 1,026,444
---------- ----------- ---------- ----------
Gross profit...................... 1,736,873 2,043,257 506,042 614,284
Operating expense:
Marketing.............................. 992,258 1,332,934 261,343 387,020
General and administrative............. 854,433 1,244,551 216,315 303,267
Compensation related to forgiveness of
employee notes...................... -- 1,472,009 -- --
---------- ----------- ---------- ----------
Operating (loss) income................ (109,818) (2,006,237) 28,384 (76,003)
Other income (expense):
Interest expense....................... (622,793) (471,186) (184,014) (66,033)
Other (expense) income, net............ (24,292) (443,190) (10,000) --
---------- ----------- ---------- ----------
Loss before provision for income
taxes.......................... (756,903) (2,920,613) (165,630) (142,036)
Provision for income taxes............... (800) (800) (800) (800)
---------- ----------- ---------- ----------
Net loss.......................... $ (757,703) $(2,921,413) $ (166,430) $ (142,836)
========== =========== ========== ==========
Loss per share (basic and diluted):
Net loss per share..................... $ (1.16) $ (3.81) $ (0.24) $ (0.14)
========== =========== ========== ==========
Weighted average shares used in computing
net loss per share..................... 651,162 767,613 701,022 1,041,730
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE> 57
LEGACY BRANDS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JANUARY 31, 1997 AND 1998, AND THE THREE MONTH PERIOD ENDED
APRIL 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK NOTES TOTAL
---------------------- RECEIVABLE SHAREHOLDERS'
NUMBER OF CONTRIBUTED FROM ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL SHAREHOLDERS DEFICIT (DEFICIT)
--------- ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1996................ 605,451 $3,124,922 $559,500 $ -- $(3,879,664) $ (195,242)
Issuance of common stock for services,
including the Contingent Shares
Guarantee (Note 5)..................... 55,375 441,360 -- -- -- 441,360
Issuance of common stock for cash upon
exercise of warrants................... 1,062 34 -- -- -- 34
Issuance of common stock to employees for
notes.................................. 181,250 1,450,000 -- (1,450,000) -- --
Accrual of interest on employee notes.... -- 12,171 -- (12,171) -- --
Issuance of common stock for notes upon
exercise of warrants................... 20,343 65,100 -- (65,100) -- --
Net loss for the year.................... -- -- -- -- (757,703) (757,703)
--------- ---------- -------- ----------- ----------- -----------
Balance, January 31, 1997................ 863,481 5,093,587 559,500 (1,527,271) (4,637,367) (511,551)
Issuance of common stock for cash........ 108,499 747,249 -- -- -- 747,249
Recognition of deferred offering costs... -- (614,271) -- -- -- (614,271)
Issuance of common stock upon conversion
of debt................................ 46,000 570,089 -- -- -- 570,089
Issuance of common stock upon conversion
of accrued interest on related party
line of credit......................... 9,375 75,000 -- -- -- 75,000
Extension of and issuance of warrants for
services............................... -- 245,940 -- -- -- 245,940
Issuance of common stock for services.... 14,375 115,000 -- -- -- 115,000
Accrual of interest on shareholder and
employee notes receivable.............. -- 14,213 -- (14,213) -- --
Forgiveness of employee notes............ -- -- -- 1,472,009 -- 1,472,009
Net loss for the year.................... -- -- -- -- (2,921,413) (2,921,413)
--------- ---------- -------- ----------- ----------- -----------
Balance, January 31, 1998................ 1,041,730 6,246,807 559,500 (69,475) (7,558,780) (821,948)
Amendment of common stock warrants for
services (unaudited)................... -- 6,250 -- -- -- 6,250
Net loss for the period (unaudited)...... -- -- -- -- (142,836) (142,836)
--------- ---------- -------- ----------- ----------- -----------
Balance, April 30, 1998 (unaudited)...... 1,041,730 $6,253,057 $559,500 $ (69,475) $(7,701,616) $ (958,534)
========= ========== ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 58
LEGACY BRANDS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED JANUARY 31, APRIL 30,
-------------------------- ----------------------------
1997 1998 1997 1998
--------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(757,703) $(2,921,413) $(166,430) $(142,836)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 110,307 179,144 28,376 47,590
Amortization of debt issuance costs..................... 468,528 236,155 130,980 7,250
Common stock and common stock warrants issued for
services.............................................. 3,960 283,190 -- --
Forgiveness of employee notes........................... -- 1,472,009 -- --
Changes in assets and liabilities:
Decrease (increase) in receivable from related
parties............................................. 22,158 (73,775) -- --
Increase in trade accounts receivable................. (22,921) (156,649) (84,974) (72,102)
Decrease in other receivables......................... 14,785 -- -- --
Increase in inventory................................. (50,000) (37,100) -- (169,046)
Increase in prepaid expenses and other................ (6,996) (19,645) (23,878) (14,768)
(Decrease) increase in accounts payable............... (32,239) 137,536 67,354 398,146
(Decrease) increase in accrued expenses and other
liabilities......................................... (27,717) 519,301 (40,055) (188,595)
Increase (decrease) in accrued interest payable....... 46,912 (2,943) 16,783 58,246
Payments on liability to manufacturer................. (346,959) (334,086) (92,776) (90,469)
--------- ----------- --------- ---------
Net cash used in operating activities............... (577,885) (718,276) (164,620) (166,584)
--------- ----------- --------- ---------
Cash flows from investing activities:
Purchases of office equipment............................. (6,079) (86,741) (12,342) (1,193)
Payments toward purchase of licenses...................... (12,500) -- -- (27,500)
--------- ----------- --------- ---------
Net cash used in investing activities................. (18,579) (86,741) (12,342) (28,693)
--------- ----------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 34 747,249 -- --
Proceeds from issuance of loans payable................... 445,000 -- -- --
Payment of loans payable.................................. (5,000) (595,000) -- --
Proceeds from issuance of notes payable to related
parties................................................. 454,000 -- -- --
Payments on notes and advances payable to related
parties................................................. (46,500) -- -- --
Payments of debt issuance costs........................... (163,038) (8,000) (20,497) --
Issuance of advance to related party...................... (135,000) -- -- --
Proceeds from repayment of advance to related party....... 135,000 -- -- --
Payment of deferred offering costs........................ (147,354) (1,439) (49,960) --
Proceeds from draw on related party line of credit........ -- 848,000 225,472 --
Payments on related party line of credit.................. -- (198,000) -- --
Proceeds from issuance of note payable to underwriter..... -- -- -- 200,000
--------- ----------- --------- ---------
Net cash provided by financing activities........... 537,142 792,810 155,015 200,000
--------- ----------- --------- ---------
(Decrease) increase in cash................................. (59,322) (12,207) (21,947) 4,723
Cash, beginning of period................................... 81,568 22,246 22,246 10,039
--------- ----------- --------- ---------
Cash, end of period......................................... $ 22,246 $ 10,039 $ 299 $ 14,762
========= =========== ========= =========
Supplemental disclosure of cash flow information:
Cash payments for interest................................ $ 61,615 $ 73,909 $ 29,645 $ 810
========= =========== ========= =========
Cash payments for income taxes............................ $ 800 $ 800 $ 800 $ 800
========= =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 59
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operations
Legacy Brands, Inc. (Company) is a California corporation that licenses and
markets premium branded consumer food products sold in supermarkets, club
stores, convenience stores, drug stores and mass merchandisers throughout the
United States. The Company currently holds three licenses for food products
using names and trademarks held by Mrs. Fields, Gumby and Mattel. The Company
has developed and is currently marketing products under the Mrs. Fields and
Gumby licenses and intends to develop and market products utilizing the Extreme
Dinosaurs trademark held by Mattel. The Company intends to build a portfolio of
well-known premium brand products by continuing to seek licensing opportunities
for nationally recognized brand names, increasing product offerings under
current and new licenses, and further developing distribution of the Company's
existing products. The Company filed an initial registration on Form 10SB with
the Securities Exchange Commission (SEC) in late July 1997 and became a
registrant under Section 12(g) of the 1934 Act in September 1997. In February
1998, the Company filed Form 15 with the SEC to terminate its registration. The
Company is planning an initial public offering of equity securities (IPO) as
described in Note 12.
Interim Results (Unaudited)
The accompanying balance sheet as of April 30, 1998, and the statements of
operations, changes in shareholders' equity (deficit) and cash flows for the
three month periods ended April 30, 1997 and 1998, are unaudited. In the opinion
of management, these statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting of only
normal recurring adjustments, necessary for the fair presentation of the results
of the interim periods. The data discussed in these notes to the financial
statements for those interim periods are also unaudited.
Concentration of Manufacturer and Product
The Company currently maintains an informal relationship with two frozen
cookie dough manufacturers and one ice cream product manufacturer. The Company
believes that several other suppliers are capable of providing substantially
similar services. The Company currently markets frozen cookie dough, which is
available in retail stores in five varieties, through a network of brokers and
distributors. The Company introduced cookie ice cream sandwiches in July 1997,
and has expanded the product line to ice cream cookie pops in fiscal 1998. These
products are marketed under the Mrs. Fields license. The Company also introduced
freeze pops marketed under the Gumby license under the trade name of "Gumby and
Friends" during the year ended January 31, 1998.
The primary frozen cookie dough manufacturer produces the product and bills
the retailer for sales upon approval by the Company. Sales proceeds, net of
manufacturing and certain other costs, are remitted to the Company by the
manufacturer. The Company is liable to the frozen cookie dough manufacturer for
uncollectible receivables and spoiled inventory.
The Company's other products, Mrs. Fields cookie ice cream sandwiches and
ice cream cookie pops and Gumby freeze pops, are billed directly by the Company
when the products are shipped by the manufacturers to the retailers.
Sales to one customer, consisting of three divisions which each make
independent purchasing decisions, approximated 23% and 25% and 36% and 32% of
total sales during the years ended January 31, 1997 and 1998 and the three month
periods ended April 30, 1997 and 1998, respectively. Sales to a second customer
accounted for approximately 15% and 8% of total sales during the years ended
January 31, 1997 and 1998, and 13% and 12% for the three month periods ended
April 30, 1997 and 1998, respectively.
F-7
<PAGE> 60
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
For all of the Company's products, revenue is recognized when the product
is shipped by the manufacturers to the retailers.
Cash
The Company includes all cash accounts and all highly liquid instruments
purchased with an original maturity of three months or less as cash. The
Company's bank deposits generally exceed the federally insured limit.
Inventory
Inventory at lower of cost (average cost) or market, consists primarily of
cookie ice cream sandwiches maintained in cold storage and raw materials used in
the manufacture of ice cream products.
Office Equipment
Office equipment is recorded at cost. Depreciation is computed using the
straight-line method over the assets' useful lives ranging from five to seven
years. Expenditures for maintenance, repairs and minor renewal and betterments
are charged to expense. The cost and related accumulated depreciation of
equipment sold or retired are removed from the accounts and the resulting gain
or loss is included in other expense.
Accumulated depreciation on office equipment totaled $11,940 and $15,009 at
January 31, 1998 and April 30, 1998, respectively. Depreciation expense on
office equipment totaled $1,722 and $9,186 for the years ended January 31, 1997
and 1998, respectively, and $687 and $3,069 for the three month periods ended
April 30, 1997 and 1998, respectively.
Debt Issuance Costs
Costs incurred in obtaining debt financing are deferred and amortized over
the term of the associated debt agreements using the interest method and include
the following:
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1998 1998
----------- ---------
<S> <C> <C>
Costs related to issuance of related party line of credit
facility, net of accumulated amortization of $21,750 and
$29,000 at January 31, 1998 and April 30, 1998,
respectively.............................................. $7,250 $ 6,250
====== =========
</TABLE>
Organization Costs
Organization costs consist of legal fees of $5,000 incurred to incorporate
and are recorded at cost. Amortization is computed using the straight-line
method over a period of five years. Accumulated amortization was $4,000 and
$4,250 at January 31, 1998 and April 30, 1998. Amortization of the organization
costs totaled $1,000 in each of the years ended January 31, 1997 and 1998, and
$250 in each of the three month periods ended April 30, 1997 and 1998.
Deferred Offering Costs
During the year ended January 31, 1998, all deferred offering costs of
$614,271, consisting primarily of legal, accounting and printing costs were
netted against the proceeds of the 1997 private placement offering of common
stock. During the three month period ended April 30, 1998, the Company incurred
additional
F-8
<PAGE> 61
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
deferred offering costs of $137,676, which will be netted against the proceeds
of the IPO described in Note 12. If the IPO does not occur, such costs will be
expensed.
License Agreements
MRS. FIELDS LICENSE
The Company has entered into an exclusive license agreement (Mrs. Fields
License) with Mrs. Fields Development Corporation (Mrs. Fields) whereby the
Company has the exclusive right and license to use the licensed names to market
products through certain designated distribution channels in North America,
Hawaii and Puerto Rico over the 30 year duration of the Mrs. Fields License,
including option periods. The initial term of the Mrs. Fields License expires in
December 1999 (Initial Term). During the 30-year duration, the Company has, at
its sole discretion, the option to extend the Mrs. Fields License for five
consecutive five-year periods (Option Periods) that expire in December 2024.
However, Mrs. Fields may terminate the Mrs. Fields License as of the end of
any Option Period by notifying the Company of its intention to terminate the
Mrs. Fields License. Mrs. Fields must also provide written notice of such
termination not more than twelve and not less than three months prior to the end
of any Option Period, and pay the Company an amount equal to three times the
average gross margin for sales of Mrs. Fields products reported by the Company
over the last three years of the current option term in accordance with the Mrs.
Fields License (Buy Out Amount). The Buy Out Amount would be payable in cash
over three years in twelve equal quarterly installments. The first Option Period
ends in December 2004.
In accordance with the Mrs. Fields License, the Company is obligated to
maintain specified levels of product sales (Minimum Volume Commitment) during
the Initial Term and during each Option Period. If the Company fails to meet the
Minimum Volume Commitment, the Company must pay a royalty in an amount equal to
the royalty that would have been paid had the Company met its Minimum Volume
Commitment. If the Company is determined to be insolvent, or files a petition in
bankruptcy or for reorganization, then the Mrs. Fields License may be terminated
upon notice by Mrs. Fields. Mrs. Fields has confirmed that the Company is in
compliance with the terms of the Mrs. Fields License as of May 5, 1998, and has
waived its rights and remedies related to the insolvency provision of the Mrs.
Fields License until such time as an IPO shall have been completed (Note 12),
but not later than September 15, 1998, unless there shall have been a bankruptcy
filing of the Company.
In March 1996, the Mrs. Fields License was amended to require that the
Company meet revised Minimum Volume Commitments beginning January 1, 1997 on a
calendar year basis. The Minimum Volume Commitments were substantially reduced
from the prior commitments. The Minimum Volume Commitment for calendar year 1997
was 285,000 twelve pound equivalent cases, for calendar 1998 is 350,000 twelve
pound equivalent cases, and increases to certain specified quantities over the
life of the agreement to 583,434 twelve pound equivalent cases in 2015, and
remains at that level until the expiration of the last Option Period.
During calendar 1997, the Company generated twelve pound equivalent case
sales resulting in royalties of $179,139, but under the terms of the Mrs. Fields
License was required to pay a minimum of $285,000. In January 1998, the Company
executed a second amendment to the Mrs. Fields License (Second Amendment) due to
a Minimum Volume Commitment shortage for the 1997 calendar year. Pursuant to the
Second Amendment, $120,000 (including a $20,000 penalty) will be paid to Mrs.
Fields during 1998 and thereafter until satisfied through higher royalties. Such
amount has been accrued as of January 31, 1998.
As part of the Mrs. Fields License, the Company paid a non-refundable fee
described as a prepaid royalty of $2,500,000 to Mrs. Fields. The fee is being
amortized on a straight-line basis over the life of the Mrs. Fields
F-9
<PAGE> 62
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
License or a total of 30 years. Accumulated amortization was $277,777 and
$298,610 at January 31, 1998 and April 30, 1998, respectively. Amortization
expense included in general and administrative expense totaled $83,333 for each
of the years ended January 31, 1997 and 1998, and $20,833 for each of the three
month periods ended April 30, 1997 and 1998. In addition, the Company pays a
royalty equal to $1 per twelve pound equivalent case sold, net of damages,
returns and credits, plus additional royalties per case as required by the
Second Amendment. Such royalties included in marketing expense were $177,574 and
$287,587 for the years ended January 31, 1997 and 1998, respectively, and
$30,049 and $49,085 for the three month periods ended April 30, 1997 and 1998,
respectively.
Management believes the carrying value of the Mrs. Fields License to be
recoverable over future periods based upon current sales forecasts. Should
anticipated volumes not be achieved and the Company not be able to make the
required royalty payment to meet its commitment under the license agreement or
should the license be terminated, the carrying value of the Mrs. Fields License
may need to be reduced accordingly in future periods.
GUMBY LICENSE
In September 1996, the Company entered into a trademark license agreement
(Gumby License Agreement) whereby the Company has a nonexclusive right and
license to distribute throughout the United States certain food products
displaying the Gumby cartoon characters. The initial two year term of the Gumby
License Agreement began September 1, 1996 and ends August 31, 1998. The Company
has a renewal option for an additional two year period which is dependent upon
performance during the initial term.
As consideration for the Gumby License Agreement, the Company paid $12,500
in September 1996, and agreed to pay monthly royalties equal to 5% of net sales
of Gumby products, with such royalties guaranteed to aggregate a minimum of
$112,500 by August 31, 1998. The Gumby License Agreement has been recorded at
$125,000. Accumulated amortization on the Gumby License Agreement totaled
$70,314 and $93,752 at January 31, 1998 and April 30, 1998, respectively.
Amortization of the minimum royalty is over the initial term of the license at
the greater of straight line amortization or 5% of net sales. Amortization
expense included in general and administrative expense, for the years ended
January 31, 1997 and 1998, totaled $0 and $70,314, respectively, and $0 and
$23,438 for the three month periods ended April 30, 1997 and 1998, respectively.
Through April 30, 1998, the Company had cumulative sales of Gumby products of
$145,008, resulting in royalties of $7,250. Minimum royalties payable, including
the $7,250 noted above, totaled $112,500 at January 31, 1998 and April 30, 1998,
respectively.
EXTREME DINOSAURS LICENSE
In May 1997, the Company entered into a Letter of Intent with BKN Kids
Network, Inc., under a sublicense from Mattel, Inc., pursuant to which the
Company acquired the exclusive right and license to use the trademarks,
copyrights, plots, environmental settings and artwork as well as the characters,
names and likenesses all as used in or emanating from the one half-hour
television program currently entitled "Extreme Dinosaurs" to be used for freeze
pops, gelatin snacks, molded and generic coolers, banked and shaped cookies and
crackers, fruit snacks and candies to be distributed throughout the United
States (the BKN License).
In April 1998 the parties reached substantive agreement pursuant to which
the term of the BKN License commenced on May 1, 1998, and continues through July
31, 2000. The Company has guaranteed a minimum payment of $110,000, payable in
increments to be agreed upon and allowed to be offset against a 4% royalty
payable on all net sales. The Extreme Dinosaurs license has been recorded at
$110,000 as of April 30, 1998. Amortization is being recorded over the initial
term of the license at the greater of straight line amortization or
F-10
<PAGE> 63
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
4% of net sales. The Company paid the required first payment of $27,500 during
the three month period ended April 30, 1998. The $82,500 balance has been
accrued as of April 30, 1998. The Company holds an option to renew the license
for a period of two years if it is not in default and it has generated at least
$220,000 in royalties during the initial term and it pays an additional $60,000
toward a renewal guarantee payment of $125,000 in increments over the two year
term of the option period. The parties are sill negotiating terms relating to
the timing with respect to when items will be required to be brought to market
and royalty payments.
Marketing Costs
The costs of marketing, including advertising, are charged to expense in
the period incurred.
New market distribution costs (slotting allowances) are also charged to
expense in the period incurred.
Other (Expense) Income, Net
Other (expense) income, net for the year ended January 31, 1998, consists
of a $150,000 provision for a legal settlement (Note 13) and $293,190 related to
the final settlement of two placement agent agreements (Notes 8 and 10).
Income Taxes
The Company reports income taxes under the liability method. Accordingly,
deferred tax assets and liabilities arise from the differences between the tax
basis of an asset or liability and its reported amount in the financial
statements. Deferred tax amounts are determined using the tax rates expected to
be in effect when the taxes will actually be paid or refunds received, as
provided under currently enacted tax law. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. At January 31, 1998 and April 30, 1998, the Company has recorded a
100% valuation allowance against the net deferred tax assets.
Accounting 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.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1998 1998
----------- ---------
<S> <C> <C>
Professional fees.................................... $ 458,589 $456,241
Royalties............................................ 323,072 302,646
Accrued liability for legal settlement (Note 13)..... 150,000 150,000
Other................................................ 86,626 58,481
---------- --------
$1,018,287 $967,368
========== ========
</TABLE>
F-11
<PAGE> 64
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Accrued Expenses, Noncurrent
Accrued expenses, noncurrent, consists of $82,500 for the Extreme Dinosaurs
license as of April 30, 1998.
Net Loss Per Share
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, which is required to be
adopted for financial statement periods ending after December 15, 1997. SFAS No.
128 requires that "primary" and "fully diluted" earnings per share be replaced
by "basic" and "diluted" earnings per share, respectively. The basic calculation
computes earnings per share based only on the weighted average number of shares
outstanding, as compared to primary earnings per share which included common
stock equivalents. The diluted earnings per share calculation is computed
similarly to fully diluted earnings per share.
The retroactive adoption of SFAS No. 128 had no effect on net loss per
share for the year ended January 31, 1997.
Basic and diluted net loss per share has been computed based on the
weighted average number of shares outstanding during the period presented.
Common share equivalents, consisting of restricted stock issued to employees for
notes, stock issued for notes upon the exercise of warrants, convertible debt
and warrants issued by the Company, are anti-dilutive for each of the periods
presented and, therefore, are not included in the computation of diluted net
loss per share.
Stock-Based Compensation
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
during the year ended January 31, 1997, and elected to measure and record
compensation cost as defined in Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees. There was no additional
compensation cost under the fair value method as prescribed by SFAS No. 123 for
the years ended January 31, 1997 and 1998 or for the three month periods ended
April 30, 1997 and 1998.
Fair Value of Financial Instruments
The carrying amount of cash approximates fair value due to the short-term
nature of these instruments.
Due to uncertainties regarding the Company's financial status, it is not
practicable to determine the fair value of the Company's related party line of
credit, notes payable to related parties and an underwriter, and the liability
to manufacturer.
2. BASIS OF PRESENTATION:
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has suffered recurring
losses and negative cash flows from operations, and must obtain additional
financing or complete its planned initial public offering of equity securities
to fund working capital requirements. As explained in Notes 1 and 5, the
Company's license compliance confirmation with respect to the Mrs. Field's
License expires September 15, 1998, and a $203,123 note payable, including
interest accrued to April 30, 1998, to an underwriter is due on the earlier of
the closing of an IPO, or, if the IPO has not closed by October 31, 1998, 30
days after demand for payment by the holder. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
F-12
<PAGE> 65
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
2. BASIS OF PRESENTATION, CONTINUED:
Management plans to improve profitability through further increases in
sales volume, reduction of overhead expenses and stronger controls over product
development and marketing and is seeking additional financing. The Company
received a $103,500 bridge loan from a related party in July 1998, a letter of
intent in May 1998 for another bridge loan for up to $500,000, and is currently
pursuing an IPO. There can be no assurance that management's plans to achieve
profitability and raise sufficient financing will be successful. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
3. ACCOUNTS PAYABLE:
The Company has certain old accounts payable, primarily dating back to the
summer of 1994, which have been recorded at the billed amounts. Some uncertainty
exists related to substantiation of the extent of goods and services received in
relation to the billed amounts. Such amounts are included in accounts payable
and total $422,202 at January 31, 1998 and April 30, 1998.
4. RELATED PARTY LINE OF CREDIT:
Effective June 10, 1997, the Company entered into a formal agreement with
DayStar L.L.C. (DayStar), a related party, pursuant to which DayStar agreed to
provide a credit facility to the Company in an amount not to exceed $440,000 to
be used for working capital purposes (DayStar Credit Facility). A general
partner of DayStar became a director of the Company in January 1998. As of
January 31, 1998 and April 30, 1998, $420,000 is outstanding under the DayStar
Credit Facility. The interest rate on the DayStar Credit Facility was initially
12%, and increased to 15% effective February 1, 1998. The DayStar Credit
Facility is due at the earlier of: (i) September 1, 1998 or, (ii) within five
business days of the Company raising $1,750,000 in connection with a financing
transaction (Maturity Date). If the note has not been repaid at the Maturity
Date, the Company shall thereupon repay the principal and interest outstanding
in monthly amounts of $20,000 with any unpaid amounts due and payable at the
expiration of 24 months.
On July 1, 1997, the Company entered into a second agreement with DayStar
pursuant to which DayStar agreed to provide to the Company a supplemental
facility (Supplemental DayStar Credit Facility) in the aggregate amount of
$408,000, including a facility fee of 2% of the amount advanced, to be used to
repay certain bridge notes which matured on June 30, 1997. Pursuant to the
Supplemental DayStar Credit Facility, the Company executed a promissory note
providing for the payment of interest on the amounts outstanding at a rate of 1%
per week. With regard to the Supplemental DayStar Credit Facility, the Company
repaid $178,000 through January 31, 1998 and April 30, 1998. Accordingly, the
principal outstanding at January 31, 1998 and April 30, 1998, is $230,000. An
agreement was entered into effective November 1997 with respect to the
Supplemental DayStar Credit Facility to provide the same maturity provisions as
applicable to the DayStar Credit Facility.
The Company has pledged substantially all of its assets as collateral on
the line of credit, subject to other security interests.
DayStar converted $75,000 of accrued interest into 9,375 shares of common
stock of the Company on October 31, 1997, at fair market value. As of January
31, 1998 and April 30, 1998, total accrued interest payable to DayStar was
$49,235 and $104,085, respectively.
In connection with the DayStar line of credit, certain warrants were issued
to DayStar as described in Note 8.
In April 1998, the Company amended its agreements with DayStar such that
the 1% per week interest on the Supplemental DayStar Credit Facility was fixed
at $39,100 for the period from February 1, 1998 until maturity. Additionally,
the maturity dates of the DayStar Credit Facility and the DayStar Supplemental
F-13
<PAGE> 66
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
4. RELATED PARTY LINE OF CREDIT, CONTINUED:
Credit Facility were extended from July 1998 to September 1, 1998. In exchange
for the reduction in interest and the extension of the maturity date, the
exercise price on the warrants held by DayStar to purchase 31,250 shares of
common stock was decreased from $16.00 to $7.20 per share. The amendment to the
warrants was valued at $6,250 and has been recorded as debt issuance costs at
April 30, 1998.
Note Payable to Underwriter
In March 1998, the Company borrowed $200,000 from the underwriter of the
IPO (Note 12) under a promissory note. The note accrues interest at 10% per
annum, and is due on the earlier of the closing of the IPO or, if the IPO has
not closed by October 31, 1998, 30 days after demand for payment by the holder.
5. NOTES PAYABLE:
Notes Payable to Related Parties
Notes payable to related parties, including accrued interest, consist of
the following:
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1998 1998
----------- ---------
<S> <C> <C>
Uncollateralized notes payable to related parties bearing
interest at 12%, principal and interest payable the
earlier of ten working days after the closing of an IPO or
September 30, 1999........................................ $85,217 $11,715
======= =======
</TABLE>
During the three month period ended April 30, 1998, the related party
receivable was offset against the note and accrued interest, as discussed in
Note 10.
Convertible Notes Payable
In the period August 1995 through October 1996, C. Brands Management,
L.L.C. (C. Brands), a company whose principal manager is a shareholder of the
Company, received notes from the Company, for cash consideration of $622,500, of
which $454,000 was received during the year ended January 31, 1997. In
connection with services provided related to the issuance of the notes, the
Company paid Capitol Bay Securities (a related party) 15 percent of the
principal amount of the notes plus other costs ($94,000), 17,187 shares of
common stock, valued at $49,500, and warrants to purchase 18,750 shares of
common stock, valued at $1,200. In addition, C. Brands received 31,250 shares of
common stock from the founder, which was valued at $90,000 and recorded as debt
discount. The debt discount was accreted over the life of the debt agreement
using the interest method. The stated rate of interest was 12% per annum.
Under the note agreement, the notes were convertible into common stock at
$16 per share, at the option of the noteholders. The noteholders committed in
writing in June 1997 to convert upon the close of the 1997 private placement
equity offering. That offering closed on November 27, 1997, and the notes in the
principal amount of $622,500 converted into 38,906 shares of common stock.
Concurrently, the noteholders elected to convert interest accrued to date on the
notes totaling $113,500 into 7,094 shares of common stock at a rate of $16 per
share.
Loans Payable
In the period November 1995 through March 1996, Pacific Acquisition Group
(PAG) made loans (First Bridge Loan), through investors, to the Company totaling
$300,000, of which $145,000 was received by the Company during the year ended
January 31, 1997. As consideration for receiving an additional $300,000
F-14
<PAGE> 67
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
5. NOTES PAYABLE, CONTINUED:
bridge loan (Second Bridge Loan), the Company paid PAG other issuance costs of
$101,988 (including commissions of $90,000) and issued PAG 4,687 shares. The
4,687 shares issued to PAG in connection with the Second Bridge Loan were also
subject to certain registration rights and limitations on reverse stock splits.
The Company also issued an additional 50,000 shares to PAG in connection with
the debt issuance agreements. These 54,687 shares issued were valued at $315,000
and recorded as additional debt issuance costs. In addition, the Company agreed
that it would issue additional shares of common stock to PAG to reach a
$1,300,000 minimum value (Contingent Shares Guarantee). The Contingent Shares
Guarantee was valued at $122,400 and recorded as an addition to debt issuance
costs and common stock.
In April 1997, in preparation for the Company's then anticipated IPO, the
Company and PAG executed an agreement to eliminate the limitation on reverse
stock splits and the Contingent Shares Guarantee. In consideration therefore the
Company granted to PAG the right to have its shares registered for sale
contemporaneous with the IPO, subject only to an agreement by PAG that holders
of PAG shares in excess of 10,000 would enter into a "lock-up" agreement with
the underwriter not to sell shares for a period of 13 months, and the Company
also agreed to issue 10,937 additional shares to PAG. When the Company
terminated the IPO in May 1997 and proceeded with a private placement of its
equity securities, it was necessary to amend and clarify the April 1997
agreement. In June 1997, the April 1997 agreement was rescinded by the parties,
and replaced by an agreement to (i) grant to PAG limited piggy-back registration
rights subject to an underwriter's discretion, and (ii) reinstate and clarify
the Contingent Shares Guarantee, whereby the Company would be required to issue
additional shares at the expiration of twelve months after the date upon which
the common stock shares shall have commenced trading, such that the determined
value of the PAG holdings would be equal to approximately $1,300,000 based upon
the determined highest trading priced during such twelve months, with the
maximum number of shares which the Company would be required to issue to PAG
under any circumstances set at 200,000. The April and June 1997 agreements did
not change the original accounting for the Contingent Shares Guarantee noted
above.
In May 1998, the Company executed an agreement with PAG to issue an
additional 120,625 shares to PAG in exchange for cancellation of the Contingent
Shares Guarantee. The Company is in the process of valuing the 120,625 shares as
of May 1998 and will record the related expense during the second quarter of
fiscal 1999.
The debt issuance costs related to the PAG bridge loans were fully
amortized as of January 31, 1998.
The original bridge loan maturity dates were extended in February and March
1997 and the interest rate was increased to 16%. The loans remaining after a
$5,000 principal payment during the year ended January 31, 1997, in the
principal amount of $595,000, were repaid on July 3, 1997.
6. LIABILITY TO MANUFACTURER:
During 1994, the Company arranged for the manufacture of approximately
$2,500,000 of frozen cookie dough product. In 1995, all of this product was
either discarded by the manufacturer due to obsolescence or reworked and sold to
reduce the loss. Based upon a troubled debt restructuring negotiated with the
manufacturer, $2 per case of new product sold since March 1995 is deducted from
the monthly amount received by the Company from the manufacturer. (Note 1) The
Company may negotiate with the manufacturer related to a discount for early
payoff of the liability. Such discount, if any, will be recorded when final
settlement is made.
F-15
<PAGE> 68
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
6. LIABILITY TO MANUFACTURER, CONTINUED:
Estimated aggregate future payments based on historical data are as
follows:
<TABLE>
<S> <C>
YEAR ENDING JANUARY 31:
1999...................................................... $ 348,092
2000...................................................... 348,092
2001...................................................... 367,592
----------
Total............................................. 1,063,776
Less current portion...................................... (348,092)
----------
Noncurrent portion........................................ $ 715,684
==========
</TABLE>
7. INCOME TAXES:
The net deferred tax asset consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
1998
-----------
<S> <C>
Deferred tax assets, net:
Net operating loss carryforwards.......................... $ 1,437,286
Package design costs...................................... 48,627
License, net.............................................. (105,835)
Built-in-losses........................................... 91,785
Other..................................................... 8,640
-----------
1,480,503
Less valuation allowance.................................... (1,480,503)
-----------
Net deferred tax asset...................................... $ --
===========
</TABLE>
As a result of providing a valuation allowance equal to the net deferred
tax assets, there is no federal tax provision. The valuation allowance increased
from January 31, 1997 to January 31, 1998, by $1,047,601, due primarily to the
increase in net operating loss carryforwards. The valuation allowance increased
by a minor amount from January 31, 1998 to April 30, 1998, again primarily due
to an increase in net operating loss carryforwards. The provision for tax for
the years ended January 31, 1997 and 1998, and for the three month periods ended
April 30, 1997 and 1998, is the state minimum tax.
At January 31, 1998, the Company had approximately $3,700,000 and
$1,800,000 in net operating losses for federal and state tax purposes,
respectively, available to be carried forward to future periods. The
carryforwards expire from 2010 to 2012 for federal purposes and from 2000 to
2002 for state purposes.
During fiscal year ended January 31, 1996, the Company had more than a 50%
change in ownership. Section 382 of the Internal Revenue Code and comparable
state statutes impose certain annual limitations on the utilization of net
operating loss carryforwards to offset income in future periods. The amounts
shown above for the operating loss carryforwards consider the reductions under
the Code due to such ownership change.
The Company has plans for future equity transactions. If these transactions
are completed, it is likely that another 50% ownership change will occur within
the meaning of Section 382 of the Internal Revenue Code. If this occurs, there
may be further reductions in the ability to use the net operating losses of the
Company in future periods.
F-16
<PAGE> 69
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
8. SHAREHOLDERS' EQUITY:
Reverse Stock Split
In October 1996, the Company amended its articles of incorporation to
effect a one-for-ten reverse stock split. Subsequent to April 30, 1998, the
Board and the shareholders approved a one-for-three and two-tenths(3.2) reverse
stock split.
All common share and per share information in these financial statements
has been adjusted to reflect the reverse stock splits.
Preferred Stock
In January 1998, the Board approved amending the articles of incorporation
of the Company to authorize, subject to shareholder approval, 10,000,000 shares
of preferred stock. Subsequent to April 30, 1998 the shareholders voted to
approve such amendment to the articles of incorporation.
Pending Amendments to Articles of Incorporation
The amendments to the Company's articles of incorporation necessary to
effect the one-for-three and two-tenths reverse stock split and the
authorization for the issuance of preferred stock shall be effective upon filing
of such amendment with the California Secretary of State.
Shareholders' Equity Transactions for the Year Ended January 31, 1997
In May 1996, 688 shares valued at $3,960 were issued to an outside party
for services rendered to the Company.
In June 1996, the Company issued 54,687 shares of common stock to PAG
valued at $315,000 and the Contingent Shares Guarantee valued at $122,400 for
services provided in obtaining debt financing.
These shares issued were valued at $5.76 per share based on an independent
valuation.
In October 1996, the Company, in connection with management compensation
agreements, issued restricted shares aggregating 181,250 to four key employees
in exchange for notes aggregating $1,450,000 and treated as nonrecourse. The
Company recorded $12,171 of interest on such notes during the year ended January
31, 1997.
In January 1997, warrants issued in the original private placement offering
in 1994 were exercised; and the Company issued 20,343 shares in exchange for
notes totaling $65,100 bearing interest at 6.72% per annum. The Company is in
the process of finalizing a written extension of the shareholder notes which
were to mature on June 30, 1998.
Shareholders' Equity Transactions for the Year Ended January 31, 1998
On October 31, 1997, DayStar converted $75,000 of accrued interest into
9,375 shares of the Company's common stock, at fair market value.
During November 1997, the Company completed a private placement offering of
95,999 shares of common stock for $662,249, and recognized related deferred
offering costs of $614,271.
In December 1997, the Company issued 12,500 shares of common stock for
$85,000.
F-17
<PAGE> 70
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
8. SHAREHOLDERS' EQUITY, CONTINUED:
In November 1997, the C. Brands debt in the carrying amount of $570,089
(principal of $622,500, plus accrued interest, less unaccreted discount and
unamortized debt issuance costs), converted into 46,000 shares of common stock.
In connection with the final settlement of the placement agent agreement
with Capitol Bay Securities, the Company issued 14,375 shares of common stock
valued at $115,000.
Effective January 30, 1998, the Company forgave the employee notes
receivable and accrued interest to date thereon, totaling $1,472,009.
Shareholders' Equity Transactions Subsequent to January 31, 1998
As discussed in Note 5, the Company executed an agreement in May 1998 with
PAG to issue an additional 120,625 shares of common stock in exchange for
cancellation of the Contingent Shares Guarantee.
Common Stock Warrants
As part of the original private placement offerings in 1994 and 1995, the
Company issued warrants to purchase 70,781 shares of common stock at $3.20 per
share to several individuals, of which 5,125 expired January 31, 1997, and
20,343 were exercised as described above and 45,313 have been extended and
remain outstanding at January 31, 1998 and April 30, 1998, as described below.
Under their original terms, the 45,313 warrants were to expire March 6,
1998. Effective December 31, 1997, in connection with the final settlement of an
investment banking agreement, the term of the 45,313 remaining warrants at $3.20
per share was extended to April 15, 1999. The extended 45,313 warrants were
valued at $217,500 during the year ended January 31, 1998. The settlement
agreement also required the Company to issue new warrants to purchase 100,000
shares of common stock at $7.50 per share, which warrants were valued at $3,000.
As additional consideration for the DayStar Credit Facility, the Company
agreed to grant to DayStar, a related party, three year warrants to purchase
62,500 shares of common stock at $7.20 per share and 31,250 shares of common
stock at $16.00 per share. The warrants were valued at $21,000, and are
exercisable for three years commencing 90 days after the closing of an offering
of securities by the Company. As discussed in Note 4, the exercise price on the
warrants to purchase 31,250 shares was decreased from $16.00 to $7.20, effective
April 1998.
Certain piggy back registration rights were given to DayStar in connection
with the first 1933 Act registration statement, subject to the underwriter's
discretion.
In connection with the final settlement of the placement agent agreement
with Capitol Bay Securities, the Company issued warrants to purchase 148,000
shares of common stock at $7.50 per share, valued at $4,440.
9. STOCK OPTION PLAN:
In October 1996, the Company adopted a Stock Option Plan (Plan) which
provides for the issuance of incentive stock options or nonqualified stock
options to certain employees, officers, directors, and non-employees of up to
10% of the outstanding common shares of the Company in accordance with the Plan.
Under this Plan, incentive and nonqualified stock options are granted at prices
determined by the Stock Option Plan Committee (Committee) but shall not be less
than 85% of the fair market value of the underlying stock on the date of grant.
The exercise price of any incentive stock option granted under the Plan to a
more
F-18
<PAGE> 71
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
9. STOCK OPTION PLAN, CONTINUED:
than 10% shareholder shall be equal to at least 110% of the fair market value of
the underlying stock on the date of the grant. The term of options granted under
the plan may not exceed ten years, with vesting as determined by the Committee.
No options have been granted under the Plan.
10. RELATED-PARTY TRANSACTIONS:
Through October 1997, the Company shared office space and related
administrative expenses for a monthly flat rate of $2,000 with Capitol Bay
Group, a company controlled by a shareholder. For the years ended January 31,
1997 and 1998, these office and administrative expenses amounted to $24,000 and
$24,700, respectively, under a month-to-month agreement, which expired in
October 1997.
Effective November 1, 1997, the Company commenced a month-to-month tenancy
in a building owned by the Company's chief executive officer and another
shareholder of the Company. Accrued rent totaled $14,450 and $20,000 at January
31, 1998 and April 30, 1998, respectively. Rent expense for the year ended
January 31, 1998, and the three month period ended April 30, 1998, totaled
$15,579 and $16,766, respectively. The Company has provided notice that it
intends to relocate to a new nearby premises to be leased from an unrelated
party. It is anticipated that such relocation will occur in September 1998.
Included in interest expense, excluding amortization of debt issuance
costs, are amounts to related parties of $49,808, $190,935 and $55,660 for the
years ended January 31, 1997 and 1998, and three month period ended April 30,
1998, respectively.
In late calendar 1995 and continuing into calendar 1996, the Company
periodically borrowed various amounts not exceeding $50,000 at any time from
Capitol Bay Group, which amounts were repaid by May 1996, without interest.
In November 1996, the Company loaned $135,000 to Capitol Bay Group, which
was repaid within six days. Interest related to the loan approximated $400 and
was received in January 1997.
In connection with the Company's 1997 private placement offering of its
common stock, the Company entered into a placement agent agreement with Capitol
Bay Securities, Inc., a related party. Commissions and expenses to Capitol Bay
Securities, Inc. totaled $102,080 for the year ended January 31, 1998.
The Company amended its placement agent agreement with Capitol Bay
Securities, Inc. effective January 31, 1998. As compensation for the final
settlement of all of Capital Bay Securities, Inc.'s rights contained in the
original placement agent agreement, including its right of first refusal on
future offerings, Capitol Bay Securities, Inc. received 14,375 shares of the
Company's common stock valued at $115,000, and warrants to purchase 148,000
shares of the Company's common stock at $7.50 per share, exercisable commencing
January 30, 1999 through January 30, 2003, and valued at $4,440.
In connection with the final settlement of the placement agent agreement,
the Company also agreed to indemnify C. Brands by agreeing to issue up to 31,250
additional shares in the event of an adverse determination in a pending action
by the founder of the Company (Note 13).
At January 31, 1998, the Company had $73,775 receivable from Capitol Bay
Securities, Inc., a related party. In April 1998, the Company received a written
right to offset the receivable against notes payable and accrued interest to
Capitol Bay Securities, Inc. and related entities totaling $85,217. The offset
has been recorded as of April 30, 1998, resulting in a net payable to related
parties of $11,715.
F-19
<PAGE> 72
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
11. COMMITMENTS:
Consulting Services Agreement
In February 1996, the Company completed renegotiating an agreement for
consulting services with a shareholder. Under terms of the agreement, the
Company paid the consultant as current compensation $5,000 each month from
February 1996 through January 1997. Additionally, the agreement provided for the
payment of a maximum bonus of $60,000 contingent upon a company sales target for
the fiscal year ended January 31, 1997, which was not achieved. The agreement
also stipulated that all prior agreements with the Company and the shareholder
be canceled. In exchange for the cancellation of all prior agreements, the
Company agreed to pay $5,000 each month for twelve months with the final payment
in January 1997. The Company accrued the $60,000 liability as of January 31,
1996. The Company has extended the monthly consulting portion of the agreement
increasing the compensation to $6,000 per month for each of the years ending
January 31, 1998 and 1999, respectively, without any bonus arrangement.
Management Compensation
Pursuant to the Board of Directors' approval in October 1996, effective
September 1, 1996, and as amended on February 28, 1997 and January 30, 1998, the
Company entered into employment agreements with four key employees for
three-year terms, which will be automatically extended for an additional year
unless canceled by either party. Compensation may be increased by the Board of
Directors with respect to the chief executive officer or by the chief executive
officer with respect to the other employees during the term of the agreements.
The minimum aggregate compensation expense under these agreements is $520,000
and $347,000 in the fiscal years ending January 31, 1999 and January 31, 2000,
respectively.
In addition to the minimum compensation described above, such individuals
are entitled to an annual bonus calculated on targeted earnings for the year, as
defined. The bonus could reach between 45% and 70% of the annual minimum salary
noted above, plus additional amounts based upon earnings levels. Such bonuses
are paid to the individuals during the year based on predetermined percentages
and adjusted after year-end based on audited data. Bonuses were not earned or
paid related to the compensation agreements for the 1997 and 1998 fiscal years,
or for the three month period ended April 30, 1998.
Employee Stock Purchase Plan
As part of the compensation agreements described above, each individual was
granted the right to purchase shares of common stock of the Company pursuant to
a Restricted Stock Purchase Agreement. Vesting was to occur over a three year
period based on the terms of the agreements. Vesting and payment provisions were
amended in June 1997 to provide for vesting and payment for future stock
purchases ratably over a ten-year period. Vesting for one of the key employees,
as well as his $1,000,000 note payment term, was also extended to ten years in
the June 1997 amendment.
In October 1996, shares aggregating 181,250 were purchased under these
agreements at $8.00 per share by the issuance of notes in the aggregate
principal amount of $1,450,000, interest payable at 6.72%, maturing on the third
anniversary of the first issuance of a certificate of vesting by the Company,
subject to forfeiture in the event of early termination, certain repurchase
rights of the Company, and with certain anti-dilution protection. Such shares
were pledged as collateral on the notes. Effective January 31, 1997, the Company
and the key employees amended the note agreements to eliminate all prepayment
provisions. Therefore, from January 31, 1997 forward, the Company was not
required to evaluate compensation expense based on increases in the value of the
Company's common stock. Compensation expense was not recorded currently by the
Company as the value of the Company's stock at October 31, 1996 and January 31,
1997, of $6.08 and
F-20
<PAGE> 73
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
11. COMMITMENTS, CONTINUED:
$7.20 per share, respectively, based on an independent valuation, was below the
stock purchase price (including interest).
The shares, pursuant to the restricted stock purchase agreements described
above, were issued in accordance with an Employee Stock Purchase Plan adopted by
the Board of Directors in October 1996.
Effective January 30, 1998, the Company's Board of Directors approved the
forgiveness of employee notes totaling $1,450,000, and the accrued interest to
date of $22,009, resulting in expense upon the forgiveness of $1,472,009 during
the year ended January 31, 1998. In connection with the forgiveness, the
employees involved amended their respective employment agreements to eliminate
certain scheduled base salary increases. Upon the forgiveness of the employee
notes, the related shares of common stock fully vested to the employees.
The Board intends to terminate the Employee Stock Purchase Plan during the
year ending January 31, 1999.
12. OFFERINGS OF EQUITY SECURITIES:
The Company commenced an offering to private investors, on a best efforts
basis, of shares of its common stock at a price of $8.00 per share in July 1997.
The offering, which closed on November 27, 1997, resulted in net proceeds of
$747,249. In addition, $75,000 of accrued interest payable to DayStar on the
line of credit was converted into 9,375 shares of common stock of the Company.
Effective February 1998, the Company signed a letter of intent with another
underwriting firm in connection with a proposed initial public offering of
equity securities. The letter of intent is for a firm commitment to sell up to
1,500,000 units, each consisting of one share of common stock and one five year
warrant to purchase one additional share of common stock. The exercise price,
adjustments and redemption provisions of the warrants shall be agreed upon prior
to the closing of the offering.
13. CONTINGENCIES:
On November 19, 1997, a founder and shareholder holding in excess of 5% of
the Company's outstanding Common Stock, filed a lawsuit against the Company with
respect to:
(i) An August 1995 agreement entered into among the shareholder, the
Company and other parties providing for the establishment of a management
committee to restructure the Company. The August 1995 agreement involved the
infusion of new capital and the distribution of certain of the shareholder's
shares to other parties. The August 1995 agreement also contained mutual
releases and a waiver of certain provisions of the California Civil Code, the
intent of which was to waive the right of any party to assert claims including
those of which they might not have been aware at the time the general release
was given;
(ii) An alleged note due from the Company in the amount of $112,500, that
allegedly is still outstanding, plus accrued interest;
(iii) An allegation that the transfer of certain shares of the common stock
of the Company in 1995 pursuant to the August 1995 agreement is not valid; and
(iv) An allegation of back wages owing to him by the Company.
The maximum exposure related to the note and back wages is estimated to be
$370,000. In the opinion of management, the estimated exposure to the Company,
if any, is approximately $150,000. Such amount is accrued as of January 31, 1998
and April 30, 1998, and has been included in other expenses for the year ended
F-21
<PAGE> 74
LEGACY BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS CONTINUED
(UNAUDITED WITH RESPECT TO THE THREE MONTH PERIODS ENDED APRIL 30, 1997 AND
1998)
13. CONTINGENCIES, CONTINUED:
January 31, 1998. Management is also of the opinion that the transfer of certain
shares of common stock pursuant to the August 1995 agreement are valid and in
force. The Company believes it has substantial defenses to and offsets against
the claims.
14. SUBSEQUENT EVENTS:
The Company received a letter of intent dated May 15, 1998 and amended on
June
2, 1998, for a bridge loan from a third party lender in an amount up to
$500,000. Under the letter of intent:
- Interest on the loan accrues at 12%, increasing to 15% if the loan is
unpaid at September 1, 1998.
- An additional fee is also to be paid in an amount equal to 25% of amounts
drawn on the loan, with a maximum fee of $125,000.
- A due diligence fee of a maximum of $50,000 will be paid.
- Three-year warrants exercisable at 120% of the IPO price will be granted
to purchase the number of shares of common stock of the Company equal to
25% of the amount drawn on the loan.
- The loan will have a maturity of September 30, 1998, or five days after
the closing of an IPO.
- If the loan is not paid upon maturity, i) quarterly payments are to be
made over one year, each consisting of 25% of the principal and the
additional fee and all accrued interest, and ii) the exercise price on
the warrants decreases to $1.00 per share.
As of June 30, 1998, $40,000 in principal had been drawn on the loan plus
additional fees of $10,000 had accrued, for a total repayment obligation of
$50,000. The loan documents are in the process of being formalized.
The Company received a loan of $103,500 on July 6, 1998 from Larry Wells
Company, Inc., an affiliate of a director of the Company. If the loan is repaid
prior to October 31, 1998, a total of $115,000 shall be paid. If paid
thereafter, $145,000 shall be due increasing by $1,500 per month. The loan
documents are in the process of being formalized.
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<PAGE> 75
DESCRIPTION OF COLOR ART WORK ON INSIDE BACK COVER
A full page, full-color illustration of all of the stock keeping units
(boxes) currently in distribution by the Company, including seven boxes for Mrs.
Fields Frozen Cookie Dough in various sizes, five boxes of Mrs. Fields Ice Cream
novelties and one box of Gumby Freeze Pops. On the bottom right is an
illustration of the color logo for Mattel's Extreme Dinosaurs, recently licensed
by the Company.
<PAGE> 76
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE
INFORMATION IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 8
Corporate History...................... 15
Dividend Policy........................ 15
Use of Proceeds........................ 16
Capitalization......................... 17
Dilution............................... 18
Selected Financial Data................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 20
Business............................... 25
Management............................. 33
Certain Transactions................... 38
Principal Shareholders................. 41
Description of Securities.............. 43
Shares Eligible for Future Sale........ 46
Underwriting........................... 48
Legal Matters.......................... 50
Experts................................ 50
Additional Information................. 50
Index to Financial Statements.......... F-1
</TABLE>
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 DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,500,000 UNITS
EACH CONSISTING OF ONE SHARE OF
COMMON STOCK AND
ONE COMMON STOCK PURCHASE WARRANT
[Legacy Brands Logo]
LEGACY BRANDS, INC.
--------------------
PROSPECTUS
--------------------
PAULSON INVESTMENT
COMPANY, INC.
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
The Articles of Incorporation of Legacy Brands, Inc. (the "Company")
limit the liability of directors for monetary damages to the fullest extent
permitted under California law. The effect of this provision is that the Company
and shareholders, through derivative suits, may not recover monetary damages
against a director for any alleged failure to discharge one's duties as a
director, with certain exceptions. Directors may still be liable for monetary
damages for failure to discharge such duties for: (i) acts or omissions that
involve intentional misconduct or a knowing and culpable violation of the law,
(ii) acts and omissions that a director believes to be contrary to the best
interests of the Company or its shareholders or that involve the absence of good
faith on the part of the director, (iii) any transaction from which a director
derived an improper personal benefit, (iv) acts or omissions that show a
reckless disregard for the director's duty to the Company or its shareholders in
the circumstances in which the director was aware, or should have been aware, in
the ordinary course of performing a director's duties, of a risk of a serious
injury to the Company or its shareholders, (v) acts or omissions that constitute
an unexcused pattern of inattention that amounts to an abdication of the
director's duty to the Company or its shareholders, and (vi) any act or omission
as an officer, notwithstanding that the officer is also a director or that his
or her actions, if negligent or improper, have been ratified by the directors.
The Articles of Incorporation also allow the Company to indemnify any
director, officer, employee, agent or other person serving at the request of the
Company (collectively known as "Agent") for breach of duty to the Company and
its shareholders to the fullest extent allowed by California law. Generally
speaking the Company shall have the duty to indemnify any Agent who prevails on
the merits in defense of any action brought against him or her relating to
breach of Agent's duty to the Company or its Shareholders. The Company may
provide indemnification where Agent has acted in good faith and in a manner that
Agent reasonably believed was in the best interests of the Company and, in the
case of a criminal proceeding, where Agent had no reasonable cause to believe
that its conduct was unlawful. The Company shall not, with certain exceptions,
provide indemnification where it appears (i) that it would be inconsistent with
a provision of the Articles, bylaws, a resolution of the shareholders, or an
agreement in effect at the time of the accrual of the alleged cause of action
asserted in the proceeding in which the expenses were incurred or other amounts
were paid, which prohibits or otherwise limits indemnification, or (ii) that it
would be inconsistent with any condition expressly imposed by a court in
approving a settlement.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Company's expenses in connection with the offering, other than
underwriting discounts and commissions and the non-accountable expense
allowance, are set forth below. All of these amounts are estimates, except for
registration and filing fees.
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<PAGE> 78
<TABLE>
<CAPTION>
Amount Payable
by Registrant
-------------
<S> <C>
SEC Registration Fee............................... $ 6,958.33
NASD Filing Fee.................................... 2,858.76
NASDAQ Listing Fee................................. 20,000.00
Blue Sky Fees and Expenses......................... 40,000.00
Printing Costs..................................... 75,000.00
Registrar and Transfer Agent Fees.................. 20,000.00
Representative's Non-accountable Expense Allocation 225,000.00
Legal Fees and Expenses............................ 170,000.00
Accounting Fees and Expenses....................... 60,000.00
Miscellaneous...................................... 60,182.91
------------
Total $680,000.00
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
All information pertaining to outstanding shares herein are determined as if
the 1:10 reverse stock split effective in March, 1998 and the 1:3.2 stock split
effective prior to the Offering had been effective as of all relevant times
herein.
BRIDGE LOAN WARRANTS
Pursuant to a letter of intent dated May 15, 1998 and amended on June 2,
1998, the Company received a commitment for a bridge loan from a third party
lender in an amount up to $500,000. Under the terms of that commitment, the
Company will issue to the lender three-year warrants to purchase that number of
shares of the Common Stock of the Company equal to 20% of the principal amount
advanced, exercisable at 120% of the Offering price. As of June 30, 1998, the
lender had advanced $40,000.
The warrants will be issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended
(the "Act"). The lender is a single, sophisticated investor who also has a
lending relationship with the Company.
DECEMBER 31, 1997 HAAG, ET AL. WARRANTS
Pursuant to an Agreement for Termination, Release and Waiver of Rights
dated as of December 31, 1997, the Company extended five year warrants
previously issued to four individuals to purchase an aggregate of 45,312 shares
of the Common Stock of the Company, at a purchase price of $3.20 per share.
Additional five year warrants to purchase 100,000 shares of the Common Stock of
the Company at $7.50 were also issued to Haag (collectively, the "Haag
Warrants"). None of such warrants are exercisable until at least 90 days
following
II-2
<PAGE> 79
the closing of the Offering. The Haag Warrants were issued in consideration of
the settlement and release of any and all rights and claims that the holders may
have had against the Company based upon an Investment Banking Compensation
Agreement dated March 7, 1995.
The Haag Warrants were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Act. There were a total of four
recipients, each of whom had a pre-existing contractual relationship with the
Company and was a sophisticated investor.
1997 PRIVATE PLACEMENT OF COMMON STOCK
In the period between June and November 1997, the Company sold 108,499
shares of Common Stock at a per share price of $8.00 to a total of 16 investors
(the "1997 Private Placement"). The shares were offered on a best efforts basis
through Capitol Bay Securities ("Capitol Bay"), which was acting as the
Company's Placement Agent. Pursuant to the provisions of a Placement Agent
Agreement dated as of June 25, 1997, the Company paid an aggregate of $102,080
in cash compensation to Capitol Bay for the placement of the shares. By way of
final settlement of all of Capitol Bay's rights whether pursuant to the
Placement Agent Agreement or otherwise arising out of all transactions between
the parties since the August 8, 1995 Agreement, the Placement Agent Agreement
was amended as of November 27, 1997, and all rights thereunder and with respect
to any and all services previously provided by Capitol Bay Group or Capitol Bay
(including, without limitation, advice in connection with the reorganization of
the Company, infusions of capital and retention of new management), Capitol Bay
was granted 14,375 shares of Common Stock and warrants to purchase 138,750
shares of Common Stock at $8.00 per share, exercisable commencing January 30,
1999 through January 30, 2003. Additionally, an over payment of commissions
thereon in the amount of $72,975, plus interest of $2,047 (in the aggregate, the
"Commission Refund"), was repaid by Capitol Bay to the Company on April 15,
1998, in the form of an agreement to offset against such Commission Refund due
to the Company, an equal amount due by the Company to Capitol Bay and other
entities or individuals on whose behalf Capitol Bay was authorized to act, in
the principal amount of $60,000 plus interest thereon in the amount of $26,715.
The net difference of $11,715 will be paid by the Company to Capitol Bay from
the proceeds of the Offering.
The shares issued in the private placement were issued in reliance upon
the exemption from registration provided by Section 4(2) of the Act and Rule 506
of Regulation D promulgated thereunder. There were a total of 16 investors, of
whom 14 were accredited investors. The non accredited investors were provided
with a Private Placement Memorandum containing all of the information required
by Rule 502. Based upon the investor suitability questionnaires completed by the
purchasers who were not accredited investors, the Company reasonably believed
that such purchasers had such knowledge and experience in financial and business
matters that they were capable of evaluating the merits and risks of the
prospective investment.
APRIL 1997 DAYSTAR CREDIT FACILITY AND RELATED WARRANTS
The term DayStar ("DayStar") refers to three entities: DayStar Fund II,
L.L.C.; DayStar Partners, L.P. and Larry Wells Company, Inc. Both DayStar
Partners L.P. and DayStar Fund II, L.L.C. are managed by Larry Wells Company,
Inc. and are interrelated. Mr. Larry Wells, who is an affiliate of each of the
DayStar entities, was elected to serve as a director of the Company on January
30, 1998.
In April 1997, the Company entered into an agreement with DayStar
pursuant to which DayStar agreed to provide a credit facility to the Company in
an amount not to exceed $440,000 to be used for working capital
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<PAGE> 80
purposes (the "Initial Credit Facility"). The Company executed a seven-month
revolving promissory note providing for the payment of interest on amounts
outstanding at the initial rate of 12% per annum, payable at the maturity of the
note. In July 1997, a supplemental credit facility was provided by DayStar in
the aggregate additional amount of $408,000 (the "Supplemental Credit Facility,"
and together with the Initial Credit Facility, collectively, the "DayStar Credit
Facility") which was used to repay $400,000 of the $595,000 of PAG Bridge Notes
which were then maturing and due. In connection with the Supplemental Credit
Facility, the maturity of the entire DayStar Credit Facility was extended to
thirteen months from the date of the last advance (maturity date of August 3,
1998) and the 12% interest rate on the Initial Credit Facility was changed to
15% per annum effective January 1998, with interest on the Supplemental Credit
Facility being incurred at the rate of one percent per week. If the DayStar
Credit Facility is not repaid at maturity, the Company may repay the principal
and interest outstanding in monthly amounts of $20,000 with any unpaid amounts
due and payable at the expiration of 24 months.
In consideration for the granting of the DayStar Credit Facility, the
Company initially granted to DayStar warrants to purchase 31,250 shares of the
Common Stock at $7.20 per share and warrants to purchase 62,500 shares of the
Common Stock at $16.00 per share, exercisable during a three-year period
commencing 90 days after the closing of an offering of securities by the Company
(the "Facility Warrants"). In addition certain "piggyback" registration rights
were granted.
On October 30, 1997, DayStar purchased 9,375 shares of the Common Stock
of the Company in the 1997 Private Placement at a price of $8.00 per share, by
converting $75,000 due under the DayStar Credit Facility. As of March 31, 1998,
an aggregate of approximately $725,000 in principal and interest was due under
the DayStar Credit Facility. On April 17, 1998 DayStar agreed to fix the
interest payable under the Supplemental Credit Facility at an amount not to
exceed $39,100, the amount which would accrue thereon from January 1, 1998
through May 31, 1998, plus any amounts accrued and unpaid with respect to the
period preceding January 1, 1998, with no further interest to accrue thereafter
and to extend the maturity date to September 1, 1998. In consideration, the
Company agreed to revise the exercise price on the 31,250 Facility Warrants
originally exercisable at $16.00 per share to $7.20 per share, such that all
93,750 of the Facility Warrants are now exercisable at $7.20 per share. Interest
continues to accrue on the Initial Credit Facility at the note rate of 15% per
annum. It is the intent of the Company to repay the entire DayStar Credit
Facility from the proceeds of the Offering.
The notes issued by the Company in connection with the DayStar Credit
Facility and the Facility Warrants were issued to DayStar in reliance upon the
exemption from registration provided by Section 4(2) of the Act and Rule 506 of
Regulation D promulgated thereunder. Larry J. Wells, the managing member of
DayStar is a sophisticated investor with a long-standing relationship with the
Company.
C BRANDS NOTES; CONVERSION OF NOTES INTO COMMON STOCK
Pursuant to a Memorandum of Agreement, dated August 8, 1995, between the
Company, Gregory Plunkett ("Plunkett"), the founder of the Company and a holder
of in excess of 5% of the Common Stock of the Company, Capitol Bay and various
other shareholders of the Company (the "August 8, 1995 Agreement"), Capitol Bay
Group committed and undertook, through and on behalf of its affiliated entity,
Capitol Bay Securities, although not a party to the August 8, 1995 Agreement or
a signatory to the August 1, 1995 Letter Agreement referenced in the August 8,
1995 Agreement, to certain actions therein, including raising financing for the
Company. Thereafter, in January 1996, the Company issued a convertible
promissory note (the "Initial
II-4
<PAGE> 81
Note") to C. Brands, the "investor" contemplated in the August 8, 1995
Agreement, in exchange for funds provided in the amount of $215,000. On October
31, 1996, the Company issued a second convertible promissory note in the
principal amount of $407,500 (the "Supplemental Note" and collectively the
"Notes"). Effective November 27, 1997, the entire principal and interest of
$736,000 owing under the Notes was converted into 46,000 shares of the Company's
Common Stock.
The C Brands Notes were issued to C Brands in reliance upon the
exemption from registration provided by Section 4(2) of the Act. The notes were
converted into common stock in reliance upon the exemption from registration
provided by Section 3(a)(9) of the Act. C Brands is a single, sophisticated
investor with a long-standing relationship with the Company. The manager of C
Brands is Mr. Stephen C. Kircher. Mr. Kircher is a shareholder of the Company
and is President of Capitol Bay, which has served as a placement agent with
respect to certain private placements previously made by the Company.
JANUARY 1996 CAPITOL BAY WARRANTS
Warrants to purchase 18,750 shares of Common Stock at $8.00 per share
were issued to Capitol Bay during the fiscal year ended January 31, 1996 for
services performed in connection with certain private placements provided to the
Company. These warrants expired, unexercised, on January 31, 1997.
The warrants were issued in reliance upon the exemption provided by
Section 4(2) of the Act. Capitol Bay is a single, sophisticated investor with a
long-standing business relationship with the Company.
PACIFIC ACQUISITION GROUP TRANSACTIONS
During the period commencing in November 1995 and ending in March 1996,
the Company engaged in a private placement pursuant to which it sold $300,000 of
its one year promissory notes (the "Bridge Notes"), bearing interest at a rate
of 15% per annum and maturing on the anniversary of the date of issuance. In
June 1996, the Company sold an additional $300,000 of the Bridge Notes, bearing
interest at a rate of 15% per annum. Pacific Acquisition Group, Inc. ("PAG")
acted as placement agent in connection with these private placements and was
paid cash commissions of $90,000. All of the Bridge Notes were paid in full in
June 1997.
Pursuant to various amendments to the Bridge Loan and Consulting
Agreement between Legacy and PAG (collectively, the "Amended Agreement"), the
Company has issued an aggregate of 63,333 shares of Common Stock to PAG, and had
agreed to issue additional shares, up to a maximum of 200,000 shares, in the
event that the value of the Common Stock holdings of PAG were less than
$1,300,000 as measured 12 months following the commencement of trading in the
Common Stock (the "PAG Contingency"). Pursuant to the Amended Agreement, the
Company has granted certain "piggy-back" registration rights to PAG, and Capitol
Bay Securities was granted a first right of refusal to purchase any of the
Common Stock subject to the Amended Agreement. Pursuant to a Supplement to
Second Amended Bridge Loan and Consulting Agreement dated as of May 8, 1998 (the
"Supplemental Agreement"), the parties agreed to deem the PAG Contingency
satisfied in consideration of the issuance of 120,625 shares of Common Stock to
be issued following the closing of the Offering. The Supplemental Agreement
includes a full accord and satisfaction and mutual general releases between the
parties. The registration rights and first right of refusal in favor of Capitol
Bay Securities remain in effect.
The Bridge Notes were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Act and Rule 506 of Regulation D
promulgated thereunder. There were a total of 37 investors. Of the 37
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<PAGE> 82
investors, 21 were accredited investors. The non accredited investors were
provided with a Private Placement Memorandum containing all of the information
required by Rule 502. Based upon the information provided by the purchasers who
were not accredited investors, the Company reasonably believed that such
purchasers, either alone or together with their purchaser representatives, had
such knowledge and experience in financial and business matters that they were
capable of evaluating the merits and risks of the prospective investment.
The shares of Common Stock were issued to PAG in reliance upon the
exemption from registration provided by Section 4(2) of the Act. PAG is a
single, sophisticated investor with a long-standing relationship with the
Company.
ITEM 27. EXHIBITS
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT
NO. Description
--- -----------
<S> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Agreement Among Underwriters***
1.3 Form of Selected Dealer Agreement***
3(i).1 Articles of Incorporation dated February 14, 1994*
3(i).2 Certificate of Amendment of Articles of Incorporation dated March 10,
1994*
3(i).3 Certificate of Amendment of Articles of Incorporation dated January 27,
1995*
3(i).4 Certificate of Amendment of Articles of Incorporation dated March 6,
1996*
3(i).5 Certificate of Amendment of Articles of Incorporation dated March 13,
1998
3(i).6 Certificate of Amendment of Articles of Incorporation dated July ,
1998***
3(ii).1 Bylaws*
3(ii).2 Amendment to Bylaws
4.1 Form of Representative Warrant
4.2 Specimen of Common Stock Certificate
4.3 Warrant Agreement with U. S. Stock Transfer, including form of Warrant
***
5 Opinion of Resch Polster Alpert & Berger LLP re legality***
10.1 Trademark License Agreement between Mrs. Fields Development Corporation
and Plunkett, Inc. dated August 14, 1994* 10.2 First Amendment to
Trademark License Agreement between Mrs. Fields Development Corporation
and Plunkett, Inc. [March 28, 1996]*
10.3 License Agreement by and between AJM Marketing Enterprises, Inc./Prema
Toy Co., Inc. and Legacy Brands, Inc. [Gumby -- September 1, 1996]*
</TABLE>
II-6
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT
NO. Description
--- -----------
<S> <C>
10.4 Letter Agreement relating to license for the property "Extreme
Dinosaurs," dated July 8, 1997
10.5 Stock Option Plan, Form of Incentive Stock Option Agreement, Form of
Non-Qualified Stock Option Agreement*
10.6 Employee Stock Purchase Plan
10.7 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Thomas E. Kees*
10.8 Amendment to Employment Agreement, dated February 28, 1997, by and
between Legacy Brands, Inc. and Mr. Kees*
10.9 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Michael E. Banks
10.10 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Craig Connerty
10.11 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Steven Riccardelli
10.12 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Thomas E. Kees
10.13 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Michael E. Banks
10.14 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Craig Connerty
10.15 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Steven Riccardelli
10.16 Second Amended and Restated Bridge Loan and Consulting Agreement by and
between Pacific Acquisition Group, Inc. and Legacy Brands, Inc., dated
June, 1997
10.17 Supplement to Second Amended Bridge Loan and Consulting Agreement dated
May 8, 1998
10.18 Investment Banking Compensation Agreement between Greg Plunkett, Inc.
and Steve Jizmagian and Randy Haag dated March 7, 1995
10.19 Agreement for Termination, Release and Waiver of Rights between Legacy
Brands, Inc., Jizmagian and Haag dated December 31, 1997
10.20 Common Stock Purchase Warrants issued in connection with the
Termination, Release and Waiver of Rights between Legacy Brands, Inc.,
Jizmagian and Haag
10.21 Credit Facility Agreement by and between Legacy Brands, Inc., and
DayStar, LLC*
10.22 Supplemental Credit Facility Agreement by and between Legacy Brands,
Inc. and DayStar, LLC*
</TABLE>
II-7
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NO. Description
<S> <C>
10.23 Amended Promissory Note payable by Legacy Brands, Inc. to Paulson
Investment Company, Inc., dated June 23, 1998
10.24 Letters to Legacy Brands, Inc. from C&K Capital Corporation, dated May
15, 1998 and June 2, 1998
10.25 Correspondence between Legacy Brands, Inc., and Pennant Foods (formerly
known as "Van den Bergh Foods Company") dated March 16, 1995, January
15, 1996, January 22, 1996, June 14, 1996, October 9, 1996, November 1,
1996, December 11, 1996, December 27, 1996 and March 4, 1997
10.26 Manufacturing Agreement by and between Legacy Brands, Inc., and Kisko
Products dated May 28, 1997
10.27 Placement Agent Agreement between Legacy Brands, Inc. and Capitol Bay
Securities dated June 25, 1997*
10.28 Amendment No. 2 to Private Placement Agent Agreement between Capitol Bay
Securities and Legacy Brands, Inc., dated as of November 27, 1997
10.29 Warrant and Share Purchase Agreement between Legacy Brands, Inc. and
Capitol Bay Securities, dated November 27, 1997
10.30 Common Stock Purchase Warrant issued to Capitol Bay Securities dated
January 30, 1998
10.31 Memorandum of Agreement, dated August 18, 1995, re restructuring and
recapitalization of Company**
10.32 Letter Agreement between Legacy Brands, Inc., C Brands Management LLC
and Capitol Bay Group relating to conversion and indemnification, dated
January 30, 1998
12.1 Consent of Resch Polster Alpert & Berger LLP***
12.2 Consent of PricewaterhouseCoopers LLP
24 Power of Attorney (see signature page)
27 Financial Data Schedule
</TABLE>
- -------------------
* Incorporated by reference from Legacy Brands, Inc.'s Registration Statement
on Form 10-SB filed with the Securities and Exchange Commission on July 31,
1997.
** Incorporated by reference from Legacy Brands, Inc.'s Quarterly Report on
Form 10-QSB for the Quarterly Period ended October 31, 1997.
*** To be provided by amendment.
ITEM 28. UNDERTAKINGS
The Company will file, during any period in which it offers or sell
securities, a post-effective amendment to this registration statement to: (i)
include any prospectus required by Section 10(a)(3) of the Securities Act; (ii)
II-8
<PAGE> 85
reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement, (iii) include additional or changed material information
on the plan of distribution, and (iv) file a post-effective amendment to remove
from registration any of the securities that remain unsold at the end of the
offering. For determining liability under the Securities Act, the Company will
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.
The Company will provide to the Underwriter at the closing or closings
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
For determining liability under the Securities Act, the Company will
treat the information omitted from the prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Company under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
For determining liability under the Securities Act, the Company will
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 that offering of the securities at that time as the initial bona
fide offering of those securities.
II-9
<PAGE> 86
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, in the City of Roseville, State of California,
on July 8, 1998.
LEGACY BRANDS, INC.
By: /s/ Thomas E. Kees
------------------------------------
Thomas E. Kees, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below appoints Thomas E. Kees his true and lawful attorney-in-fact and agent,
with full power of substitution for him and in his name, place and stead, in any
and all capacities, to sign any or all amendments (including post-effective
amendments) to this Registration Statement, and any related Registration
Statement filed pursuant to Rule 462(b) of the rules adopted by the Securities
and Exchange Commission under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes he might or could do in person,
hereby ratifying and conforming all that such attorney-in-fact and agent, or his
substitute may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Thomas E. Kees President, Chief Executive Officer, July 6, 1998
- -------------------- Chairman and Director (Principal Executive
Thomas E. Kees Officer)
/s/ Arthur L. Patch Director July 3, 1998
- --------------------
Arthur L. Patch
/s/ Larry J. Wells Director July 1, 1998
- --------------------
Larry J. Wells
/s/ Craig C. Connerty Chief Financial Officer and July 6, 1998
- -------------------- Treasurer (Principal Financial and
Craig C. Connerty Accounting Officer)
</TABLE>
II-10
<PAGE> 87
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. Description
--- -----------
<S> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Agreement Among Underwriters***
1.3 Form of Selected Dealer Agreement***
3(i).1 Articles of Incorporation dated February 14, 1994*
3(i).2 Certificate of Amendment of Articles of Incorporation dated March 10,
1994*
3(i).3 Certificate of Amendment of Articles of Incorporation dated January 27,
1995*
3(i).4 Certificate of Amendment of Articles of Incorporation dated March 6,
1996*
3(i).5 Certificate of Amendment of Articles of Incorporation dated March 13,
1998
3(i).6 Certificate of Amendment of Articles of Incorporation dated July ,
1998***
3(ii).1 Bylaws*
3(ii).2 Amendment to Bylaws
4.1 Form of Representative Warrant
4.2 Specimen of Common Stock Certificate
4.3 Warrant Agreement with U. S. Stock Transfer, including form of Warrant
***
5 Opinion of Resch Polster Alpert & Berger LLP re legality***
10.1 Trademark License Agreement between Mrs. Fields Development Corporation
and Plunkett, Inc. dated August 14, 1994* 10.2 First Amendment to
Trademark License Agreement between Mrs. Fields Development Corporation
and Plunkett, Inc. [March 28, 1996]*
10.3 License Agreement by and between AJM Marketing Enterprises, Inc./Prema
Toy Co., Inc. and Legacy Brands, Inc. [Gumby -- September 1, 1996]*
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NO. Description
--- -----------
<S> <C>
10.4 Letter Agreement relating to license for the property "Extreme
Dinosaurs," dated July 8, 1997
10.5 Stock Option Plan, Form of Incentive Stock Option Agreement, Form of
Non-Qualified Stock Option Agreement*
10.6 Employee Stock Purchase Plan
10.7 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Thomas E. Kees*
10.8 Amendment to Employment Agreement, dated February 28, 1997, by and
between Legacy Brands, Inc. and Mr. Kees*
10.9 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Michael E. Banks
10.10 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Craig Connerty
10.11 Employment Agreement, dated October 30, 1996, by and between Legacy
Brands, Inc. and Steven Riccardelli
10.12 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Thomas E. Kees
10.13 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Michael E. Banks
10.14 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Craig Connerty
10.15 Agreement and Mutual Release dated as of January 30, 1998, by and
between Legacy Brands Inc. and Steven Riccardelli
10.16 Second Amended and Restated Bridge Loan and Consulting Agreement by and
between Pacific Acquisition Group, Inc. and Legacy Brands, Inc., dated
June, 1997
10.17 Supplement to Second Amended Bridge Loan and Consulting Agreement dated
May 8, 1998
10.18 Investment Banking Compensation Agreement between Greg Plunkett, Inc.
and Steve Jizmagian and Randy Haag dated March 7, 1995
10.19 Agreement for Termination, Release and Waiver of Rights between Legacy
Brands, Inc., Jizmagian and Haag dated December 31, 1997
10.20 Common Stock Purchase Warrants issued in connection with the
Termination, Release and Waiver of Rights between Legacy Brands, Inc.,
Jizmagian and Haag
10.21 Credit Facility Agreement by and between Legacy Brands, Inc., and
DayStar, LLC*
10.22 Supplemental Credit Facility Agreement by and between Legacy Brands,
Inc. and DayStar, LLC*
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT
NO. Description
--- -----------
<S> <C>
10.23 Promissory Note payable by Legacy Brands, Inc. to Paulson Investment
Company, Inc., dated March 4, 1998
10.24 Letters to Legacy Brands, Inc. from C&K Capital Corporation, dated May
15, 1998 and June 2, 1998
10.25 Correspondence between Legacy Brands, Inc., and Pennant Foods (formerly
known as "Van den Bergh Foods Company") dated March 16, 1995, January
15, 1996, January 22, 1996, June 14, 1996, October 9, 1996, November 1,
1996, December 11, 1996, December 27, 1996 and March 4, 1997
10.26 Manufacturing Agreement by and between Legacy Brands, Inc., and Kisko
Products dated May 28, 1997
10.27 Placement Agent Agreement between Legacy Brands, Inc. and Capitol Bay
Securities dated June 25, 1997*
10.28 Amendment No. 2 to Private Placement Agent Agreement between Capitol Bay
Securities and Legacy Brands, Inc., dated as of November 27, 1997
10.29 Warrant and Share Purchase Agreement between Legacy Brands, Inc. and
Capitol Bay Securities, dated November 27, 1997
10.30 Common Stock Purchase Warrant issued to Capitol Bay Securities dated
January 30, 1998
10.31 Memorandum of Agreement, dated August 18, 1995, re restructuring and
recapitalization of Company**
10.32 Letter Agreement between Legacy Brands, Inc., C Brands Management LLC
and Capitol Bay Group relating to conversion and indemnification, dated
January 30, 1998
12.1 Consent of Resch Polster Alpert & Berger LLP***
12.2 Consent of PricewaterhouseCoopers LLP
24 Power of Attorney (see signature page)
27 Financial Data Schedule
</TABLE>
- -------------------
* Incorporated by reference from Legacy Brands, Inc.'s Registration Statement
on Form 10-SB filed with the Securities and Exchange Commission on July 31,
1997.
** Incorporated by reference from Legacy Brands, Inc.'s Quarterly Report on
Form 10-QSB for the Quarterly Period ended October 31, 1997.
*** To be provided by amendment.
<PAGE> 1
EXHIBIT 1.1
1,500,000 UNITS
LEGACY BRANDS, INC.
UNDERWRITING AGREEMENT
_________________, 1998
Paulson Investment Company, Inc.
As Representative of the Several Underwriters
811 SW Naito Parkway, Suite 200
Portland, Oregon 97204
Gentlemen:
Legacy Brands, Inc., a California corporation (the "Company"), proposes
to sell to the several underwriters (the "Underwriters") named in Schedule I
hereto for whom you are acting as Representative (the "Representative") an
aggregate of 1,500,000 Units (the "Firm Units"). Each Unit will consist of one
share of the Company's Common Stock, no par value, substantially in the form
filed as an exhibit to the Registration Statement (herein defined) ("Preferred
Stock"), and one Common Stock Purchase Warrant substantially in the form filed
as an exhibit to the Registration Statement ("Warrants"). The respective amounts
of the Firm Units to be so purchased by the several Underwriters are set forth
opposite their names in Schedule I hereto. The Company also proposes to grant to
the Representative an option to purchase an aggregate up to 225,000 additional
Units, identical to the Firm Units, (the "Option Units") as set forth below. The
offer and sale of the Firm Units and the Option Units pursuant to this Agreement
is referred to as the "Offering."
As the Representative, you have advised the Company (a) that you are
authorized to enter into this Agreement for yourself as the Representative and
on behalf of the several Underwriters, and (b) that the several Underwriters are
willing, acting severally and not jointly, to purchase the number of Firm Units
set forth opposite their respective names in Schedule I. The Firm Units and the
Option Units (to the extent the aforementioned option is exercised) are herein
collectively called the "Units."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
<PAGE> 2
1. Representations and Warranties of the Company.
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form SB-2 (File No.
333-_________) with respect to the Units has been carefully prepared by the
Company in conformity with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder and has
been filed with the Commission. Copies of such registration statement, including
any amendments thereto, the preliminary prospectuses (meeting the requirements
of the Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have heretofore been
delivered by the Company to you. Such registration statement, together with any
registration statement filed by the Company pursuant to Rule 462(b) of the Act,
herein referred to as the "Registration Statement," which shall be deemed to
include all information omitted therefrom in reliance upon Rule 430A and
contained in the Prospectus referred to below, has become effective under the
Act and no post-effective amendment to the Registration Statement has been filed
as of the date of this Agreement. "Prospectus" means (a) the form of prospectus
first filed with the Commission pursuant to Rule 424(b) or (b) the last
preliminary prospectus included in the Registration Statement filed prior to the
time it becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Units, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus."
(b)(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
California, with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement. The Company
is duly qualified to transact business in all jurisdictions in which the conduct
of its business requires such qualification.
(ii) The Company has no subsidiaries and does not own and
never has owned a controlling interest in any corporation or other business
entity that has or ever has had any material assets, liabilities or operations.
(c) This Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of, the Company, enforceable
against it in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(d) The outstanding shares of Common Stock of the Company have
been duly authorized and validly issued and are fully paid and nonassessable and
have been issued and sold by the Company in compliance in all material respects
with applicable securities laws; the Warrants to be included in the Units have
been duly authorized and when issued and paid for as contemplated
<PAGE> 3
herein will be validly issued, fully paid and nonassessable; and no preemptive
rights of shareholders exist with respect to any security of the Company or the
issue and sale thereof. Neither the filing of the Registration Statement nor the
offering or sale of the Units as contemplated by this Agreement gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock or other securities
of the Company.
(e) The information set forth under the caption "Capitalization"
in the Prospectus is true and correct. The Common Stock and the Warrants conform
to the description thereof contained in the Registration Statement. The form of
certificates for the Common Stock and Warrants conform to the corporate law of
the jurisdiction of the Company's incorporation.
(f) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of the
Units nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and will
conform, to the requirements of the Act and the Rules and Regulations. The
Registration Statement and any amendment thereto do not contain, and will not
contain, any untrue statement of a material fact and do not omit, and will not
omit, to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. The Prospectus and any amendments
and supplements thereto do not contain, and will not contain, any untrue
statement of material fact; and do not omit, and will not omit, to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the Company makes no representations or
warranties as to information contained in or omitted from the Registration
Statement or the Prospectus, or any such amendment or supplement, in reliance
upon, and in conformity with, written information furnished to the Company by or
on behalf of any Underwriter through the Representative, specifically for use in
the preparation thereof.
(g) The financial statements of the Company, together with
related notes thereto as set forth in the Registration Statement, present fairly
the financial position and the results of operations and cash flows of the
Company at the indicated dates and for the indicated periods. Such financial
statements have been prepared in accordance with generally accepted principles
of accounting, consistently applied throughout the periods involved, except as
disclosed herein, and all adjustments necessary for a fair presentation of
results for such periods have been made. The summary financial and statistical
data of the Company included in the Registration Statement present fairly the
information shown therein and such data have been compiled on a basis consistent
with the financial statements presented therein and the books and records of the
Company.
(h) Coopers & Lybrand LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(i) There is no action, suit, claim or proceeding pending or, to
the knowledge of the Company, threatened against the Company before any court or
administrative agency or otherwise which if determined adversely to the Company
might result in any material adverse change in the
3
<PAGE> 4
earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company or to prevent the
consummation of the transactions contemplated hereby, except as set forth in the
Registration Statement.
(j) The Company has good and marketable title to all of the
properties and assets reflected in the financial statements (or as described in
the Registration Statement) hereinabove described, subject to no lien, mortgage,
pledge, charge or encumbrance of any kind except those reflected in such
financial statements (or as described in the Registration Statement) or which
are not material in amount. The Company occupies its leased properties under
valid and binding leases conforming in all material respects to the description
thereof set forth in the Registration Statement.
(k) The Company has filed all Federal, State, local and foreign
income tax returns which have been required to be filed and have paid all taxes
indicated by said returns and all assessments received by it to the extent that
such taxes have become due and are not being contested in good faith. All tax
liabilities have been adequately provided for in the financial statements of the
Company.
(l) Since the respective dates as of which information is given
in the Registration Statement, as it may be amended or supplemented, there has
not been any material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise), or
prospects of the Company, whether or not occurring in the ordinary course of
business, and there has not been any material transaction entered into or any
material transaction that is probable of being entered into by the Company,
other than transactions in the ordinary course of business and changes and
transactions described in the Registration Statement, as it may be amended or
supplemented. The Company has no material contingent obligations which are not
disclosed in the Company's financial statements included in the Registration
Statement or elsewhere in the Prospectus.
(m) The Company is not, nor, with the giving of notice or lapse
of time or both, will it be, in violation of or in default under its Articles of
Incorporation or Bylaws or under any agreement, lease, contract, indenture or
other instrument or obligation to which it is a party or by which it, or any of
its properties, is bound and which default is of material significance in
respect of the condition, financial or otherwise of the Company, or the
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company. The execution and delivery
of this Agreement and the consummation of the transactions herein contemplated
and the fulfillment of the terms hereof will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust or other agreement or instrument to which the
Company is a party, or of the Articles of Incorporation or Bylaws of the Company
or any order, rule or regulation applicable to the Company of any court or of
any regulatory body or administrative agency or other governmental body having
jurisdiction.
(n) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the
4
<PAGE> 5
National Association of Securities Dealers, Inc. (the "NASD") or such additional
steps as may be necessary to qualify the Units for public offering by the
Underwriters under state securities or Blue Sky laws) has been obtained or made
and is in full force and effect.
(o) The Company holds all material patents, patent rights
trademarks, trade names, copyrights, trade secrets and licenses of any of the
foregoing (collectively, "Intellectual Property Rights") that are necessary to
the conduct of its businesses; there is no claim pending or, to the best
knowledge of the Company, threatened against the Company alleging any
infringement of Intellectual Property Rights, or any violation of the terms of
any license relating to Intellectual Property Rights, nor does the Company know
of any basis for any such claim. The Company knows of no material infringement
by others of Intellectual Property Rights owned by or licensed to the Company.
The Company has obtained, is in compliance in all material respects with and
maintains in full force and effect all material licenses, certificates, permits,
orders or other, similar authorizations granted or issued by any governmental
agency (collectively "Government Permits") required to conduct its business as
it is presently conducted. All applications for additional Government Permits
described in the Prospectus as having been made by the Company have been
properly and effectively made in accordance with the applicable laws and
regulations with respect thereto and such applications constitute, in the best
judgment of the Company's management, those reasonably required to have been
made in order to carry out the Company's business plan as described in the
Prospectus. No proceeding to revoke, limit or otherwise materially change any
Government Permit has been commenced or, to the Company's best knowledge, is
threatened against the Company with respect to materials supplied to the
Company, and the Company has no reason to anticipate that any such proceeding
will be commenced against the Company. Except as disclosed or contemplated in
the Prospectus, the Company has no reason to believe that any pending
application for a Government Permit will be denied or limited in a manner
inconsistent with the Company's business plan as described in the Prospectus.
(p) The Company is in all material respects in compliance with
all applicable Environmental Laws. The Company has no knowledge of any past,
present or, as anticipated by the Company, future events, conditions,
activities, investigation, studies, plans or proposals that (i) would interfere
with or prevent compliance with any Environmental Law by the Company or (ii)
could reasonably be expected to give rise to any common law or other liability,
or otherwise form the basis of a claim, action, suit, proceeding, hearing or
investigation, involving the Company and related in any way to Hazardous
Substances or Environmental Laws. Except for the prudent and safe use and
management of Hazardous Substances in the ordinary course of the Company's
business, (i) no Hazardous Substance is or has been used, treated, stored,
generated, manufactured or otherwise handled on or at any Facility and (ii) to
the Company's best knowledge, no Hazardous Substance has otherwise come to be
located in, on or under any Facility. No Hazardous Substances are stored at any
Facility except in quantities necessary to satisfy the reasonably anticipated
use or consumption by the Company. No litigation, claim, proceeding or
governmental investigation is pending regarding any environmental matter for
which the Company has been served or otherwise notified or, to the knowledge of
the Company, threatened or asserted against the Company, or the officers or
directors of the Company, in their capacities as such, or any Facility or the
Company's business. There are no orders, judgments or decrees of any court or of
any governmental agency or instrumentality under any Environmental Law which
specifically apply to the Company, any Facility or any of the
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<PAGE> 6
Company's operations. The Company has not received from a governmental authority
or other person (i) any notice that it is a potentially responsible person for
any Contaminated site or (ii) any request for information about a site alleged
to be Contaminated or regarding the disposal of Hazardous Substances. There is
no litigation or proceeding against any other person by the Company regarding
any environmental matter. The Company has disclosed in the Prospectus or made
available to the Underwriters and their counsel true, complete and correct
copies of any reports, studies, investigations, audits, analysis, tests or
monitoring in the possession of or initiated by the Company pertaining to any
environmental matter relating to the Company, its past or present operations or
any Facility.
For the purposes of the foregoing paragraph, 'Environmental Laws" means
any applicable federal, state or local statute, regulation, code, rule,
ordinance, order, judgment, decree, injunction or common law pertaining in any
way to the protection of human health or the environment, including without
limitation, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Toxic Substances
Control Act, the Clean Air Act, the Federal Water Pollution Control Act and any
similar or comparable state or local law; "Hazardous Substance" means any
hazardous, toxic, radioactive or infectious substance, material or waste as
defined, listed or regulated under any Environmental Law; "Contaminated" means
the actual existence on or under any real property of Hazardous Substances, if
the existence of such Hazardous Substances triggers a requirement to perform any
investigatory, remedial, removal or other response action under any
Environmental Laws or if such response action legally could be required by any
governmental authority; "Facility" means any property currently owned, leased or
occupied by the Company.
(q) Neither the Company, nor to the Company's best knowledge, any
of its affiliates, has taken or intends to take, directly or indirectly, any
action designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the Units, Common
Stock or Warrants.
(r) The Company is not an "investment company" within the meaning
of such term under the Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder.
(s) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(t) The Company carries, or is covered by, insurance in such
amounts and covering such risks as is adequate for the conduct of their
respective businesses and the value of their respective properties and as is
customary for companies engaged in similar industries.
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(u) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Section 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
(v) The Company is in material compliance with all laws, rules,
regulations, orders of any court or administrative agency, operating licenses or
other requirements imposed by any governmental body applicable to it, including,
without limitation, all applicable laws, rules, regulations, licenses or other
governmental standards applicable to the industries in which the Company
operates; and the conduct of the business of the Company, as described in the
Prospectus, will not cause the Company to be in violation of any such
requirements.
(w) The Warrants have been authorized for issuance to the various
purchasers of the Units and will, when issued, possess rights, privileges, and
characteristics as represented in the most recent form of Warrants filed as an
exhibit to the Registration Statement; the securities to be issued upon exercise
of the Warrants, when issued and delivered against payment therefor in
accordance with the terms of the Warrants, will be duly and validly issued,
fully paid, nonassessable and free of preemptive rights, and all corporate
action required to be taken for the authorization and issuance of the Warrants,
and the securities to be issued upon their exercise, have been validly and
sufficiently taken.
(x) The Representative's Warrants (as defined in Paragraph (d) of
Section 2 hereof) have been authorized for issuance to the Representative and
will, when issued, possess rights, privileges, and characteristics as
represented in the most recent form of Representative's Warrants filed as an
exhibit to the Registration Statement; the securities to be issued upon exercise
of the Representative's Warrants, when issued and delivered against payment
therefor in accordance with the terms of the Representative's Warrants, will be
duly and validly issued, fully paid, nonassessable and free of preemptive
rights, and all corporate action required to be taken for the authorization and
issuance of the Representative's Warrants, and the securities to be issued upon
their exercise, have been validly and sufficiently taken.
(y) Except as disclosed in the Prospectus, neither the Company,
nor any of its officers, directors or affiliates have caused any person, other
than the Underwriters, to be entitled to reimbursement of any kind, including,
without limitation, any compensation that would be includable as underwriter
compensation under the NASD's Corporate Financing Rule with respect to the
offering of the Units, as a result of the consummation of such offering based on
any activity of such person as a finder, agent, broker, investment adviser or
other financial service provider.
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<PAGE> 8
(z) There are no business relationships or related party
transactions involving the Company or any other person required to be described
in the Prospectus that have not been described as required.
2. Purchase, Sale and Delivery of the Units.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees, severally and
not jointly, to purchase, at a price of $_____ per Unit (representing a 10%
discount from the initial public offering price of the Units), the number of
Firm Units set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Units to be sold hereunder is to be made
in New York Clearing House funds and, at the option of the Representative, by
certified or bank cashier's checks drawn to the order of the Company or bank
wire to an account specified by the Company against either uncertificated
delivery of the securities comprising the Firm Units or of certificates therefor
(which delivery, if certificated, shall take place in such location in New York,
New York as may be specified by the Representative) to the Representative for
the several accounts of the Underwriters. Such payment is to be made at the
offices of the Representative, at the address set forth on the first page of
this agreement, at 7:00 a.m., Pacific time, on the third business day after the
commencement of trading of the Units, or at such other time and date not later
than five business days thereafter as you and the Company shall agree upon, such
time and date being herein referred to as the "Closing Date." (As used herein,
"business day" means a day on which the New York Stock Exchange is open for
trading and on which banks in New York are open for business and not permitted
by law or executive order to be closed.) Except to the extent uncertificated
securities comprising the Firm Units are delivered at closing, the certificates
for the securities comprising the Firm Units will be delivered in such
denominations and in such registrations as the Representative requests in
writing not later than the second full business day prior to the Closing Date,
and will be made available for inspection by the Representative at least one
business day prior to the Closing Date.
(c) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company hereby grants an option to the Representative to purchase the
Option Units at the price per Unit as set forth in the first paragraph of this
Section 2. The option granted hereby may be exercised in whole or in part by
giving written notice (i) at any time before the Closing Date and (ii)
thereafter (on one or more occasions) within 45 days after the date of this
Agreement, by the Representative to the Company setting forth the number of
Option Units as to which the Representative is exercising the option, the names
and denominations in which the securities comprising the Option Units are to be
registered and the time and date at which certificates representing the
securities comprising such Units are to be delivered. The time and date at which
certificates for the securities comprising the Option Units are to be delivered
shall be determined by the Representative but shall not be earlier than three
nor later than 10 full business days after the exercise of such option, nor in
any event prior to the Closing Date (such time and date being herein referred to
as the "Option Closing Date"). If the date of exercise of the option is three or
more days before the Closing Date, the notice of exercise shall set the Closing
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<PAGE> 9
Date as the Option Closing Date. The option with respect to the Option Units
granted hereunder may be exercised only to cover over-allotments in the sale of
the Firm Units by the Underwriters. The Representative may cancel such option at
any time prior to its expiration by giving written notice of such cancellation
to the Company. To the extent, if any, that the option is exercised, payment for
the Option Units shall be made on the Option Closing Date in New York Clearing
House funds and, at the option of the Representative, by certified or bank
cashier's check drawn to the order of the Company for the Option Units to be
sold by the Company or bank wire to an account specified by the Company against
delivery of certificates therefor at the offices of Paulson Investment Company,
Inc. set forth on the first page of this Agreement.
(d) In addition to the sums payable to the Representative as
provided elsewhere herein, the Representative shall be entitled to receive at
the Closing, for itself alone and not as the Representative of the Underwriters,
as additional compensation for its services, purchase warrants (the
"Representative's Warrants") for the purchase of up to 150,000 Units at a price
of $____ per Unit (120% of the initial public offering price of the Units), upon
the terms and subject to adjustment as described in the form of Representative's
Warrants filed as an exhibit to the Registration Statement.
3. Offering by the Underwriters.
It is understood that the several Underwriters are to make a
public offering of the Firm Units as soon as the Representative deems it
advisable to do so. The Firm Units are to be initially offered to the public at
the initial public offering price set forth in the Prospectus. The
Representative may from time to time thereafter change the public offering price
and other selling terms. To the extent, if at all, that any Option Units are
purchased pursuant to Section 2 hereof, the Representative will offer them to
the public on the foregoing terms.
It is further understood that you will act as the Representative
for the Underwriters in the offering and sale of the Units in accordance with an
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. Covenants of the Company.
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (i) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representative containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations, and (ii) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representative shall not
previously have been advised and furnished with a copy or to which the
Representative shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations.
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<PAGE> 10
(b) The Company will advise the Representative promptly (i) when
the Registration Statement or any post-effective amendment thereto shall have
become effective, (ii) of receipt of any comments from the Commission, (iii) of
any request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representative in
endeavoring to qualify the Units for sale under the securities laws of such
jurisdictions as the Representative may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports, and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representative may reasonably request for distribution of the Units.
(d) The Company will deliver to, or upon the order of, the
Representative, from time to time, as many copies of any Preliminary Prospectus
as the Representative may reasonably request. The Company will deliver to, or
upon the order of, the Representative during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representative may
reasonably request. The Company will deliver to the Representative at or before
the Closing Date, two signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver to
the Representative such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), and of all amendments thereto, as the Representative
may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder, so as to
permit the completion of the distribution of the Units as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
not misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will prepare and file
with the Commission an appropriate amendment to the Registration Statement or
supplement to the Prospectus so that the Prospectus as so amended or
supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with the law.
(f) The Company will make generally available to its security
holders, as soon as it
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<PAGE> 11
is practicable to do so, but in any event not later than 15 months after the
effective date of the Registration Statement, an earnings statement (which need
not be audited) in reasonable detail, covering a period of at least 12
consecutive months beginning after the effective date of the Registration
Statement, which earnings statement shall satisfy the requirements of Section
11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you
in writing when such statement has been so made available.
(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representative copies of annual reports and copies of all
other documents, reports and information furnished by the Company to its
shareholders or filed with any securities exchange pursuant to the requirements
of such exchange or with the Commission pursuant to the Act or the Exchange Act.
The Company will deliver to the Representative similar reports with respect to
significant subsidiaries, as that term is defined in the Rules and Regulations,
which are not consolidated in the Company's financial statements.
(h) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of Common
Stock (or agreement for such) will be made for a period of one year after the
date of this Agreement, directly or indirectly, by the Company otherwise than
hereunder or with the prior written consent of the Representative, which consent
will not be unreasonably withheld, other than pursuant to outstanding
convertible securities, stock option and warrants or pursuant to employee
benefit plans in effect as of the date hereof, in each case as disclosed in the
Prospectus.
(i) The Company will use its best efforts to list, subject to
notice of issuance, the Units, Common Stock and Warrants on The Nasdaq SmallCap
Market.
(j) The Company has caused each officer, director and holders of
5% or more of the Company's outstanding Common Stock prior to the Offering to
furnish to the Representative, on or prior to the date of this Agreement, a
letter or letters, in form and substance satisfactory to the Representative
("Lockup Agreements"), pursuant to which each such person shall agree (A) not to
offer to sell, sell, contract to sell, sell short or otherwise dispose of any
shares of Common Stock or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Stock or
derivatives of Common Stock owned by such person, or request the registration
for the offer or sale of any of the foregoing (or as to which such person has
the right to direct the disposition of) for a period of one year after the date
of this Agreement, directly or indirectly, except with the prior written consent
of Paulson Investment Company, Inc., which consent shall not be unreasonably
withheld. The Lockup Agreements shall also provide that, after the expiration of
the lockup period, each person shall give you prior notice with respect to any
offers to sell, sales, contracts to sell, short sales or other dispositions of
Common Stock pursuant to Rule 144 under the Act or any similar provisions
enacted subsequent to the date of this Agreement for a period of five years from
the date of this Agreement.
(k) The Company shall apply the net proceeds of its sale of the
Units as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Units
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<PAGE> 12
and the application of the proceeds therefrom as may be required in accordance
with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Units in such a manner as would
require the Company or any of the subsidiaries to register as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar, for the
Preferred Stock and Common Stock and a warrant agent for the Warrants.
(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
securities of the Company.
5. Costs and Expenses.
(a) The Representative shall be entitled to receive from the
Company, for itself alone and not as the Representative of the Underwriters, a
nonaccountable expense allowance collectively equal to 3% of the aggregate
public offering price of Units sold to the Underwriters in connection with the
Offering. The Representative shall be entitled to withhold this allowance on the
Closing Date (less the $35,000 advance against such amount that has been
previously paid by the Company) with respect to Units delivered on the Closing
Date and to require the Company to make payment of this allowance on the Option
Closing Date with respect to Units delivered on the Option Closing Date.
(b) In addition to the payment described in Paragraph (a) of this
Section 5, the Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting fees
of the Company; the fees and disbursements of counsel for the Company; the cost
of electronic filing, printing and delivering to, or as requested by, the
Underwriters copies of the Registration Statement, Preliminary Prospectuses, the
Prospectus, this Agreement, the Underwriters' Selling Memorandum, the
Underwriters' Invitation Letter, the Listing Application, the Blue Sky Survey
and any supplements or amendments thereto; the filing fees of the Commission;
the filing fees incident to securing any required review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of
the Units; the Listing Fee of The Nasdaq SmallCap Market; the reasonable costs
of conducting a due diligence investigation of the principals of the Company by
a firm acceptable to the Representative, and the expenses, including the fees
and disbursements of counsel for the Underwriters, incurred in connection with
the qualification of the Units under State securities or Blue Sky laws. Any
transfer taxes imposed on the sale of the Units to the several Underwriters will
be paid by the Company. The Company agrees to pay all costs and expenses of the
Underwriters, including the fees and disbursements of counsel for the
Underwriters, incident to the offer and sale of Units by the Underwriters to
employees and persons having business relationships with the Company. The
Company shall not, however, be required to pay for any of the Underwriters'
expenses (other than those related to qualification under NASD regulation and
state
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securities or Blue Sky laws) except that, if this Agreement shall not be
consummated, then the Company shall reimburse the several Underwriters for
reasonable accountable out-of-pocket expenses, including fees and disbursements
of counsel, reasonably incurred in connection with investigating, marketing and
proposing to market the Units or in contemplation of performing their
obligations hereunder (less the $35,000 advance that has been paid by the
Company); but the Company shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Units. In the event this Agreement is not consummated, any
nonaccountable portion of the $35,000 advance shall be promptly returned to the
Company.
(c) In the event the Company elects to redeem the Warrants at any
time commencing one year after the date of this Agreement, the Company shall
retain Paulson Investment Company, Inc. as the Company's solicitation agent (the
"Warrant Solicitation Agent"). The Company shall pay to the Warrant Solicitation
Agent for its services a solicitation fee equal to 3% of the total amount paid
by the holders of the Warrants whom the Warrant Solicitation Agent solicits to
exercise the Warrants. The exercise will be presumed to be unsolicited unless
the customer states in writing that the transaction was solicited by the
Warrants Solicitation Agent and designates in writing the registered
representative of the Warrant Solicitation Agent entitled to receive
compensation for the exercise. The fee shall not be payable for the exercise of
any Warrant held by the Warrant Solicitation Agent in a discretionary account at
the time of exercise, unless the Warrant Solicitation Agent receives from the
customer prior specific written approval of such exercise.
6. Conditions of Obligations of the Underwriters.
The several obligations of the Underwriters to purchase the Firm
Units on the Closing Date and the Option Units, if any, on the Option Closing
Date are subject to the accuracy, as of the Closing Date or the Option Closing
Date, as the case may be, of the representations and warranties of the Company
contained herein, and to the performance by the Company of their covenants and
obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representative and
complied with to its reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing Date
which would prevent the issuance of the Units.
(b) The Representative shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Resch Polster Alpert
& Berger LLP, counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters (and stating
that it may be relied upon by counsel to the Underwriters), substantially
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as follows:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
California, with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement; the Company
is duly qualified to transact business in all jurisdictions in which the conduct
of its business requires such qualification, or in which the failure to qualify
would have a materially adverse effect upon the business of the Company.
(ii) The Company has authorized and outstanding capital stock
as set forth under the caption "Capitalization" in the Prospectus; the
outstanding shares of the Company's Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable; all issued and outstanding
shares of the capital stock of the Company and all other securities issued and
sold or exchanged by the Company have been issued and sold or exchanged in
compliance in all material respects with applicable securities laws and
regulations; all of the securities of the Company conform to the description
thereof contained in the Prospectus; the certificates for the Units, Common
Stock and Warrants, assuming they are in the form filed with the Commission, are
in due and proper form; the shares of Common Stock to be sold by the Company
pursuant to this Agreement, including shares of Common Stock to be sold as a
part of the Option Units have been duly authorized and, upon issuance and
delivery thereof as contemplated in this Agreement and the Registration
Statement, will be validly issued, fully paid and nonassessable; no preemptive
rights of shareholders exist with respect to any of the Common Stock of the
Company or the issuance or sale thereof pursuant to any applicable statute or
the provisions of the Company's charter documents or, to such counsel's best
knowledge, pursuant to any contractual obligation. The Warrants and the
Representative's Warrants have been authorized for issuance to the purchasers of
Units or the Representative's Warrants, as the case may be, and will, when
issued, possess rights, privileges, and characteristics as represented in the
most recent form of Warrants or Representative's Warrants, as the case may be,
filed as an exhibit to the Registration Statement; the securities to be issued
upon exercise of the Warrants or the Representative's Warrants, as the case may
be, when issued and delivered against payment therefor in accordance with the
terms of the Warrants or the Representative's Warrants, as the case may be, will
be duly and validly issued, fully paid, nonassessable and free of preemptive
rights, and all corporate action required to be taken for the authorization and
issuance of the Warrants, the Representative's Warrants, and the securities to
be issued upon their exercise, has been validly and sufficiently taken.
(iii) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Units or the right to have any Common Stock or other
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<PAGE> 15
securities of the Company included in the Registration Statement or the right,
as a result of the filing of the Registration Statement, to require registration
under the Act of any shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the
Act and, to the best of the knowledge of such counsel, no stop order proceedings
with respect thereto have been instituted or are pending or threatened under the
Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material respects with
the requirements of the Act and the applicable rules and regulations thereunder
(except that such counsel need express no opinion as to the financial statements
therein).
(vi) The statements under the captions "Business - Licensing
Agreements," "Business - Legal Proceedings," "Certain Transactions" and
"Description of Securities" in the Prospectus and in Item 24 of the Registration
Statement, insofar as such statements constitute a summary of documents referred
to therein or matters of law, fairly summarize in all material respects the
information called for with respect to such documents and matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or the Prospectus which are not so filed or described
as required, and such contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized in all material
respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company, except as set forth in
the Registration Statement.
(ix) This Agreement has been duly authorized, executed and
delivered by the Company and, assuming due authorization, execution, and
delivery by the other parties thereto, is a valid and binding agreement of the
Company enforceable against the Company in accordance with its terms, except as
rights to indemnity and contribution may be limited by applicable securities
laws, and except as enforceability may be limited by application of bankruptcy,
insolvency, moratorium, or similar laws affecting the rights of creditors
generally or judicial limits upon the right of specific performance and except
that such counsel need express no opinion as to the enforceability of the venue
provisions under Section 14 of this Agreement. The execution and delivery of
this Agreement and the consummation of the transactions herein contemplated do
not and will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Articles of Incorporation or
Bylaws of the Company, or any agreement or instrument known to such counsel to
which the Company is a party or by which the Company may be bound or to the
knowledge of such counsel any order or decree to which the Company is a party or
by which it is bound, or any California or federal law or regulation applicable
to the Company (other than state securities laws, as to which such counsel need
not opine).
(x) The Warrant Agreement has been duly authorized, executed
and delivered
15
<PAGE> 16
by the Company; and, assuming due authorization, execution, and delivery by the
other parties thereto, is a valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, except as rights
to indemnity and contribution may be limited by applicable securities laws, and
except as enforceability may be limited by application of bankruptcy,
insolvency, moratorium, or similar laws affecting the rights of creditors
generally or judicial limits upon the right of specific performance. The
execution and delivery of the Warrant Agreement and the consummation of the
transactions therein contemplated do not and will not conflict with or result in
a breach of any of the terms or provisions of, or constitute a default under,
the Articles of Incorporation or Bylaws of the Company, or any agreement or
instrument known to such counsel to which the Company is a party or by which the
Company may be bound or to the knowledge of such counsel any order or decree to
which the Company is a party or by which it is bound, or any California or
federal law or regulation applicable to the Company (other than state securities
laws, as to which such counsel need not opine).
(xi) The Representative's Warrants have been duly authorized,
executed, delivered and validly issued by the Company; the securities to be
issued on exercise of the Representative's Warrants will be, when issued in
accordance with the terms of the Representative's Warrants, duly authorized,
validly issued, fully paid, nonassessable and free of preemptive rights; the
holders thereof will not be subject to personal liability by reason of being
such holders; no governmental or regulatory approvals are required in connection
with the execution and delivery of the Representative's Warrants and the
issuance of the securities upon exercise thereof (other than such approvals as
may be required by the NASD, the SEC and applicable state securities
regulations); such SEC approval has been obtained in connection with the order
of effectiveness of the Registration Statement; and the execution, delivery and
exercise of the Representative's Warrants will not conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the Articles of
Incorporation or Bylaws of the Company, or any agreement or instrument known to
such counsel to which the Company is a party or by which the Company may be
bound or to the knowledge of such counsel any order or decree to which the
Company is a party or by which it is bound, or any California or federal law or
regulation applicable to the Company (other than state securities laws, as to
which such counsel need not opine);
(xii) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein contemplated
(other than as may be required by the NASD or as required by State securities
and Blue Sky laws as to which such counsel need express no opinion) except such
as have been obtained or made, specifying the same.
(xiii) The Company is not, and will not become, as a result of
the consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
In rendering such opinion, such counsel may rely as to matters
governed by the laws of states other than California or Federal laws on local
counsel in such jurisdictions, provided that in each case such counsel shall
state that they believe that they and the Underwriters are justified in
16
<PAGE> 17
relying on such other counsel. In addition to the matters set forth above, the
opinion of Resch Polster Alpert & Berger LLP shall also include a statement to
the effect that nothing has come to the attention of such counsel that has
caused them to believe that (i) the Registration Statement, at the time it
became effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements and statistical information therein).
(c) The Representative shall have received from Grover T.
Wickersham, P.C., counsel for the Underwriters, an opinion dated the Closing
Date or the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (i), (iv) and (v) of Paragraph (b) of this Section 6.
In rendering such opinion, Grover T. Wickersham, P.C. may rely as to all matters
governed other than by the laws of the State of California or Federal laws on
the opinion of counsel referred to in Paragraph (b) of this Section 6. In
addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such counsel
that has caused them to believe that (i) the Registration Statement, or any
amendment thereto, as of the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (ii) the Prospectus, or any supplement thereto, on
the date it was filed pursuant to the Rules and Regulations and as of the
Closing Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact, necessary in
order to make the statements, in the light of the circumstances under which they
are made, not misleading (except that such counsel need express no view as to
financial statements and statistical information therein). With respect to such
statement, Grover T. Wickersham, P.C. may state that their belief is based upon
the procedures set forth therein, but is without independent check and
verification.
(d) The Representative shall have received at or prior to the
Closing Date from Grover T. Wickersham, P.C. a memorandum or summary, in form
and substance satisfactory to the Representative, with respect to the
qualification for offering and sale by the Underwriters of the Units under the
State securities or Blue Sky laws of such jurisdictions as the Representative
may reasonably have designated to the Company.
(e) The Representative, on behalf of the several Underwriters,
shall have received, on each of the dates hereof, the Closing Date and the
Option Closing Date, as the case may be, a letter dated the date hereof, the
Closing Date or the Option Closing Date, as the case may be, in form and
substance satisfactory to the Representative, of Coopers & Lybrand LLP
confirming that they are independent public accountants within the meaning of
the Act and the applicable published Rules
and Regulations thereunder and stating that in their opinion the financial
statements examined by them
17
<PAGE> 18
and included in the Registration Statement comply in form in all material
respects with the applicable accounting requirements of the Act and the related
published Rules and Regulations and containing such other statements and
information as are ordinarily included in accountants' "comfort letters" to
Underwriters with respect to the financial statements and certain financial and
statistical information contained in the Registration Statement and Prospectus.
(f) The Representative shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer or the President and the Chief Financial Officer of
the Company to the effect that, as of the Closing Date or the Option Closing
Date, as the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration Statement
has been issued, and no proceedings for such purpose have been taken or are, to
his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing Date or the
Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and
the Prospectus and, in his opinion, as of the effective date of the Registration
Statement, the statements contained in the Registration Statement were true and
correct, and such Registration Statement and Prospectus did not omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, and since the effective date of the
Registration Statement, no event has occurred which should have been set forth
in a supplement to or an amendment of the Prospectus which has not been so set
forth in such supplement or amendment; and
(v) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company,
whether or not arising in the ordinary course of business.
(g) The Company shall have furnished to the Representative such
further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters as the
Representative may reasonably have requested.
(h) The Units, Common Stock and Warrants have been approved for
quotation upon notice of issuance on the Nasdaq SmallCap Market.
(i) The Lockup Agreements described in Section 4(j) are in full
force and effect.
18
<PAGE> 19
The opinions and certificates mentioned in this Agreement shall
be deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representative and to Grover T.
Wickersham, P.C., counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section
6 shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representative by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be
under any obligation to each other (except to the extent provided in Sections 5
and 8 hereof).
7. Conditions of the Obligations of the Company.
The obligations of the Company to sell and deliver the portion of
the Units required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities to which
such Underwriter or any such controlling person may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Units, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representative
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and
hold harmless the
19
<PAGE> 20
Company, each of its directors, each of its officers who have signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act, against any losses, claims, damages or liabilities to
which the Company or any such director, officer or controlling person may become
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or are
based upon (i) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or (ii) the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances under which they were made; and will reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding; provided, however, that each
Underwriter will be liable in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance upon and
in conformity with written information furnished to the Company by or through
the Representative specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available to any
party who shall fail to give notice as provided in this Section 8(c) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was materially prejudiced by the failure to give
such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 8(a) or (b). In case any such proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
20
<PAGE> 21
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) and by the Company in the case of parties indemnified pursuant to
Section 8(b). The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Units. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bears to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the one hand or the Underwriters on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
21
<PAGE> 22
The Company and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this Section 8(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 8(d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
referred to above in this Section 8(d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Units purchased by such Underwriter, and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d)
to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. Default by Underwriters.
If on the Closing Date or the Option Closing Date, as the case
may be, any Underwriter shall fail to purchase and pay for the portion of the
Units which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
the Representative of the Underwriters, shall use your reasonable efforts to
procure within 36 hours thereafter one or more of the other Underwriters, or any
others, to purchase from the Company such amounts as may be agreed upon and upon
the terms set forth herein, the Firm Units or Option Units, as the case may be,
which the defaulting Underwriter or Underwriters failed
22
<PAGE> 23
to purchase. If during such 36 hours you, as such Representative, shall not have
procured such other Underwriters, or any others, to purchase the Firm Units or
Option Units, as the case may be, agreed to be purchased by the defaulting
Underwriter or Underwriters, then (a) if the aggregate number of Units with
respect to which such default shall occur does not exceed 10% of the Firm Units
or Option Units, as the case may be, covered hereby, the other Underwriters
shall be obligated, severally, in proportion to the respective numbers of Firm
Units or Option Units, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Units or Option Units, as the case may be, which
such defaulting Underwriter or Underwriters failed to purchase, or (b) if the
aggregate number of Firm Units or Option Units, as the case may be, with respect
to which such default shall occur equals or exceeds 10% of the Firm Units or
Option Units, as the case may be, covered hereby, the Company or you as the
Representative of the Underwriters will have the right, by written notice given
within the next 36-hour period to the parties to this Agreement, to terminate
this Agreement without liability on the part of the non-defaulting Underwriters
or of the Company except to the extent provided in Section 8 hereof. In the
event of a default by any Underwriter or Underwriters, as set forth in this
Section 9, the Closing Date or Option Closing Date, as the case may be, may be
postponed for such period, not exceeding seven days, as you, as the
Representative, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. Notices.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows: if to the Underwriters, to Paulson Investment Company,
Inc., 811 SW Naito Parkway, Suite 200, Portland, Oregon 97204, Attention:
Chester L.F. Paulson; with a copy to Grover T. Wickersham, P.C., 430 Cambridge
Avenue, Suite 100, Palo Alto, California 94306, Attention: Debra K. Weiner; if
to the Company, to Legacy Brands, Inc., 2424 Professional Drive, Suite A,
Roseville, California 95661, Attention: Thomas E. Kees; with a copy to Resch,
Polster, Alpert & Berger LLP, 10390 Santa Monica Boulevard, 4th Floor, Los
Angeles, California 90025, Attention: Harvey H. Rosen.
11. Termination.
This Agreement may be terminated by you by notice to the Company
as follows:
(a) at any time prior to the earlier of (i) the time the Units
are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following
has occurred: (i) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, any material adverse change or
any development involving a prospective material adverse change in or affecting
the condition, financial or otherwise, of the Company, taken as a whole or the
earnings, business, management, properties, assets, rights, operations,
condition (financial or
23
<PAGE> 24
otherwise) or prospects of the Company and its subsidiaries taken as a whole,
whether or not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or declaration of war or national emergency or other
national or international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, escalation, declaration, emergency,
calamity, crisis or change on the financial markets of the United States would,
in your reasonable judgment, make it impracticable to market the Units or to
enforce contracts for the sale of the Units, (iii) the Dow Jones Industrial
Average shall have fallen by 15 percent or more from its closing price on the
day immediately preceding the date that the Registration Statement is declared
effective by the Commission, (iv) suspension of trading in securities generally
on the New York Stock Exchange or the American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such Exchange, (v) the enactment, publication, decree or
other promulgation of any statute, regulation, rule or order of any court or
other governmental authority which in your opinion materially and adversely
affects or may materially and adversely affect the business or operations of the
Company, (vi) declaration of a banking moratorium by United States or New York
State authorities, (vii) any downgrading in the rating of the Company's debt
securities by any "nationally recognized statistical rating organization" (as
defined for purposes of Rule 436(g) under the Exchange Act); (viii) the
suspension of trading of the Preferred Stock by the Commission on the Nasdaq
SmallCap Market or (ix) the taking of any action by any governmental body or
agency in respect of its monetary or fiscal affairs which in your reasonable
opinion has a material adverse effect on the securities markets in the United
States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Units from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
13. Information Provided by Underwriters.
The Company and the Underwriters acknowledge and agree that the
only information furnished or to be furnished by any Underwriter to the Company
for inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-B under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. Miscellaneous.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by
24
<PAGE> 25
or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or its directors or officers and (c) delivery of and
payment for the Units under this Agreement.
This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Oregon. All disputes relating to this
Underwriting Agreement shall be adjudicated before a court located in Multnomah
County, Oregon to the exclusion of all other courts that might have
jurisdiction.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
LEGACY BRANDS, INC.
By: ___________________________________
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
PAULSON INVESTMENT COMPANY, INC.
As Representative of the several
Underwriters listed on Schedule I
By: _____________________________
25
<PAGE> 26
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Units
Underwriter to be Purchased
----------- ---------------
<S> <C>
Paulson Investment Company, Inc.
---------
Total 1,500,000
=========
</TABLE>
26
<PAGE> 1
EXHIBIT 3(i).5
ENDORSED-FILED
In the office of the Secretary of State
of the State of California
MAR 13 1998
BILL JONES, Secretary of State
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
LEGACY BRANDS, INC.
Thomas E. Kees and Craig C. Connerty certify that:
1. They are the president and secretary, respectively, of Legacy Brands, Inc., a
California corporation.
2. Article IV of the Articles of Incorporation of this corporation is amended to
read in its entirety as follows:
"This corporation is authorized to issue only one class of shares of
stock, and the total number of shares which this corporation is authorized
to issue is 5,000,000. Upon the effectiveness of this amendment to the
Articles of Incorporation of this corporation to read as herein set forth,
each outstanding share is split up and converted into 0.10 share."
3. The amendment herein set forth has been duly approved by the board of
directors.
4. The amendment herein set forth has been duly approved by the required vote of
the shareholders in accordance with Section 902 of the California Corporations
Code. The corporation has one class of shares and the number of outstanding
shares is 26,980,450. The number of shares voting in favor of the amendment
equaled or exceeded the vote required. The percentage vote required for the
approval of the amendment herein set forth was more than 50%.
Dated: 3/10/98 /s/ THOMAS E. KEES
------------------------------------------
Thomas E. Kees, President
/s/ CRAIG C. CONNERTY
------------------------------------------
Craig C. Connerty, Secretary
<PAGE> 2
Verification by Written Declaration
Each of the undersigned declares under penalty of perjury under the laws of
the State of California that he has read the foregoing certificate and knows the
contents thereof and that the same is true of his own knowledge.
Dated: 3/10/98 /s/ THOMAS E. KEES
------------------------------------------
Thomas E. Kees, President
/s/ CRAIG C. CONNERTY
------------------------------------------
Craig C. Connerty, Secretary
<PAGE> 3
STATE OF CALIFORNIA
[SEAL]
SECRETARY OF STATE
I, BILL JONES, Secretary of State of the State of California, hereby
certify:
That the attached transcript has been compared with the record on file in
this office, of which it purports to be a copy, and that it is full, true and
correct.
IN WITNESS WHEREOF, I execute this
certificate and affix the Great Seal of the
State of California this
--------------------------------------------
[SEAL]
/s/ BILL JONES
----------------------------------------------
Secretary of State
<PAGE> 1
EXHIBIT 3(ii).2
AMENDMENT TO BYLAWS
[Adopted by Legacy shareholders by Written Consent dated as of October 30, 1996]
RESOLVED, that ARTICLE III, Section 3.02 of the Bylaws of this corporation is
hereby amended to read in its entirety as follows:
The authorized number of directors shall be a maximum of seven (7) and a
minimum of four (4), with the actual number to be set by a vote of the
sitting Board of Directors. The present number shall be set at four (4).
<PAGE> 1
EXHIBIT 4.1
THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
UNIT
PURCHASE WARRANTS
Issued to:
PAULSON INVESTMENT COMPANY, INC.
Exercisable to Purchase
150,000 Units
of
LEGACY BRANDS, INC.
Void after _____________, 2003
<PAGE> 2
This is to certify that, for value received and subject to the terms and
conditions set forth below, the Warrantholder (hereinafter defined) is entitled
to purchase, and the Company promises and agrees to sell and issue to the
Warrantholder, at any time on or after _____________, 1999 and on or before
______________, 2003, up to 150,000 Units (hereinafter defined) at the Exercise
Price (hereinafter defined).
This Warrant Certificate is issued subject to the following terms and
conditions:
1. Definitions of Certain Terms. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Closing Date" means the date on which the Offering is
closed.
(c) "Commission" means the Securities and Exchange Commission.
(d) "Common Stock" means the common stock, no par value, of
the Company.
(e) "Company" means Legacy Brands, Inc., a California
corporation.
(f) "Company's Expenses" means any and all expenses payable by
the Company or the Warrantholder in connection with an offering described in
Section 6 hereof, except Warrantholder's Expenses.
(g) "Effective Date" means the date on which the Registration
Statement is declared effective by the Commission.
(h) "Exercise Price" means the price at which the
Warrantholder may purchase one complete Unit (or Securities obtainable in lieu
of one complete Unit) upon exercise of Warrants as determined from time to time
pursuant to the provisions hereof. The initial Exercise Price is $____ per Unit
(120% of the initial public offering price of a Unit). If a Warrant is exercised
for a component of a Unit or Units, then the price payable in connection with
such exercise shall be determined by allocating $0.001 to the Unit Warrant and
the balance of the Exercise Price to the share of Common Stock, or, in each
case, to any securities obtainable in addition to or in lieu of such share of
Unit Warrant or Common Stock by virtue of the application of Section 3 of this
Warrant.
(i) "Offering" means the public offering of Units made
pursuant to the Registration Statement.
(j) "Participating Underwriter" means any underwriter
participating in the sale of the Securities pursuant to a registration under
Section 6 of this Warrant Certificate.
(k) "Registration Statement" means the Company's registration
statement (File
2
<PAGE> 3
No.333-________), as amended on the Closing Date.
(l) "Rules and Regulations" means the rules and regulations of
the Commission adopted under the Act.
(m) "Securities" means the securities obtained or obtainable
upon exercise of the Warrant or securities obtained or obtainable upon exercise,
exchange, or conversion of such securities.
(n) "Unit" means one of the Units offered to the Public
pursuant to the Registration Statement.
(o) "Unit Warrant" means a Common Stock purchase warrant
included as a component of a Unit.
(p) "Warrant Certificate" means a certificate evidencing the
Warrant.
(q) "Warrantholder" means a record holder of the Warrant or
Securities. The initial Warrantholder is Paulson Investment Company, Inc.
(r) "Warrantholder's Expenses" means the sum of (i) the
aggregate amount of cash payments made to an underwriter, underwriting
syndicate, or agent in connection with an offering described in Section 6 hereof
multiplied by a fraction the numerator of which is the aggregate sales price of
the Securities sold by such underwriter, underwriting syndicate, or agent in
such offering on behalf of the Warrantholder and the denominator of which is the
aggregate sales price of all of the securities sold by such underwriter,
underwriting syndicate, or agent in such offering and (ii) all out-of-pocket
expenses of the Warrantholder, except for the reasonable fees and disbursements
of one firm retained as legal counsel on behalf of all of the Warrantholders
that will be paid by the Company.
(s) "Warrant" means the warrant evidenced by this certificate,
any similar certificate issued in connection with the Offering, or any
certificate obtained upon transfer or partial exercise of the Warrant evidenced
by any such certificate.
2. Exercise of Warrants. All or any part of the Warrant may be
exercised commencing on the first anniversary of the Effective Date and ending
at 5 p.m. Pacific Time on the fifth anniversary of the Effective Date by
surrendering this Warrant Certificate, together with appropriate instructions,
duly executed by the Warrantholder or by its duly authorized attorney, at the
office of the Company, 2424 Professional Drive, Suite A, Roseville, California
95661, or at such other office or agency as the Company may designate. Upon
receipt of notice of exercise, the Company shall immediately instruct its
transfer agent to prepare certificates for the Securities to be received by the
Warrantholder upon completion of the Warrant exercise. When such certificates
are prepared, the Company shall notify the Warrantholder and deliver such
certificates to the Warrantholder or as per the Warrantholder's instructions
immediately upon payment in full by the Warrantholder, in lawful money of the
United States, of the Exercise Price payable with respect to the Securities
being
3
<PAGE> 4
purchased. If the Warrantholder shall represent and warrant that all applicable
registration and prospectus delivery requirements for their sale have been
complied with upon sale of the Securities received upon exercise of the Warrant,
such certificates shall not bear a legend with respect to the Securities Act of
1933.
If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver to
the Warrantholder a new Warrant Certificate (dated the date hereof), in form and
tenor similar to this Warrant Certificate, evidencing that portion of the
Warrant not exercised. The Securities to be obtained on exercise of the Warrant
will be deemed to have been issued, and any person exercising the Warrants will
be deemed to have become a holder of record of those Securities, as of the date
of the payment of the Exercise Price.
3. Adjustments in Certain Events. The number, class, and price of
Securities for which this Warrant Certificate may be exercised are subject to
adjustment from time to time upon the happening of certain events as follows:
(a) If the outstanding shares of the Company's Common Stock
are divided into a greater number of shares or a dividend in stock is paid on
the Common Stock, the number of shares of Common Stock for which the Warrant is
then exercisable will be proportionately increased and the Exercise Price will
be proportionately reduced; and, conversely, if the outstanding shares of Common
Stock are combined into a smaller number of shares of Common Stock, the number
of shares of Common Stock for which the Warrant is then exercisable will be
proportionately reduced and the Exercise Price will be proportionately
increased. The increases and reductions provided for in this subsection 3(a)
will be made with the intent and, as nearly as practicable, the effect that
neither the percentage of the total equity of the Company obtainable on exercise
of the Warrants nor the price payable for such percentage upon such exercise
will be affected by any event described in this subsection 3(a).
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or other
change in the capital structure of the Company, then, as a condition of such
change, lawful and adequate provision will be made so that the holder of this
Warrant Certificate will have the right thereafter to receive upon the exercise
of the Warrant the kind and amount of shares of stock or other securities or
property to which he would have been entitled if, immediately prior to such
event, he had held the number of shares of Common Stock obtainable upon the
exercise of the Warrant. In any such case, appropriate adjustment will be made
in the application of the provisions set forth herein with respect to the rights
and interest thereafter of the Warrantholder, to the end that the provisions set
forth herein will thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the exercise of the Warrant. The Company will not permit any change in its
capital structure to occur unless the issuer of the shares of stock or other
securities to be received by the holder of this Warrant Certificate, if not the
Company, agrees to be bound by and comply with the provisions of this Warrant
Certificate.
(c) When any adjustment is required to be made in the number
of shares of Common Stock, other securities, or the property purchasable upon
exercise of the Warrant, the
4
<PAGE> 5
Company will promptly determine the new number of such shares or other
securities or property purchasable upon exercise of the Warrant and (i) prepare
and retain on file a statement describing in reasonable detail the method used
in arriving at the new number of such shares or other securities or property
purchasable upon exercise of the Warrant and (ii) cause a copy of such statement
to be mailed to the Warrantholder within thirty (30) days after the date of the
event giving rise to the adjustment.
(d) No fractional shares of Common Stock or other securities
will be issued in connection with the exercise of the Warrant, but the Company
will pay, in lieu of fractional shares, a cash payment therefor on the basis of
the mean between the bid and asked prices of the Common Stock in the
over-the-counter market or the last sale price on a national securities exchange
or on The Nasdaq National Market on the day immediately prior to exercise.
(e) If securities of the Company or securities of any
subsidiary of the Company are distributed pro rata to holders of Common Stock,
such number of securities will be distributed to the Warrantholder or his
assignee upon exercise of his rights hereunder as such Warrantholder or assignee
would have been entitled to if this Warrant Certificate had been exercised prior
to the record date for such distribution. The provisions with respect to
adjustment of the Common Stock provided in this Section 3 will also apply to the
securities to which the Warrantholder or his assignee is entitled under this
subsection 3(e).
(f) Notwithstanding anything herein to the contrary, there
will be no adjustment made hereunder on account of the sale of the Common Stock
or other Securities purchasable upon exercise of the Warrant.
4. Reservation of Securities. The Company agrees that the number of
shares of Common Stock, Unit Warrants or other Securities sufficient to provide
for the exercise of the Warrant upon the basis set forth above will at all times
during the term of the Warrant be reserved for issuance upon exercise of the
Warrant.
5. Validity of Securities. All Securities delivered upon the
exercise of the Warrant will be duly and validly issued in accordance with their
terms, and the Company will pay all documentary and transfer taxes, if any, in
respect of the original issuance thereof upon exercise of the Warrant.
6. Registration of Securities Issuable on Exercise of Warrant
Certificate.
(a) The Company will register the Securities with the
Commission pursuant to the Act so as to allow the unrestricted sale of the
Securities to the public from time to time commencing on the first anniversary
of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth
anniversary of the Effective Date (the "Registration Period"). The Company will
also file such applications and other documents necessary to permit the sale of
the Securities to the public during the Registration Period in those states in
which the Units were qualified for sale in the Offering or such other states as
the Company and the Warrantholder agree to. In order to comply with the
provisions of this Section 6(a), the Company is not required to file more than
one registration statement. No registration right of any kind, "piggyback" or
otherwise, will last longer than five years
5
<PAGE> 6
from the Closing Date.
(b) The Company will pay all of the Company's Expenses and
each Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer, and sale of the Securities.
(c) Except as specifically provided herein, the manner and
conduct of the registration, including the contents of the registration, will be
entirely in the control and at the discretion of the Company. The Company will
file such post-effective amendments and supplements as may be necessary to
maintain the currency of the registration statement during the period of its
use. In addition, if the Warrantholder participating in the registration is
advised by counsel that the registration statement, in their opinion, is
deficient in any material respect, the Company will use its best efforts to
cause the registration statement to be amended to eliminate the concerns raised.
(d) The Company will furnish to the Warrantholder the number
of copies of a prospectus, including a preliminary prospectus, in conformity
with the requirements of the Act, and such other documents as it may reasonably
request in order to facilitate the disposition of Securities owned by it.
(e) The Company will, at the request of Warrantholders holding
at least 50 percent of the then outstanding Warrants, (i) furnish an opinion of
the counsel representing the Company for the purposes of the registration
pursuant to this Section 6, addressed to the Warrantholders and any
Participating Underwriter, (ii) furnish an appropriate letter from the
independent public accountants of the Company, addressed to the Warrantholders
and any Participating Underwriter, and (iii) make representations and warranties
to the Warrantholders and any Participating Underwriter. A request pursuant to
this subsection (e) may be made on three occasions. The documents required to be
delivered pursuant to this subsection (e) will be dated within ten days of the
request and will be, in form and substance, equivalent to similar documents
furnished to the underwriters in connection with the Offering, with such changes
as may be appropriate in light of changed circumstances.
7. Indemnification in Connection with Registration.
(a) If any of the Securities are registered, the Company will
indemnify and hold harmless each selling Warrantholder, any person who controls
any selling Warrantholder within the meaning of the Act, and any Participating
Underwriter against any losses, claims, damages, or liabilities, joint or
several, to which any Warrantholder, controlling person, or Participating
Underwriter may be subject under the Act or otherwise; and it will reimburse
each Warrantholder, each controlling person, and each Participating Underwriter
for any legal or other expenses reasonably incurred by the Warrantholder,
controlling person, or Participating Underwriter in connection with
investigating or defending any such loss, claim, damage, liability, or action,
insofar as such losses, claims, damages, or liabilities, joint or several (or
actions in respect thereof), arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained, on the effective
date thereof, in any such registration statement or any preliminary prospectus
or final prospectus, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make
6
<PAGE> 7
the statements therein not misleading; provided, however, that the Company will
not be liable in any case to the extent that any loss, claim, damage, or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in any registration statement,
preliminary prospectus, final prospectus, or any amendment or supplement
thereto, in reliance upon and in conformity with written information furnished
by a Warrantholder for use in the preparation thereof. The indemnity agreement
contained in this subparagraph (a) will not apply to amounts paid to any
claimant in settlement of any suit or claim unless such payment is first
approved by the Company, such approval not to be unreasonably withheld.
(b) Each selling Warrantholder, as a condition of the
Company's registration obligation, will indemnify and hold harmless the Company,
each of its directors, each of its officers who have signed any registration
statement or other filing or any amendment or supplement thereto, and any person
who controls the Company within the meaning of the Act, against any losses,
claims, damages, or liabilities to which the Company or any such director,
officer, or controlling person may become subject under the Act or otherwise,
and will reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, or action,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue or alleged untrue statement
of any material fact contained in said registration statement, any preliminary
or final prospectus, or other filing, or any amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in said registration statement, preliminary or final prospectus, or other
filing, or amendment or supplement, in reliance upon and in conformity with
written information furnished by such Warrantholder for use in the preparation
thereof; provided, however, that the indemnity agreement contained in this
subparagraph (b) will not apply to amounts paid to any claimant in settlement of
any suit or claim unless such payment is first approved by the Warrantholder,
such approval not to be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under
subparagraphs (a) or (b) above of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, notify the indemnifying party of the commencement thereof;
but the omission to notify the indemnifying party will not relieve it from any
liability that it may have to any indemnified party otherwise than under
subparagraphs (a) and (b).
(d) If any such action is brought against any indemnified
party and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel satisfactory to such indemnified party;
and after notice from the indemnifying party to such indemnified party of its
election to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation.
7
<PAGE> 8
8. Restrictions on Transfer. This Warrant Certificate and the
Warrant may not be sold, transferred, assigned or hypothecated for a one-year
period after the Effective Date except to underwriters of the Offering or to
individuals who are either a partner or an officer of such an underwriter or by
will or by operation of law. The Warrant may be divided or combined, upon
request to the Company by the Warrantholder, into a certificate or certificates
evidencing the same aggregate number of Warrants.
9. No Rights as a Shareholder. Except as otherwise provided herein,
the Warrantholder will not, by virtue of ownership of the Warrant, be entitled
to any rights of a shareholder of the Company but will, upon written request to
the Company, be entitled to receive such quarterly or annual reports as the
Company distributes to its stockholders.
10. Notice. Any notices required or permitted to be given hereunder
will be in writing and may be served personally or by mail; and if served will
be addressed as follows:
If to the Company:
2424 Professional Drive, Suite A
Roseville, California 95661
Attn: President
If to the Warrantholder:
at the address furnished by the
Warrantholder to the Company for the
purpose of notice.
Any notice so given by mail will be deemed effectively given 48 hours
after mailing when deposited in the United States mail, registered or certified
mail, return receipt requested, postage prepaid and addressed as specified
above. Any party may by written notice to the other specify a different address
for notice purposes.
8
<PAGE> 9
11. Applicable Law. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without reference
to conflict of laws principles thereunder. All disputes relating to this Warrant
Certificate shall be tried before the courts of Oregon located in Multnomah
County, Oregon to the exclusion of all other courts that might have
jurisdiction.
Dated as of ________________, 1998
LEGACY BRANDS, INC.
By: ____________________________________
Its: ___________________________________
Agreed and Accepted as of _________, 1998.
PAULSON INVESTMENT COMPANY, INC.
By: ____________________________
Its: ___________________________
9
<PAGE> 1
EXHIBIT 4.2
[LEGACY BRANDS INCORPORATED LOGO]
COMMON STOCK COMMON STOCK
LB
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR STATEMENTS
THE STATE OF CALIFORNIA RELATING TO RIGHTS, REFERENCES,
PRIVILEGES AND RESTRICTIONS,
IF ANY
CUSIP 524918 10 9
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF
LEGACY BRANDS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[SIG] [SEAL] [SIG]
SECRETARY CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
(C)Security Columbian --United States Banknote Company --1960
<PAGE> 1
EXHIBIT 10.4
July 16, 1997
Michael Banks
Legacy Brands
2200-B Douglas Blvd.
Suite #130
Roseville, CA
VIA FAX
Dear Michael;
Attached is a fully-executed letter agreement between our respective companies
for Extreme Dinosaurs. As agreed, please discard the fully executed letter
agreement dated June 27, 1997. You will be receiving a more formal agreement
shortly.
We look forward to working with you on what promises to be a mutually successful
venture.
Sincerely,
/s/ ELISA A. FEENEY
- --------------------
Elisa A. Feeney
Senior Vide President
Domestic Consumer Products
Enc.
EAF/rl
[BOHBOT ENTERTAINMENT, INC. LETTERHEAD]
<PAGE> 2
Michael Banks [ARTWORK] July 8, 1997
Legacy Brands
2200-B Douglas Blvd. Suite #130
Roseville, CA 95661
Dear Michael:
The following is intended to set forth our understanding of the terms and
conditions under which Legacy Brands is agreeing to purchase a license for the
property EXTREME DINOSAURS. This deal memo shall supercede the fully executed
deal memo dated June 27, 1997.
1. Licensee/Contact: Legacy Brands
2200-B Douglas Blvd. Suite #130
Roseville, CA 95661
Michael Banks
Ph: (916) 782-2029
Fx: (916) 624-7083
2. Product Category/Licensed Products: Freeze pops, gelatin snacks, molded
and generic coolers, baked and shaped
cookies and crackers
Licensor reserves the right to
participate in any third party
promotion involving food items
including freeze pops, gelatin snacks,
molded & generic coolers, baked and
shaped cookies and crackers.
Licensee has first right of
negotiation to match or exceed third
party promotional proposal.
3. Guarantee: $110,000
Advance: $27,500 to be paid upon signing
4. Payment Schedule: Balance payable in 3 installments as
follows:
12/1/97 $27,500
6/1/98 $27,500
12/1/98 $27,500
5. Royalty Fee: 4%
6. Distribution: Mass market including mass retailers,
grocery/convenience stores, club &
discount stores, toy & drug stores and
military commissaries.
<PAGE> 3
Legacy Brands
June 27, 1997
Page Two
7. Territory: U.S., its territories and possessions
8. Term of Contract: 12/31/99
9. First Date of Marketing: 7/15/97
10. First Date of Shipping: 4/1/98
11. Renewal Option/Terms: Optional automatic renewal for
additional 2 year term if licensee
generates $220,000 in earned
royalties. Renewal guarantee of
$125,000 with a $60,000 advance
payable upon execution of renewal.
Bohbot Entertainment, Inc. represents and warrants that it has the authority
to enter into this letter agreement to grant all of the rights it has granted
to Legacy Brands hereunder. Legacy Brands represents that it has the
authority to enter into and fully perform all obligations of this letter
agreement.
Bohbot Entertainment reserves the right to revoke this offer if the signed
letter agreement is not received within five (5) days from the date of this
letter.
Your signature constitutes your agreement to purchase the license described
herein. At that point, a formal licensing agreement which will contain
additional obligations of both parties will be forwarded to you incorporating
the terms and conditions set forth in this letter agreement. The parties
agree to execute the formal licensing agreement within thirty (30) days of
signing this letter agreement. If the formal licensing agreement is not
executed by the parties, this signed letter agreement will remain binding
on the parties.
Sincerely,
Bohbot Entertainment, Inc.
By: /s/ ELISA A. FOENEY Date: 7/16/97
---------------------- --------
Elisa A. Foeney
Senior Vice President
Domestic Consumer Products
ACCEPTED AND AGREED:
Legacy Brands
By: /s/ MICHAEL BANKS Date: 7/16/97
-------------------- --------
Michael Banks
<PAGE> 1
EXHIBIT 10.6
LEGACY BRANDS, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1996 Employee Stock
Purchase Plan of Legacy Brands, Inc., a California corporation (the "Company").
1. Purpose: The purpose of the Plan is to provide employees of the Company
and its Designated Subsidiaries with an opportunity to purchase Common Stock of
the Company through recourse promissory notes or any other means approved by the
Board.
2. Definitions As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 19 of the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Common Stock" means the Common Stock of the Company.
(e) "Company" means Legacy Brands, Inc., a California corporation.
(f) LEFT INTENTIONALLY BLANK
(g) "Designated Subsidiaries" shall mean the Subsidiaries which have
been designated by the Board of Directors (the "Board") from time to time in its
sole discretion as eligible to participate in the Plan.
(h) "Employee" shall mean any individual who is an Employee of the
Company for tax purposes whose customary employment with the Company is at least
twenty hours per week and more than five months in any calendar year. For the
purposes of the Plan, the employment relationship shall be treated as continuing
intact while the individual is on sick leave or other leave of absence approved
by the Company. Where the period of leave exceeds 90 days and the individual's
right to reemployment is not guaranteed either by statute or by contract, the
employment relationship shall be deemed to have terminated on the 91st day of
such leave.
1
<PAGE> 2
(i) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is fisted on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or the National SmallCap Market of the Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable, or;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable, or;
(3) In the absence of a public market for the Common Stock,
the price at which securities of reasonably comparable corporations, if any, in
the same industry are being traded, subject to appropriate adjustments for any
dissimilarities, or;
(4) In the absence of a public market for the Common Stock
or comparable securities, the Fair Market Value shall be determined in good
faith by the Board based on earnings history, book value and prospects of the
Company in light of market conditions generally.
(j) "Plan" shall mean the Employee Stock Purchase Plan,
(k) "Subsidiary" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(1) "Trading Day" shall mean a day on which national stock exchanges
and the Nasdaq system are open for trading.
3. Eligibility Any Employee (as defined in Section 2(h)), who shall be
employed by the Company shall be eligible to participate in the Plan.
4. Participation An eligible Employee, as determined by the Board, may
become a participant in the Plan by completing a Restricted Stock Purchase
Agreement in the form of Exhibit A attached to this Plan and filing it with the
Company's Secretary
5. Purchase of Shares and Purchase Price. The Company shall sell and assign
to Employee free and clear of any and all liens and charges Shares of the
Company in exchange for the Purchase Price. As consideration for the Shares, the
Employee shall execute a promissory note, in favor of the Company in an amount
and bearing interest at a rate determined by the Board (the
2
<PAGE> 3
"Purchase Price") as provided in the Restricted Stock Purchase Agreement. The
Purchase Price shall be at least 85% of the Fair Market Value of the Shares at
the time the Employee is granted the right to purchase the Shares under the Plan
or at the time the purchase is consummated, or 100% of the Fair Market Value of
the Shares at the time the Employee is granted the right to purchase Shares
under the Plan or when the purchase is consummated, in the case of any Employee
who beneficially owns more than 10% of the total combined voting power of all
classes of stock of the Company.
6. Purchase Rights, Vesting and Deposit gf Shares. Until such time as the
Employee's right to transfer, convey and assign the Shares has been perfected
the Shares will be deposited with the Pledge Holder pursuant to the terms and
conditions of a Stock Pledge Agreement. The right to transfer, convey and assign
the Shares, or any portion thereof, will vest quarterly, but will only be
exercisable annually on each anniversary of the date specified in the Restricted
Stock Purchase Agreement, as determined by the Board, over a period of no less
than three and no more than ten years from such date (the "Purchase Rights").
The Board shall have the authority to determine, in its sole discretion, the
date of vesting. In no event will there be a pro-rata vesting of the Purchase
Rights, unless the Board waives this requirement. The Board, in its sole
discretion, may accelerate vesting without regard to years of service. The
Employee's right to purchase the Shares is conditioned upon his continued
service as an employee under the Employment Agreement with the Company.
7. Repurchase Rights. Once any portion of the Shares has vested and
corresponding payments have been made under the Promissory Note, or the debt has
been satisfied or forgiven, such Shares shall not be subject to repurchase by
the Company.
The Company shall have the right to repurchase any unvested portion of the
Shares (the "Repurchase Right") for the price and on the terms specified by
Section 8. In the event the Employee is terminated for other than cause pursuant
to the Employment Agreement between the Employee and the Company, and a portion
of the Shares has vested, but the Promissory Note has neither been satisfied nor
forgiven, the Employee shall have a period of thirty (30) days from such
termination to make the necessary payments under the Promissory Note. Failure to
pay any amounts due within thirty days will subject such Shares to repurchase by
the Company.
8. Purchase, Price. Terms and Conditions for Repurchases. The price with
respect to the exercise of a Repurchase Right shall be either (i) a price which
is the higher of the Purchase Price or Fair Market Value on the date of
termination of employment if the Repurchase Right must be exercised within 90
days of termination of employment for cash or cancellation of indebtedness for
the Shares, and the right terminates when the Company's securities become
publicly traded, or (ii) the Purchase Price provided that (a) the right to
repurchase at the Purchase Price lapses at the rate of at least 20% per year
over 5 years from the date the Shares were purchased, which rights must be
exercised within 90 days of termination of employment for cash or cancellation
of indebtedness for the Shares, and (b) if the Repurchase Right is assigned, the
assignee must pay the Company upon assignment of the Repurchase Right cash equal
to the difference between the
3
<PAGE> 4
Purchase Price and the Fair Market Value if the Purchase Price is less than Fair
Market Value (collectively the "Repurchase Price"). The Company shall notify the
Employee, in writing, of its intent to exercise its Repurchase Right. The
Employee shall, within fifteen (15) days of the receipt of such notice, deliver
the Shares to be repurchased according to the instructions of the Company. Said
Shares shall be transferred to the Company free and clear of all liens, charges
or encumbrances.
9. Effect of Termination of Employment. If the Employee's employment or
other relationship with the Company (or a Subsidiary) terminates, the effect of
the termination on the Employee's rights to acquire Shares shall be as follows:
9.1 Termination for Other than Disability, Cause or Death. If the
Employee ceases to be employed by the Company or a Subsidiary for any reason
other than for disability, cause or death, the Purchase Rights pursuant
described in Section 6 shall expire not later than one (1) month after the
Company issues a certificate of vesting to the Employee. During such one (1)
month period and prior to the expiration of the Purchase Right, the Employee may
exercise any right to purchase Shares granted to him, but only to the extent and
in such amount that such right existed on the date of termination of his
employment. The decision as to whether a termination for a reason other than
disability, cause or death has occurred shall be made by the Board, whose
decision shall be final and conclusive, except that employment shall not be
considered terminated in the case of sick leave or other bona fide leave of
absence approved by the Company,
9.2 Disability. If the Employee ceases to be employed by the Company
or a Subsidiary by reason of disability (within the meaning of Code Section
22(e)(3)), the Employee shall be deemed to be fully vested and shall be entitled
to all of the Shares hereunder conditioned upon payment in full, or
satisfaction, of the Promissory Note. The decision as to whether a termination
by reason of disability has occurred shall be made by the Board, whose decision
shall be final and conclusive,
9.3 Termination for Cause. If the Employee's employment by the
Company or a Subsidiary is terminated for cause, that portion of the Purchase
Rights which has not vested shall expire immediately and any Shares that have
vested and have not been paid for shall be forfeited and any remaining balance
due under the Promissory Note shall be canceled; provided, however, the Board
may, in its sole discretion, within thirty (30) days of such termination, waive
the expiration of the Purchase Rights by giving written notice of such waiver to
the Employee at such Employee's last known address. In the event of such waiver,
the Employee may exercise the Purchase Rights only to such extent, for such
time, and upon such terms and conditions as if such Employee had ceased to be
employed by the Company or a Subsidiary upon the date of such termination for a
reason other than disability, cause or death. In addition, the Company shall
have up to thirty (30) days after the date of termination to exercise its
Repurchase Rights to the Shares, or any portion thereof, or to waive such rights
and provide notice of such exercise or waiver to the Pledge Holder. Termination
for cause shall include any conduct so defined by the Employment Agreement
between the Company and the Employee, or any conduct detrimental to the
interests
4
<PAGE> 5
of the Company or a Subsidiary. The determination of the Board with respect to
whether a termination for cause has occurred shall be final and conclusive.
9.4 Death of an Employee. If an Employee ceases to be employed by
the Company by reason of death, the Employee shall be deemed to be fully vested
and shall be entitled to all of the Shares hereunder conditioned upon the
payment in full, or satisfaction, of the Promissory Note. The Purchase Rights
shall expire six (6) months after the Company issues a certificate of vesting to
the Employee, or his heirs, or his estate. The Purchase Rights may be
transferred by will or the applicable laws of descent and distribution, but only
to the extent such rights were exercisable on the date Employee ceased to be
employed by the Company or a Subsidiary by reason of death.
10. Transferability of Purchase Rights. The Purchase Rights shall not be
transferable, either voluntarily or by operation of law, otherwise than by will
or the laws of descent and distribution, and shall be exercisable during the
Employee's lifetime only by Employee.
11. Transferability of Shares. The Employee may transfer, assign or convey
Shares only upon delivery of a certificate of vesting, an opinion of legal
counsel to the Company, a certificate from the Company verifying that payment or
satisfaction has been made under the Promissory Note, and a certificate from the
Company waiving its Repurchase Rights to the Pledge Holder. Pursuant to the
terms of the Employment Agreement by and between the Company and the Employee,
the Employee shall be entitled to receive annually, based on a quarterly
calculation, a certificate of vesting from the Employer, but shall only be able
to dispose of vested Shares upon each anniversary of the date specified in the
Restricted Stock Purchase Agreement. The Company may waive any of the foregoing
requirements and in such event shall notify the Pledge Holder of the same.
12. Cancellation of Indebtedness; Refund of Purchase Price. In the event the
Board, or Company, decides to forgive any indebtedness in connection with the
promissory notes executed in connection with the Plan by a person who has
entered into an Employment Agreement with the Company, then any person then
under an Employment Agreement that has made the required payments for vested
Shares shall be entitled to a refund of the Purchase Price, or any portion
thereof, payable in cash or equity securities of the Company.
13. Adjustments Upon Changes in Capitalization. As used herein, the term
"Adjustment Event" means an event pursuant to which the outstanding Shares of
the Company are increased, decreased or changed into, or exchanged for a
different number or kind of shares or securities, without receipt of
consideration by the Company, through reorganization, merger, recapitalization,
reclassification, stock split, reverse stock split, stock dividend, stock
consolidation or otherwise. Upon the occurrence of an Adjustment Event, (i)
appropriate and proportionate adjustments shall be made to the number and kind
and price for the shares subject to the Purchase Rights, and (ii) appropriate
amendments to the Restricted Stock Purchase Agreement shall be executed by the
Company and Employee if the Board determines that such an
5
<PAGE> 6
amendment is necessary or desirable to reflect such adjustments. If determined
by the Board to be appropriate, in the event of an Adjustment Event which
involves the substitution of securities of a company other than the Company, the
Board shall make arrangements for the assumptions by such other corporation of
the Purchase Rights. Notwithstanding the foregoing, any such adjustment to the
Purchase Rights shall be made without change in the total price applicable to
the unvested portion of the Purchase Rights, but with an appropriate adjustment
to the number of shares, kind of shares and price for each share subject to the
Purchase Rights. The determination by the Board as to what adjustments,
amendments or arrangements shall be made pursuant to this Section 13, and the
extent thereof, shall be final and conclusive. No fractional Shares shall be
issued on account of any such adjustment or arrangement.
14. Time of Vesting. The time the Purchase Rights shall be deemed vested
shall be quarterly over a period of three years from the date determined by the
Board and specified in the Restricted Stock Purchase Agreement.
15. Privileges of Stock Ownership. The Employee shall be entitled to the
privileges of stock ownership as of the date of the Restricted Stock Purchase
Agreement as to all Shares to be issued and delivered to the Employee pursuant
to such agreement. No Shares shall be transferred by the Employee upon the
exercise of any Purchase Rights unless and until, in the opinion of the
Company's counsel, any then applicable requirements of any laws, or governmental
or regulatory agencies having jurisdiction, and of any exchanges upon which the
stock of the Company may be listed shall have been fully complied with.
16. Securities Law Compliance. The Company will diligently endeavor to
comply with all applicable securities laws before any stock is issued pursuant
to the Plan or related agreements. Without limiting the generality of the
foregoing, the Company may require from the Employee such investments
representation or such agreement, if any, as counsel for the Company may
consider necessary in order to comply with the Securities Act of 1933 as then in
effect, and may require that the Employee agree that any sale of the Shares will
be made only in such manner as is permitted by the Board. The Employee shall
take any action reasonably requested by the Company in connection with
registration or qualification of the Shares under federal or state securities
laws.
17. Shares Subject to Legend. If deemed necessary by the Company's counsel,
all certificates issued to represent Shares purchased upon exercise of the
Purchase Rights shall bear such appropriate legend conditions as counsel for the
Company shall require.
18. Conditions to Purchase Rights.
18.1 Compliance with Applicable Laws. The Company's obligation to
issue Shares is conditioned upon the completion by the Company of any
registration or other qualification of such Shares under any state and/or
federal law or rulings or regulations of any governmental regulatory body, or
the making of such investment representations or other
6
<PAGE> 7
representations by the Employee or any person entitled to exercise the Purchase
Rights order to comply with the requirements of any exemption from any such
registration or other qualification of Shares which the Board shall, in its sole
discretion, deem necessary or advisable. Such required representations and
undertakings may include representations and agreements that the Employee or any
person entitled to exercise the Purchase Rights (i) is not purchasing such
Shares for distribution, and (ii) agrees to have placed upon the face and
reverse of any certificates a legend setting forth any representations and
undertakings which have been given to the Board or a reference thereto.
18.2 Maximum Exercise Period. Notwithstanding any provision of the
Restricted Stock Purchase Agreement to the contrary, the Purchase Rights shall
expire no later than six years from the date hereof or five years if, as of the
date hereof, the Employee owns or is considered to own by reason of Code Section
424(d) more than 10% of the total combined voting power of all classes of stock
of the Company or any Subsidiary or parent corporation of the Company.
18.3 Opinion of Counsel. The Company's obligation to issue Shares to
the Employee is expressly conditioned upon the receipt of an opinion from
counsel to the Company certifying that the issuance of Shares and exercise of
Purchase Rights is not in violation of any state and/or federal law or rulings
or regulations of any governmental body.
19. Shares. The maximum number of Shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be five hundred thousand
(500,000) shares, subject to adjustment upon changes in capitalization of the
Company as provided in Section 13 hereof. If, on a given date, the number of
Shares with respect to which Purchase Rights are to be exercised exceeds the
number of Shares then available under the Plan, the Company shall make a pro
rata allocation of the Shares then remaining available for purchase in an
uniform manner as is practicable and as it shall determine to be equitable.
20. Shareholder Approval. The Plan is subject to approval of the
shareholders of the Company within 12 months after Board adoption. Any Shares
purchased prior to shareholder approval will be rescinded if shareholder
approval is not obtained before the expiration of the 12 month period. The
Shares subject to this Plan shall not be counted in determining shareholder
approval of this Plan.
21. Administration.
21.1 Administrative Body. The Plan shall be administered by the Board
or a committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply terms of this Plan, to determine eligibility and adjudicate
all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
7
<PAGE> 8
21.2 Rule 16b-3 Limitations. Notwithstanding the provisions of
Subsection 20.1, in the event Rule 16b-3 promulgated under the Securities Act of
1934, as amended (the "Exchange Act"), or any successor provision ("Rule 16b-3
") provides specific requirements for the administrators of plans of this type,
the Plan shall be administered only by such a body and in such a manner as shall
comply with the applicable requirements of Rule l6b-3. Unless permitted by Rule
16b-3, no discretion concerning decisions regarding the Plan shall be afforded
to any committee or person that is not "disinterested" as that term is used in
Rule 16b-3.
22. Term of Plan. The Plan shall become effective upon the earlier
to occur of its adoption by the Board or its approval by the shareholders of the
Company. It shall continue in effect for a term of ten (10) years unless sooner
terminated pursuant to Section 23.
23. Amendment or Termination. The Board may at any time and for any
reason terminate or amend the Plan. No such termination can affect Purchase
Rights previously granted. No amendment may make any change to Purchase Rights
already granted which adversely affects the rights of any participant. To the
extent necessary to comply with Rule 16b-3, the Company shall obtain shareholder
approval in such manner and to such degree as required.
8
<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated 10/30, 1996, hereinafter referred to as the
"Agreement", is by and between Legacy Brands, Inc. hereinafter referred to as
the "Employer", and Michael E. Banks, hereinafter referred to as the "Employee".
ARTICLE 1
Term
1.1 Term of Employment. The Employer hereby employs the Employee and the
Employee hereby accepts employment as Senior Vice President of Marketing and
Sales of the Employer for a period of three (3) years (the "Term") beginning on
September 1, 1996 (the "effective date"), and which will be automatically
extended on the anniversary date hereof, for an additional twelve (12) month
period, unless canceled by either party as described herein.
1.2 Notice of Cancellation. Following the expiration of the Term hereof,
the automatic extension of this Agreement may be canceled by either party by
giving written notice to the other party not later than 60 days before the
anniversary date hereof, that the Agreement shall not be extended ("Notice of
Cancellation"). In the event that either party cancels the automatic extension
of this Agreement, such failure to extend the Agreement shall be considered a
termination of the Employee as described in Article 6, herein, and such
termination shall be subject to the termination provisions provided therein.
This Agreement may be terminated earlier as hereinafter provided.
ARTICLE 2
Duties of Employee
2.1 Duties of Employee. As Senior Vice President of Marketing and Sales,
Employee shall be responsible for all facets of marketing and sales of the
Employee including overall direction, creation and implementation of a sales
plan, marketing and advertising. The Employee shall also work closely with other
executives, brokers and marketing agencies to facilitate placement and
sell-through of all products. The parties hereto agree that the Employee's
services are unique. Other duties shall include, but are not limited to, working
towards Employer's future success, and working closely with the other executives
in evaluating the acquisition of additional licenses and public financing of the
Employer. Notwithstanding the preceding provisions of this Article 2.1, the
Chief Executive Officer ("CEO") shall have the right to reassign the Employee to
such duties as he deems fit and proper in his sole discretion during the term
hereof so long as such reassignment is consistent with the Employee's general
responsibilities under this Agreement. Such reassignment shall not constitute
termination.
2.2 Best Efforts of Employee. Employee agrees that he will at all times
faithfully, industriously, and to the best of his ability, experience, and
talents, perform all of the duties that may be required of and from him pursuant
to the express and implicit terms hereof to the reasonable
<PAGE> 2
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
MICHAEL E. BANKS
Page 2
satisfaction of Employer. Such duties shall be rendered at the home office of
Employer, and at such other place or places as Employer shall in good faith
require or as the interest, needs, business or opportunity of Employer shall
require.
2.3 Engaging in Other Employment. The Employee shall devote his productive
time, ability, and attention to the business of the Employer during the term of
this Agreement. The Employee shall not, during his employment:
(i) within any jurisdiction or marketing area in which the Employer
or any of its subsidiaries or affiliates is doing business or is qualified to do
business, directly or indirectly own, manage, operate, control, be employed by
or participate in ownership, management operation or control of or be connected
in any manner with any business engaged in and in competition with the business
conducted by Employer or any of its subsidiaries or affiliates. For these
purposes, ownership of securities of not in excess of one (1%) percent of any
class of securities of a public company shall not be considered to be
competition with Employer or any of its subsidiaries or affiliates; or
(ii) solicit for himself or any person other than the Employer or
any of its subsidiaries, the business of any company which is a customer or
client of the Employer, or any of its subsidiaries, or was a customer or client
of Employer within two (2) years prior to the date of this Agreement; or
(iii) persuade or attempt to persuade any employee of the Employer
or any of its subsidiaries to leave the Employer's or subsidiary's employ or to
become employed by any person other than the Employer or subsidiary.
The Employee may perform certain marketing functions unrelated to his
position as Senior Vice President of Marketing and Sales outside of the
Employer's principal place of business so long as these activities are approved
by the CEO of the Employer and so long as they do not interfere with the
Employee's duties under this Agreement.
2.4 Regulations. The Employee agrees to comply with all federal, state and
local laws, ordinances and regulations in the conduct of his business on behalf
of Employer.
If and when licenses or other registrations become required by law
or pertinent regulatory bodies or agencies, the Employee shall undertake to make
any necessary applications or do what may be required to secure such licenses or
registrations.
<PAGE> 3
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
MICHAEL E. BANKS
Page 3
ARTICLE 3
Duties of Employer
3.1 Payment of Compensation and Provision of Benefits. During the term
hereof, Employer agrees to pay all compensation due to Employee on at least a
monthly basis as provided in Article 4, as well as to provide benefits,
allowances and vacation as set forth therein.
3.2 Advance Costs of Certain Litigation. During the term hereof and
subsequent thereto, Employer agrees to advance and incur any litigation costs
incurred by Employee in connection with any act or omission under this
Agreement, or with any product liability, tampering, officer or director
litigation brought by any investor or non-party to this Agreement. In exchange
for the Employer's promise to advance such costs, the Employee agrees to
cooperate fully in the investigation and defense of any such claim.
ARTICLE 4
Compensation
4.1 Basic Compensation. As compensation for services rendered under this
Agreement, the Employee shall be entitled to receive from the Employer a minimum
annual salary ("Annual Base Salary"), payable to Employee bi-monthly on the 1st
and 15th days of each month of the term hereof, as follows:
<TABLE>
<CAPTION>
For the
Period: Amount
----------- ---------
<S> <C>
1996-1997................................. $120,000;
1997-1998................................. $132,000,
1998-1999................................. $145,000;
</TABLE>
The amount of Employee's actual compensation, including Annual Base
Salary and benefits, may be increased by the Chief Executive Officer ("CEO") of
Employer at any time above the minimum Annual Base Salary described herein, and
such increase shall not effect the operation or validity of any other provision
of this Agreement.
4.2 Bonus. The Employee is entitled to the payment of a bonus calculated
on a target profit amount for each year. The target profit amount is the amount
approved by the Chief Executive Officer (CEO) and shall be calculated based upon
a formula comprised of earnings from operations before interest, taxes,
depreciation and amortization. If, in any year hereof, the Employer attains 80%
to 99% of the target profit amount, the Employee is entitled to a bonus of 40%
of his
<PAGE> 4
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
MICHAEL E. BANKS
Page 4
Annual Base Salary for the year, minus one percentage point for each percentage
point the target profit amount is less than 100%. If the target profit amount
is met exactly, the bonus shall be 40% of the Annual Base Salary. If the target
profit amount is exceeded by 1% to 10%, the bonus shall be 40% plus 2% of the
Annual Base Salary for each percentage point over 100%. If the target profit
amount is exceeded by 111% up to a ceiling of 150%, the bonus shall be 60% of
the Annual Base Salary plus 3% of the Annual Base Salary for each percentage
point over 110%. Such bonus shall be calculated based upon the Employer's fiscal
year. Bonuses will be paid in three installments, the first payment representing
40% of the total bonus shall be made no later than seven (7) months after the
beginning of the Employer's fiscal year and will be calculated using the
Employer's unaudited budgeted profits, the second payment representing another
40% of the bonus shall be made no later than thirteen (13) months after the
beginning of the Employer's fiscal year and shall be calculated using Employer's
unaudited actual financial figures, and the third payment representing the final
20% shall be made no sooner than the date upon which the Company receives
audited financial statements. Any adjustments will be made at the time of the
third payment. Any overpayments will be offset in the first and subsequent bonus
payments in the following and subsequent fiscal year(s) until repaid. Any
retroactive change in accounting principles which might affect any prior year(s)
profit shall not give rise to any claim by the Employer against the Employee
for any bonus payment. Furthermore, any change in the accounting principles
which was not contemplated in calculating the budgeted or actual profit shall
not apply to the calculation of the Employee's bonus.
4.3 Employee Benefits. The Employer shall use its best efforts to procure
and maintain a group health insurance policy which shall provide the customary
benefits to the Employee, as well as any other benefits approved by the CEO. If
and when such benefits are provided to the Employee, the Employer agrees to
maintain such benefits for the remaining term of this Agreement.
4.4 Expenses. During the Term, Employee shall be reimbursed for his
reasonable travel, entertainment, business meeting and similar expenditures for
the benefit of Employer, but only in accordance with the policies of Employer as
adopted by the Board from time to time. With respect to any expenses which are
reimbursed by Employer to Employee, Employee shall account to Employer in
sufficient detail to allow Employer to claim an income tax deduction for such
paid item, if such item is deductible.
4.5 Restricted Stock Award. The Employee shall be offered, pursuant to a
separate Restricted Stock Purchase Agreement, an opportunity to purchase shares
of Common Stock of the Employer (the "Shares"). The Employee's right to receive
the full amount of Shares owed under the restricted Stock Purchase Agreement
shall be contingent upon the Employee's continued employment with Employer. In
the event of a change in control resulting in a merger or acquisition, the
Employee shall be granted securities of the new entity and adjusted to assure no
dilution of the Employee's ownership in the Employer.
<PAGE> 5
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
MICHAEL E. BANKS
Page 5
4.6 Vesting. The Employee is entitled to receive annually, but based on a
quarterly calculation, a certificate of vesting, in the form attached hereto as
Exhibit A, from the Employer representing the completion of twelve months of
service under this Agreement calculated from February 1, 1996, which the
Employee shall deliver to the Pledge Holder along with certain other documents
pursuant to the terms of the Restricted Stock Purchase Agreement in order to
transfer, assign or convey Shares purchased under the Restricted Stock Purchase
Agreement. Upon the expiration of one year from February 1, 1996 and delivery of
the certificate of vesting together with other required documents, the Employee
shall have the right to dispose of one-third of the Shares and shall be
obligated to pay, or otherwise satisfy, one-third of the principal amount of the
Promissory Note plus interest, if any, pursuant to the Restricted Stock Purchase
Agreement and related Promissory Note. Such right to dispose of a percentage of
Shares and corresponding duty to pay, or otherwise satisfy, amounts owed shall
increase to two-thirds on February 1, 1998. The Employee shall not have the
right to dispose of all of the Shares or the obligation to pay, or otherwise
satisfy, the principal amount and interest under the promissory Note until
February 1, 1999.
Once any portion of the Shares has vested and corresponding payments have
been made pursuant to this paragraph, or under the Promissory Note, or the debt
has been forgiven, such Shares are not subject to repurchase by the Employer. In
the event the Employee is terminated without cause pursuant to Article 6.4, or
upon the sale of the business, or change in CEO vesting will be determined
according to Article 6.5. Any corresponding payments under the Promissory Note
that have not been made will be due thirty days from the date of such
termination. Failure to pay within thirty days will subject the Shares to
repurchase by the Employer.
4.7 Vacation. Employee shall be entitled to vacation of up to fifteen (15)
calendar days per year, for the first year of this agreement and twenty (20)
calendar days per year for years two and three. Such vacation time may accrue if
not taken. Employee shall be entitled to observe all nationally observed
holidays and to take and accrue such vacation time and sick days as determined
by Employer's policy on such accruals for all employees.
ARTICLE 5
Confidentiality
5.1 Confidentiality. During the course of employment, Employee shall
become aware of certain methods, practices and procedures with which Employer
conducts its business, including but not limited to: any trade secrets,
confidential information, knowledge, data or other information of Employer
relating to products, processes, know how, designs, customer lists, business
plans, marketing plans and strategies, and pricing strategies or any subject
matter pertaining to any business of Employer or any of its clients, licensees
or affiliates, all of which
<PAGE> 6
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
MICHAEL E. BANKS
Page 6
are proprietary information and as such are trade secrets. Employee agrees to
keep confidential, except as Employer may otherwise consent, and not to
disclose, or make any use of except for the benefit of Employer, at any time
either during or subsequent to his employment, any said trade secrets.
5.2 Return of Confidential Material. In the event of Employee's
termination of employment with Employer, for any reason whatsoever, Employee
agrees to promptly surrender and deliver to Employer all records, materials,
equipment, drawings and data of any nature pertaining to any invention or
confidential information of Employer or to his employment. Employee agrees not
to take with him any description containing or pertaining to any confidential
information, knowledge or data of Employer which he may produce or obtain during
the course of his employment.
ARTICLE 6
Termination
and
Severance Pay
6.1 Termination by Death or Disability. This Agreement terminates upon the
death or disability of the Employee. Compensation provided in the case of
disability is to be determined as if the Employee had been terminated for cause
per 6.3 below. All compensation ends on the date of the Employee's death.
6.2 Termination by Employee. If the Employee terminates this Agreement
with or without cause, he shall forfeit his compensation and bonuses remaining
in this Agreement, and shall forfeit that portion of his restricted stock award
as provided elsewhere in this Agreement. Any termination by Employee shall be
with 60 days notice to the Employer.
6.3 Termination by Employer for Cause. For purposes of this Agreement, an
event or occurrence constituting "Cause" shall mean, as determined by Employer:
6.3.1 Employee's willful failure or refusal after notice thereof, to
perform specific directives of the Chief Executive Officer of
Employer, when such directives are consistent with the scope and
nature of Employees' duties and responsibilities as set forth in
clause 2.1. hereof, or
6.3.2 Dishonesty of Employee affecting Employer; or
6.3.3 Drunkenness or use of drugs which interferes with the
performance of
<PAGE> 7
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
MICHAEL E. BANKS
Page 7
Employee's duties and responsibilities under this Agreement, or
6.3.4 Any gross or willful conduct of Employee resulting in
substantial loss to Employer, substantial damage to Employer's
reputation, or theft or defalcation from Employer; or
6.3.5 Gross incompetence on the part of the Employee in the
performance of the duties and responsibilities under this Agreement;
or
6.3.6 Any material breach (not covered by any of subclauses 6.3.1
through 6.3.5) of Article 2 or Article 5 of this Agreement if such
breach is not cured within 10 days after written notice thereof to
Employee by Employer.
In the event the Employee is terminated pursuant to this Article
6.3, the Employer shall have the option to compensate the Employee pursuant to
this Agreement for a period of up to two months from the date of such
termination. If the Employer decides to compensate the Employee pursuant to this
Article, the Employee shall have the following duties and obligations for the
period so compensated: i) to cooperate with the Employer by providing consulting
services on site at any site reasonably required by the Employer, ii) to not
engage in any course of conduct which competes, directly or indirectly, with the
business of the Employer, iii) to keep confidential all of the Employer's trade
secrets, confidential information, knowledge or data, and iv) return all
confidential material to the Employer.
6.4 Termination of Employee Without Cause. In the event the Employee is
terminated for any reason other than for cause, the Employee shall be entitled
to the compensation and bonuses he would have been paid had the Employer not
terminated the Employee and the Employee had continued to provide services
hereunder for as long as the CEO shall deem proper which in no event shall be
less than two months from the date of termination. The Employee shall continue
to be bound by Article 5 hereof.
If the Employer compensates the Employee pursuant to this Article
6.4, the Employee shall have the following duties and obligations for the period
so compensated: i) to cooperate with the Employer by providing consulting
services on site at any site reasonably required by the Employer, ii) to not
engage in any course of conduct which competes, directly or indirectly, with the
business of the Employer, iii) to keep confidential all of the Employer's trade
secrets, confidential information, knowledge or data, and iv) return all
confidential material to the Employer.
6.5 Termination of Employee Upon Sale of Business; Change in CEO. This
Agreement shall survive a merger, consolidation or other business combination,
or change in the current CEO, Thomas E. Kees, for the longer of the remaining
term of this Agreement or one year. In the event
<PAGE> 8
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
MICHAEL E. BANKS
Page 8
of a merger, consolidation or other business combination, or change in CEO, the
Employer shall:
6.5.1 Pay the Employee salary under the terms of this Agreement and
may choose, at Employer's sole discretion, to utilize the services
of the Employee on a consultant or independent contractor basis;
6.5.2 Waive the vesting requirement as to any unvested Shares such
that the Employee will have the right to dispose of all of the
Shares contemplated by and pursuant to the Restricted Stock Purchase
Agreement; and
6.5.3 Provide the Employee with an Executive Placement Package.
6.6 Effect of Termination on other Employees. In the event of termination,
the Employee shall not for a period of at least three (3) years after
termination persuade or attempt to persuade any employee of the Employer or any
of its subsidiaries to leave the Employer's or subsidiary's employ or to become
employed by any person other than the Employer or subsidiary.
6.7 Effect of Termination on Article 5. In the event of the termination of
this Agreement, Article 5.1 and 5.2 will survive termination of this Agreement.
6.8 Pre-Termination Election. In the event the Employee or the Employer
does not elect to renew this Agreement for a new term, for the last 12 months of
the term hereof, the Employee and the Employer may mutually elect to convert the
Employee's duties and title under this Agreement to the duties and title of
consultant. Upon the expiration of this Agreement, the Employee may continue to
utilize his services as a consultant.
6.9 Administrative Leave. CEO shall have the right to place any Employee
on Administrative Leave for a period of up to four weeks, which shall be paid or
unpaid at the sole discretion of the CEO, during which time the Employee shall
not discharge his duties to the Employer. In the event the Employee is placed on
unpaid leave pursuant to this Article 6.9, then at the end of thirty days from
the date of effectiveness of such leave CEO shall make a determination as to
Employee's status resulting in either termination or continued employment.
ARTICLE 7
GENERAL PROVISIONS
7.1 Succession. This Agreement shall inure to the benefit of and shall be
binding upon Employer, its successors and assigns. The obligations and duties of
Employee hereunder shall be
<PAGE> 9
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
MICHAEL, E. BANKS
Page 9
personal and not assignable.
7.2 Notices. Any notices to be given hereunder by either party to the
other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested. Notices
delivered personally shall be deemed communicated as of actual receipt, mailed
notices shall be deemed communicated as of five (5) days after mailing. Mailed
notices shall be addressed to the parties as follows, but each party may change
his address by written notice in accordance with this paragraph:
If to Employer:
Legacy Brands, Inc.
2200-B Douglas Blvd., Suite 100
Roseville, California 95611
Attn: Secretary
If to Employee:
Michael E. Banks
2840 Ketchikan Drive
Rocklin, California 95765
7.3 Inclusion of Entire Agreement Herein. This Agreement supersedes any
and all other agreements, either oral or in writing, between the parties hereto
with respect to the employment of the Employee by the Employer and contains all
of the covenants and agreements between the parties with respect to such
employment in any manner whatsoever with exception of such stock bonus plans,
stock options or other deferred compensation as may from time to time be granted
to Employee by action of the Board of Directors of Employer.
7.4 Law Governing Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
It is the desire and intent of the parties to this Agreement that
the provisions of this Agreement shall be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought; and that if any particular provisions or portion of
this Agreement shall adjudicated to be invalid or unenforceable, such agreement
shall be deemed amended to delete therefrom such provision or portion
adjudicated to be invalid or
<PAGE> 10
EMPLOYMENT AGREEMENT
LEGACY BRANDS. INC. AND
MICHAEL, E. BANKS
Page 10
unenforceable, such amendment to apply only with respect to the operation of
such provision or portion in the particular jurisdiction in which such
adjudication is made.
The parties to this Agreement recognize that the performance of the
obligations under this Agreement is special, unique and extraordinary in
character and that in the event of the breach by Employee of the terms and
conditions of this Agreement to be performed, the Employer shall be entitled, if
it so elects, to institute and prosecute proceedings in any court of competent
jurisdiction, either in law or in equity, to obtain damages for any breach of
this Agreement or to enforce the specific performance thereof by Employee or to
enjoin Employee from performing services for any such other person, firm or
corporation.
7.5 Arbitration. In the event of any dispute arising under this Employment
Agreement, including any dispute regarding the nature, scope or quality of
services provided by either party hereto, it is hereby agreed that such dispute
shall be resolved by binding arbitration to be conducted by the American
Arbitration Association (AAA), to be arbitrated in accordance with their rules
and procedures in Sacramento, California. In the event of any such arbitration,
pending resolution of the arbitration and award of costs by the arbitrator, each
party hereto shall advance one-half of the amounts, if any, requested to be
advanced to the arbitrator and/or the sponsoring organization.
7.6 Attorney's Fees and Costs. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which may be entitled.
7.7 Payment of Money Due Deceased Employee. If the Employee dies prior to
the expiration of the term of employment, any money that may be due him from the
Employer under this Agreement as of the date of his death shall be paid to his
executors, administrators, heirs, personal representatives, successors, and
assigns.
7.8 Modification or Extension of Agreement. This Agreement may not be
changed, modified, released, discharged, abandoned, or otherwise amended, in
whole or in part, except in writing, signed by the Employee and the Employer,
but only after written approval of the Employer's CEO. Employee agrees that any
subsequent change or changes in his duties, salary or compensation shall not
effect the validity or scope of this Agreement.
If, on the request or with the consent of Employer, Employee continues in
his employment beyond the period described in Article 1, this Agreement shall
remain in effect during continuance of such service.
<PAGE> 11
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
MICHAEL, E. BANKS
Page 11
IN WITNESS WHEREOF, the parties have executed this Agreement at the
Employer's offices in Roseville, California, this 30th day of Oct., 1996.
EMPLOYER:
LEGACY BRANDS, INC.
By: /s/ THOMAS E. KEES
------------------------------
Name: THOMAS E. KEES
Title: PRES., CEO & CHAIRMAN
EMPLOYEE:
By: /s/ MICHAEL E. BANKS
------------------------------
Michael E. Banks
<PAGE> 12
EXHIBIT A
CERTIFICATE OF VESTING
<PAGE> 13
CERTIFICATE OF VESTING
The: Secretary, or Assistant Secretary of Legacy Brands, Inc., ("Company")
does this ___th of ___________, certify that ___________________, an employee
of the Company, has completed _____ quarters of employment. The Employee has the
right to purchase _________ shares of Common Stock of the Company.
The issuance of this certificate creates an obligation in the Employee to
pay such principal amount plus interest as bears relation to the portion of the
shares of Common Stock of the Company which he is entitled to dispose of
pursuant to the terms of the Employment Agreement, Restricted Stock Purchase
Agreement and related Promissory Note.
The undersigned certifies that the foregoing is true and accurate.
By:
------------------------------
Title:
------------------------------
<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated Oct. 31st, 1996, hereinafter referred to as the
"Agreement", is by and between Legacy Brands, Inc., hereinafter referred to as
the "Employer", and Craig C. Connerty, hereinafter referred to as the
"Employee".
ARTICLE I
Term
1.1 Term of Employment. The Employer hereby employs the Employee and the
Employee hereby accepts employment as Treasurer and Chief Financial Officer of
the Employer for a period of three (3) years (the "Term") beginning on September
1, 1996 (the "effective date"), and which will be automatically extended on the
anniversary date hereof, for an additional twelve (12) month period, unless
canceled by either party as described herein.
1.2 Notice of Cancellation. Following the expiration of the Term hereof,
the automatic extension of this Agreement may be canceled by either party by
giving written notice to the other party not later than 60 days before the
anniversary date hereof, that the Agreement shall not be extended ("Notice of
Cancellation"). In the event that either party cancels the automatic extension
of this Agreement, such failure to extend the Agreement shall be considered a
termination of the Employee as described in Article 6, herein, and such
termination shall be subject to the termination provisions provided therein.
This Agreement may be terminated earlier as hereinafter provided.
ARTICLE 2
Duties of Employee
2.1 Duties of Employee. As Treasurer and Chief Financial Officer, Employee
shall be responsible for all matters relating to the financial condition,
accounting and treasury activities of the Employer. The Employee shall also lead
the analysis of health, insurance and benefit programs of the Employer. Other
duties shall include, but are not limited to, working towards Employer's future
success, and working closely with the Chief Executive Officer and other
executives in evaluating the acquisition of other licenses and public financing.
Notwithstanding the preceding provisions of this Article 2. 1, Chief Executive
Officer ("CEO") shall have the right to reassign the Employee to such duties as
he deems fit and proper in his sole discretion during the term hereof so long as
such reassignment is consistent with the Employee's general responsibilities
under this Agreement. Such reassignment shall not constitute termination.
2.2 Best Efforts of Employee. Employee agrees that he will at all times
faithfully, industriously, and to the best of his ability, experience, and
talents, perform all of the duties that may be required of and from him pursuant
to the express and implicit terms hereof to the reasonable satisfaction of
Employer. Such duties shall be rendered at the home office of Employer, and at
such other place or places as Employer shall in good faith require or as the
interest, needs, business or
<PAGE> 2
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
CRAIG C. CONNERTY
Page 2
opportunity of Employer shall require.
2.3 Engaging in Other Employment. The Employee shall devote his productive
time, ability, and attention to the business of the Employer during the term of
this Agreement. The Employee shall not, during his employment:
(i) within any jurisdiction or marketing area in which the Employer
or any of its subsidiaries or affiliates is doing business or is qualified to do
business, directly or indirectly own, manage, operate, control, be employed by
or participate in ownership, management operation or control of or be connected
in any manner with any business engaged in and in competition with the business
conducted by Employer or any of its subsidiaries or affiliates. For these
purposes, ownership of securities of not in excess of one (1%) percent of any
class of securities of a public company shall not be considered to be
competition with Employer or any of its subsidiaries or affiliates; or
(ii) solicit for himself or any person other than the Employer or
any of its subsidiaries, the business of any company which is a customer or
client of the Employer, or any of its subsidiaries, or was a customer or client
of Employer within two (2) years prior to the date of this Agreement; or
(iii) persuade or attempt to persuade any employee of the Employer
or any of its subsidiaries to leave the Employer's or subsidiary's employ or to
become employed by any person other than the Employer or subsidiary.
The Employee may perform certain CPA functions unrelated to his position
as Chief Financial Officer outside of the Employer's principal place of business
so long as these functions are approved by the CEO of the Employer and so long
as they do not interfere with the Employee's duties under this Agreement.
2.4 Regulations. The Employee agrees to comply with all federal, state and
local laws, ordinances and regulations in the conduct of his business on behalf
of Employer.
If and when licenses or other registrations become required by law
or pertinent regulatory bodies or agencies, the Employee shall undertake to make
any necessary applications or do what may be required to secure such licenses or
registrations.
ARTICLE 3
Duties of Employer
3.1 Payment of Compensation and Provision of Benefits. During the term
hereof,
<PAGE> 3
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
CRAIG C. CONNERTY
Page 3
Employer agrees to pay all compensation due to Employee on at least a monthly
basis as provided in Article 4, as well as to provide benefits, allowances and
vacation as set forth therein.
2 Advance Costs of Certain Potential Litigation. During the term hereof
and subsequent thereto, Employer agrees to advance and incur any litigation
costs incurred by Employee in connection any act or omission under this
Agreement, or with any product liability, tampering, officer or director
litigation brought by any investor or non-party to this Agreement. In exchange
for the Employer's promise to advance any such costs, the Employee agrees to
cooperate fully in the investigation and defense of any such claims.
ARTICLE 4
Compensation
4.1 Basic Compensation. As compensation for services rendered under this
Agreement, the Employee shall be entitled to receive from the Employer a minimum
annual salary ("Annual Base Salary"), payable to Employee bimonthly on the 1st
and 15th days of each month of the term hereof, as follows:
<TABLE>
<CAPTION>
For the
Period: Amount
----------- ---------
<S> <C>
1996-1997........................... $120,000;
1997-1998........................... $132,000;
1998-1999........................... $145,000;
</TABLE>
The amount of Employee's actual compensation, including Annual Base
Salary and benefits, may be increased by CEO of Employer at any time above the
minimum Annual Base Salary described herein, and such increase shall not effect
the operation or validity of any other provision of this Agreement.
4.2 Bonus. The Employee is entitled to the payment of a bonus calculated
on a target profit amount for each year. The target profit amount is the amount
approved by the Chief Executive Officer (CEO) and shall be calculated based upon
a formula comprised of earnings from operations before interest, taxes,
depreciation and amortization. If, in any year hereof, the Employer attains 80%
to 99% of the target profit amount, the employee is entitled to a bonus of 30%
of his Annual Base Salary for the year, minus one percentage point for each
percentage point the target profit amount is less than 100%. If the target
profit amount is met exactly, the bonus shall be 30% of the Annual Base Salary.
If the target profit amount is exceeded by 1% to 10%, the bonus shall be 30%
plus 2% of the Annual Base Salary for each percentage point over 100%. If the
target profit amount
<PAGE> 4
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
CRAIG C. CONNERTY
Page 4
is exceeded by 111% up to a ceiling of 150%, the bonus shall be 50% of the
Annual Base Salary plus 3% of the Annual Base Salary for each percentage point
over 110%. Such bonus shall be calculated based upon the Employer's fiscal year.
Bonuses will be paid in three installments, the first payment representing 40%
of the total bonus shall be made no later than seven (7) months after the
beginning of the Employer's fiscal year and will be calculated using Employer's
unaudited budgeted profits, the second payment representing another 40% of the
bonus shall be made no later than thirteen (13) months after the beginning of
the Employer's fiscal year and shall be calculated using Employer's unaudited
actual financial figures, and the third payment representing the final 20% shall
be made no sooner than the date upon which the Employer receives audited
financial statements. Any adjustments will be made at the time of the third
payment. Any overpayments shall be offset in the first and subsequent bonus
payment(s) made in the following and subsequent fiscal year(s) until repaid. Any
retroactive change in accounting principles which might affect any prior year(s)
profit shall not give rise to any claim by the Employer against the Employee for
any bonus payment. Furthermore, any change in accounting principles which was
not contemplated in calculating the budgeted or actual profit shall not apply to
the calculation of the Employee's bonus.
4.3 Employee Benefits. The Employer shall use its best efforts to procure
and maintain a group health insurance policy which shall provide the customary
benefits to the Employee, as well as any other benefits approved by the CEO. If
and when such benefits are provided to the Employee, the Employer agrees to
maintain such benefits for the remaining term of this Agreement.
4.4 Expenses. During the Term, Employee shall be reimbursed for his
reasonable travel, entertainment, business meeting and similar expenditures for
the benefit of Employer, but only in accordance with the policies of Employer as
adopted by the Board from time to time. With respect to any expenses which are
reimbursed by Employer to Employee, Employee shall account to Employer in
sufficient detail to allow Employer to claim an income tax deduction for such
paid item, if such item is deductible.
4.5 Restricted Stock Award. The Employee shall be offered, pursuant to a
separate Restricted Stock Purchase Agreement, an opportunity to purchase shares
of Common Stock of the Employer (the "Shares"). The Employee's right to receive
the full amount of Shares owed under the Restricted Stock Purchase Agreement
shall be contingent on the Employee's continued employment with the Employer. In
the event of a change in control resulting in a merger or acquisition, the
Employee shall be granted securities of the new entity and adjusted to assure an
approximation of value of the Employee's ownership in the Employer.
4.6 Vesting. The Employee is entitled to receive annually, but based on a
quarterly calculation, a certificate of vesting from the Employer representing
the completion of twelve months of service under this Agreement calculated from
February 1, 1996, in the form attached hereto as Exhibit A, which the Employee
shall deliver to the Pledge Holder along with certain other
<PAGE> 5
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
CRAIG C. CONNERTY
Page 5
documents pursuant to the terms of the Restricted Stock Purchase Agreement in
order to transfer, assign or convey Shares purchased under the Restricted Stock
Purchase Agreement. Upon the expiration of one year from February 1, 1996, and
delivery of the certificate of vesting together with other required documents,
the Employee shall have the right to dispose of one-third of the Shares and
shall be obligated to pay, or otherwise satisfy, one-third of the principal
amount of the Promissory Note plus interest pursuant to the Restricted Stock
Purchase Agreement and related Promissory Note. Such right to dispose of a
percentage of Shares and corresponding duty to pay, or otherwise satisfy,
amounts owed shall increase to two-thirds on February 1, 1998. The Employee
shall not have the right to dispose of all of the Shares or the obligation to
pay, or otherwise satisfy, the principal amount and interest thereupon under the
Promissory Note until February 1, 1999.
Once any portion of the Shares has vested and corresponding payments have
been made pursuant to this paragraph, or under the Promissory Note, or the debt
has been forgiven, such Shares are not subject to repurchase by the Employer. In
the event the Employee is terminated without cause pursuant to Article 6.4, or
upon the sale of the business or a change in CEO vesting will be determined
according to Article 6.5. Any corresponding payments under the Promissory Note
that have not been made will be due thirty days from the date of such
termination. Failure to pay within thirty days will subject the Shares to
repurchase by the Employer.
4.7 Vacation. Employee shall be entitled to vacation of up to fifteen (I
5) calendar days per year, for the first year of this agreement and twenty (20)
calendar days per year for years two and three. Such vacation time may accrue if
not taken. Employee shall be entitled to observe all nationally observed
holidays and to take and accrue such vacation time and sick days as determined
by Employer's policy on such accruals for all employees.
4.8 Professional Fees and Continuing Education Costs. The Employer agrees
to pay Employee's annual CPA and association fees. The Employer shall also pay
Employee's reasonable costs and expenses incurred in connection with Employee's
annual education requirements.
ARTICLE 5
Confidentiality
5.1 Confidentiality. During the course of employment, Employee shall
become aware of certain methods, practices and procedures with which Employer
conducts its business, including but not limited to: any trade secrets,
confidential information, knowledge, data or other information of Employer
relating to products, processes, know how, designs, customer lists, business
plans, marketing plans and strategies, and pricing strategies or any subject
matter pertaining to any business of Employer or any of its clients, licensees
or affiliates, all of which Employer and
<PAGE> 6
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
CRAIG C. CONNERTY
Page 6
Employee agree are proprietary information and as such are trade secrets.
Employee agrees to keep confidential, except as Employer may otherwise consent,
and not to disclose, or make any use of except for the benefit of Employer, at
any time either during or subsequent to his employment, any said trade secrets.
5.2 Return of Confidential Material. In the event of Employee's
termination of employment with Employer, for any reason whatsoever, Employee
agrees to promptly surrender and deliver to Employer all records, materials,
equipment, drawings and data of any nature pertaining to any invention or
confidential information of Employer or to his employment. Employee agrees not
take with him any description containing or pertaining to any confidential
information, knowledge or data of Employer which he may produce or obtain
during the course of his employment.
ARTICLE 6
Termination
and
Severance Pay
6.1 Termination by Death or Disability. This Agreement terminates upon the
death or disability of the Employee. Compensation provided in the case of
disability is to be determined as if the Employee had been terminated for cause
per 6.3 below. All compensation ends on the date of the Employee's death.
6.2 Termination by Employee. If the Employee terminates this Agreement
with or without cause, he shall forfeit his compensation and bonuses remaining
in this Agreement, and shall forfeit that portion of his restricted stock award
as provided elsewhere in this Agreement. Any termination by Employee shall be
with 60 days notice to the Employer.
6.3 Termination by Employer for Cause. For purposes of this Agreement, an
event or occurrence constituting "Cause" shall mean, as determined by Employer:
6.3.1 Employee's willful failure or refusal after notice thereof, to
perform specific directives of the Chief Executive Officer of
Employer, when such directives are consistent with the scope and
nature of Employees' duties and responsibilities as set forth in
clause 2.1. hereof; or
6.3.1 Dishonesty of Employee affecting Employer; or
6.3.2 Drunkenness or use of drugs which interferes with the
performance of
<PAGE> 7
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
CRAIG C. CONNERTY
Page 7
Employee's duties and responsibilities under this Agreement; or
6.3.3 Any gross or willful conduct of Employee resulting in
substantial loss to Employer, substantial damage to Employer's
reputation, or theft or defalcation from Employer; or
6.3.4 Gross incompetence on the part of the Employee in the
performance of the duties and responsibilities under this Agreement;
or
6.3.5 Any material breach (not covered by any of subc1auses 6.3.1
through 6.3.5) of Article 2 or Article 5 of this Agreement if such
breach is not cured within 10 days after written notice thereof to
Employee by Employer.
In the event the Employee is terminated pursuant to this Article
6.3, the Employer shall have the option to compensate the Employee pursuant to
this Agreement for a period of up to two months from the date of such
termination. If the Employer decides to compensate the Employee pursuant to this
Article, the Employee shall have the following duties and obligations for the
period so compensated: i) to cooperate with the Employer by providing consulting
services on site at any site reasonably required by the Employer, ii) not engage
in any course of conduct which competes, directly or indirectly, with the
business of the Employer, iii) keep confidential all of the Employer's trade
secrets, confidential information, knowledge or data, and iv) return all
confidential material to the Employer.
6.4 Termination of Employee Without Cause. In the event the Employee is
terminated for any reason other than for cause, the Employee shall be entitled
to the compensation and bonuses he would have been paid had the Employer not
terminated the Employee and the Employee had continued to provide services
hereunder for as long as the CEO shall deem proper which in no event shall be
less than two months from the date of termination. The Employee shall continue
to be bound by Article 5 hereof.
If the Employer compensates the Employee pursuant to this Article
6.4, the Employee shall have the following duties and obligations for the period
so compensated: i) to cooperate with the Employer by providing consulting
services on site at any site reasonably required by the Employer, ii) not engage
in any course of conduct which competes, directly or indirectly, with the
business of the Employer, iii) keep confidentiality all of Employer's trade
secrets, confidential information, knowledge or data, and iv) return all
confidential material, including but not limited to trade secrets, knowledge or
data, to the Employer.
6.5 Termination of Employee Upon Sale of Business; Change in CEO. This
Agreement shall survive a merger, consolidation, or other business combination
or change in the current CEO,
<PAGE> 8
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
CRAIG C. CONNERTY
Page 8
Thomas E. Kees, for the longer of the remaining term of this Agreement or one
year. In the event of a merger, consolidation, or other business combination, or
change in the current CEO, the Employer shall:
6.5.1 Pay the Employee salary under the terms of this Agreement and
may choose, at Employer's sole discretion, to utilize the services
of the Employee on a consultant or independent contractor basis;
6.5.2 Waive the vesting requirement as to any unvested Shares such
that the Employee will have the right to dispose of all of the
Shares contemplated by and pursuant to the Restricted Stock Purchase
Agreement; and
6.5.3 Provide the Employee with an Executive Placement Package.
6.6 Effect of Termination on other Employees. In the event of termination,
the Employee shall not for a period of at least three (3) years after
termination persuade or attempt to persuade any employee of the Employer or any
of its subsidiaries to leave the Employer's or subsidiary's employ or to become
employed by any person other than the Employer or subsidiary.
6.7 Effect of Termination on Article 5. In the event of the termination of
this Agreement, Article 5.1 and 5.2 will survive termination of this Agreement.
6.8 Pre-Termination Election. In the event the Employee or the Employer
does not elect to renew this Agreement for a new term, for the last 12 months of
the term hereof, the Employee and the Employer may mutually elect to convert the
Employee's duties and title under this Agreement to the duties and title of
consultant. Upon the expiration of this Agreement, the Employee may continue to
utilize his services as a consultant.
6.9 Administrative Leave. CEO shall have the right to place any Employee
on Administrative Leave for a period of up to four weeks, which shall be paid or
unpaid at the sole discretion of the CEO, during which time the Employee shall
not discharge his duties to the Employer. In the event that the Employee is
placed on unpaid leave pursuant to this Article 6.8, then at the end of thirty
days from the date of effectiveness of such leave CEO shall make a determination
as to Employee's status resulting in either termination or continued employment.
<PAGE> 9
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
CRAIG C. CONNERTY
Page 9
ARTICLE 7
GENERAL PROVISIONS
7.1 Succession. This Agreement shall inure to the benefit of and shall be
binding upon Employer, its successors and assigns. The obligations and duties of
Employee hereunder shall be personal and not assignable.
7.2 Notices. Any notices to be given hereunder by either party to the
other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested. Notices
delivered personally shall be deemed communicated as of actual receipt; mailed
notices shall be deemed communicated as of five (5) days after mailing. Mailed
notices shall be addressed to the parties as follows, but each party may change
his address by written notice in accordance with this paragraph:
If to Employer:
Legacy Brands, Inc.
2200-B Douglas Blvd., Suite 100
Roseville, California 95611
Attn: Secretary
If to Employee:
Craig C. Connerty
5444 Thunder Ridge Circle
Rocklin, California 95765
7. Inclusion of Entire Agreement Herein. This Agreement supersedes any and
all other agreements, either oral or in writing, between the parties hereto with
respect to the employment of the Employee by the Employer and contains all of
the covenants and agreements between the parties with respect to such employment
in any manner whatsoever with exception of such stock bonus plans, stock options
or other deferred compensation as may from time to time be granted to Employee
by action of the Board of Directors of Employer.
7.4 Law Governing Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
It is the desire and intent of the parties to this Agreement that
the provisions of this
<PAGE> 10
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
CRAIG C. CONNERTY
Page 10
Agreement shall be enforced to the fullest extent permissible under the laws and
public policies applied in each jurisdiction in which enforcement is sought; and
that if any particular provisions or portion of this Agreement shall adjudicated
to be invalid or unenforceable, such agreement shall be deemed amended to delete
therefrom such provision or portion adjudicated to be invalid or unenforceable,
such amendment to apply only with respect to the operation of such provision or
portion in the particular jurisdiction in which such adjudication is made.
The parties to this Agreement recognize that the performance of the
obligations under this Agreement is special, unique and extraordinary in
character and that in the event of the breach by Employee of the terms and
conditions of this Agreement to be performed, the Employer shall be entitled, if
it so elects, to institute and prosecute proceedings in any court of competent
jurisdiction, either in law or in equity, to obtain damages for any breach of
this Agreement or to enforce the specific performance thereof by Employee or to
enjoin Employee from performing services for any such other person, firm or
corporation.
7.5 Arbitration. In the event of any dispute arising under this Employment
Agreement, including any dispute regarding the nature, scope or quality of
services provided by either party hereto, it is hereby agreed that such dispute
shall be resolved by binding arbitration to be conducted by the American
Arbitration Association (AAA), to be arbitrated in accordance with their rules
and procedures in Sacramento, California. In the event of any such arbitration,
pending resolution of the arbitration and award of costs by the arbitrator, each
party hereto shall advance one-half of the amounts, if any, requested to be
advanced to the arbitrator and/or the sponsoring organization.
7.6 Attorney's Fees and Costs. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which may be entitled.
7.7 Payment of Money Due Deceased Employee. If the Employee dies prior to
the expiration of the term of employment, any money that may be due him from the
Employer under this Agreement as of the date of his death shall be paid to his
executors, administrators, heirs, personal representatives, successors, and
assigns.
7.8 Modification or Extension of Agreement. This Agreement may not be
changed, modified, released, discharged, abandoned, or otherwise amended, in
whole or in part, except in writing, signed by the Employee and the Employer,
but only after written approval of the Employer's CEO. Employee agrees that any
subsequent change or changes in his duties, salary or compensation shall not
effect the validity or scope of this Agreement.
<PAGE> 11
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
CRAIG C. CONNERTY
Page 11
If, on the request or with the consent of Employer, Employee continues in
his employment beyond the period described in Article 1, this Agreement shall
remain in effect during continuance of such service.
IN WITNESS WHEREOF, the parties have executed this Agreement at the
Employer's offices in Roseville, California, this 31st day of Oct., 1996.
EMPLOYER:
LEGACY BRANDS, INC.
By: /s/ THOMAS E. KEES
------------------------------
Name: Thomas E. Kees
Title: Pres. & CEO
EMPLOYEE:
By: /s/ CRAIG C. CONNERTY
------------------------------
Craig C. Connerty
<PAGE> 12
EXHIBIT A
CERTIFICATE OF VESTING
<PAGE> 13
CERTIFICATE OF VESTING
The Secretary, or Assistant Secretary of Legacy Brands, Inc.,
("Company") does this _____th of________, certify that____________, an employee
of the Company, has completed_____ quarters of employment. The Employee has the
right to purchase ________ shares of Common Stock of the Company.
The issuance of this certificate creates an obligation in the Employee
to pay such principal amount plus interest as bears relation to the portion of
the shares of Common Stock of the Company which he is entitled to dispose of
pursuant to the terms of the Employment Agreement, Restricted Stock Purchase
Agreement and related Promissory Note.
The undersigned certifies that the foregoing is true and accurate.
By:
--------------------------------
Title:
-----------------------------
<PAGE> 1
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated 10/30/96, hereinafter referred to as the
"Agreement", is by and between Legacy Brands, Inc., hereinafter referred to as
the "Employer", and Steven Riccardelli, hereinafter referred to as the
"Employee".
ARTICLE I
Term
1.1 Term of Employment. The Employer hereby employs the Employee and the
Employee hereby accepts employment as Secretary and Vice President of Operations
of the Employer for a period of three (3) years (the "Term") beginning on
September 1, 1995 (the "effective date"), and which will be automatically
extended on the anniversary date hereof, for an additional twelve (12) month
period, unless canceled by either party as described herein.
1.2 Notice of Cancellation. Following the expiration of the Term hereof,
the automatic extension of this Agreement may be canceled by either party by
giving written notice to the other party not later than 60 days before the
anniversary date hereof, that the Agreement shall not be extended ("Notice of
Cancellation"). In the event that either party cancels the automatic extension
of this Agreement, such failure to extend the Agreement shall be considered a
termination of the Employee as described in Article 6, herein, and such
termination shall be subject to the termination provisions provided therein.
This Agreement may be terminated earlier as hereinafter provided.
ARTICLE 2
Duties of Employee
2.1 Duties of Employee. As Secretary and Vice President of Operations,
Employee shall be responsible for all matters relating to the implementation of
all activities with brokers, co-packers, and packaging companies. The Employee
shall also work closely with the person in charge of marketing to develop and
implement new products, markets, sales projections, marketing expenditures, and
package designs. Other duties shall include, but are not limited to, working
towards Employer's future success, and participating in negotiations of new
ventures and public financing of the Employer. Notwithstanding the preceding
provisions of this Article 2.1, the Chief Executive Officer ("CEO") shall have
the right to reassign the Employee to such duties as he deems fit and proper in
his sole discretion during the term hereof so long as such reassignment is
consistent with the Employee's general responsibilities under this Agreement.
Such reassignment shall not constitute termination.
2.2 Best Efforts of Employee. Employee agrees that he will at all times
faithfully, industriously, and to the best of his ability, experience, and
talents, perform all of the duties that may be required of and from him pursuant
to the express and implicit terms hereof to the reasonable satisfaction of
Employer. Such duties shall be rendered at the home office of Employer, and at
such
<PAGE> 2
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
STEVEN RICCARDELLI
Page 2
other place or places as Employer shall in good faith require or as the
interest, needs, business or opportunity of Employer shall require.
2.3 Engaging in Other Employment. The Employee shall devote his
productive time, ability, and attention to the business of the Employer during
the term of this Agreement. The Employee shall not, during his employment:
(i) within any jurisdiction or marketing area in which the
Employer or any of its subsidiaries or affiliates is doing business or is
qualified to do business, directly or indirectly own, manage, operate, control,
be employed by or participate in ownership, management operation or control of
or be connected in any manner with any business engaged in and in competition
with the business conducted by Employer or any of its subsidiaries or
affiliates. For these purposes, ownership of securities of not in excess of one
(1%) percent of any class of securities of a public company shall not be
considered to be competition with Employer or any of its subsidiaries or
affiliates; or
(ii) solicit for himself or any person other than the Employer or
any of its subsidiaries, the business of any company which is a customer or
client of the Employer, or any of its subsidiaries, or was a customer or client
of Employer within two (2) years prior to the date of this Agreement; or
(iii) persuade or attempt to persuade any employee of the
Employer or any of its subsidiaries to leave the Employer's or subsidiary's
employ or to become employed by any person other than the Employer or
subsidiary.
2.4 Regulations. The Employee agrees to comply with all federal, state
and local laws, ordinances and regulations in the conduct of his business on
behalf of Employer.
If and when licenses or other registrations become required by
law or pertinent regulatory bodies or agencies, the Employee shall undertake to
make any necessary applications or do what may be required to secure such
licenses or registrations.
ARTICLE 3
Duties of Employer
3.1 Payment of Compensation and Provision of Benefits. During the term
hereof, Employer agrees to pay all compensation due to Employee on at least a
monthly basis as provided in Article 4, as well as to provide benefits,
allowances and vacation as set forth therein.
<PAGE> 3
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
STEVEN RICCARDELLI
Page 3
3.2 Advance Costs of Certain Litigation. During the term hereof and
subsequent thereto, Employer agrees to advance and incur any litigation costs
incurred by Employee in connection with any act or omission under this
Agreement, or with any product liability, tampering, officer or director
litigation brought by any investor or non-party to this Agreement. In exchange
for the Employer's promise to advance any such costs, the Employee agrees to
cooperate fully in the investigation and defense of any such claims.
ARTICLE 4
Compensation
4.1 Basic Compensation. As compensation for services rendered under this
Agreement, the Employee shall be entitled to receive from the Employer a minimum
annual salary ("Annual Base Salary"), payable to Employee bi-monthly on the 1st
and 15th days of each month of the term hereof, as follows:
<TABLE>
<CAPTION>
For the
Period: Amount
------- ------
<S> <C> <C>
1995-1996 $ 80,000;
1996-1997 $ 90,000;
1997-1998 $ 100,000;
</TABLE>
The amount of Employee's actual compensation, including Annual
Base Salary and benefits, may be increased by the Chief Executive Officer
("CEO") of Employer at any time above the minimum Annual Base Salary described
herein, and such increase shall not effect the operation or validity of any
other provision of this Agreement.
4.2 Bonus. The Employee is entitled to the payment of a bonus calculated
on a target profit amount for each year. The target profit amount is the amount
approved by the Chief Executive Officer ("CEO") and shall be calculated based
upon a formula comprised of earnings from operations before interest, taxes,
depreciation and amortization. If, in any year hereof, the Employer attains 80%
to 99% of the target profit amount, the Employee is entitled to a bonus of 25%
of his Annual Base Salary for the year, minus one percentage point for each
percentage point the target profit amount is less than 100%. If the target
profit amount is met exactly, the bonus shall be 30% of the Annual Base Salary.
If the target profit amount is exceeded by 1% to 10%, the bonus shall be 25%
plus 2% of the Annual Base Salary for each percentage point over 100%. If the
target profit amount is exceeded by 111% up to a ceiling of 150%, the bonus
shall be 45% of the Annual Base Salary plus 3% of the Annual Base Salary for
each percentage point over 110%. Such bonus shall be calculated based upon the
Employer's fiscal year. Bonuses will be paid in three
<PAGE> 4
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
STEVEN RICCARDELLI
Page 4
installments, the first payment representing 40% of the total bonus shall be
made no later than seven (7) months after the beginning of the Employer's fiscal
year and will be calculated using Employer's unaudited budgeted profits, the
second payment representing another 40% of the bonus shall be made no later than
thirteen (13) months after the beginning of the Employer's fiscal year and
shall be calculated using the Employer's unaudited actual financial figures, and
the third payment representing, the final 20% shall be made no sooner than the
date upon which the Employer receives audited financial statements. Any
adjustments will be made at the time of the third payment. Any overpayments will
be offset in the first and subsequent bonus payment(s) in the following and
subsequent fiscal year(s) until repaid. Any retroactive change in accounting
principles which might affect any prior year(s) profit shall not give rise to
any claim by the Employer against the Employee for any bonus payment.
Furthermore, any change in accounting principles which was not contemplated in
calculating the budgeted or actual profit shall not apply to the calculation of
the Employee's bonus.
4.3 Employee Benefits, The Employer shall use its best efforts to
procure and maintain a group health insurance policy which shall provide the
customary benefits to the Employee, as well as any other benefits approved by
the CEO. If and when such benefits are provided to the Employee, the Employer
agrees to maintain such benefits for the remaining term of this Agreement.
4.4 Expenses. During the Term, Employee shall be reimbursed for his
reasonable travel, entertainment, business meeting and similar expenditures for
the benefit of Employer, but only in accordance with the policies of Employer as
adopted by the Board from time to time. With respect to any expenses which are
reimbursed by Employer to Employee, Employee shall account to Employer in
sufficient detail to allow Employer to claim an income tax deduction for such
paid item, if such item is deductible.
4.5 Restricted Stock Award: The Employee shall be offered, pursuant to a
Restricted Stock Purchase Agreement, the opportunity to purchase shares of
Common Stock of the Employer (the "Shares"). The Employee's right to receive the
full amount of Shares owed under the Restricted Stock Purchase Agreement shall
be contingent upon the Employee's continued employment with the Employer. In the
event of a change in control resulting in a merger or acquisition, the Employee
shall be granted securities of the new entity and adjusted to assure no dilution
of the Employee's ownership in the Employer.
4.6 Vesting. The Employee is entitled to receive annually, but based on
a quarterly calculation a certificate of vesting from the Employer representing
the completion of twelve months of service under this Agreement calculated from
September 1, 1995, in the form attached hereto as Exhibit A, which the Employee
shall deliver to the Pledge Holder along with certain other documents pursuant
to the terms of the restricted Stock Purchase Agreement in order to transfer,
assign, or convey Shares purchased under the Restricted Stock Purchase
Agreement. Upon the
<PAGE> 5
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
STEVEN RICCARDELLI
Page 5
expiration of one year from September 1, 1995 and delivery of certificate of
vesting together with other required documents, the Employee shall have the
right to dispose of one-third of the Shares and shall be obligated to pay, or
otherwise satisfy, one-third of the principal amount of the Promissory Note plus
interest, if any, pursuant to the Restricted Stock Purchase Agreement and
related Promissory Note. Such right to dispose of a percentage of Shares and
corresponding duty to pay, or otherwise satisfy, amounts owed shall increase to
two-thirds on September 1, 1997. The Employee shall not have the right to
dispose of all of the Shares or the obligation to pay, or otherwise satisfy, the
full principal amount and interest thereupon under the Promissory Note until
September 1, 1998.
Once any portion of the Shares has vested and corresponding payments
have been made pursuant to this paragraph, or under the Promissory Note, or the
debt has been forgiven, such Shares are not subject to repurchase by the
Employer. In the event the Employee is terminated without cause pursuant to
Article 6.4, or upon the sale of the business or change in CEO vesting will be
determined according to Article 6.5. Any corresponding payments under the
Promissory Note that have not been made will be due thirty days from the date of
such termination. Failure to pay within thirty days will subject the Shares to
repurchase by the Employer.
4.7 Vacation. Employee shall be entitled to vacation of up to ten (10)
calendar days per year, for the first year of this agreement and fifteen (15)
calendar days per year for years two and three. Such vacation time may accrue if
not taken. Employee shall be entitled to observe all nationally observed
holidays and to take and accrue such vacation time and sick days as determined
by Employer's policy on such accruals for all employees.
ARTICLE 5
Confidentialily
5.1 Confidentiality. During the course of employment, Employee shall
become aware of certain methods, practices and procedures with which Employer
conducts its business, including but not limited to: any trade secrets,
confidential information, knowledge, data or other information of Employer
relating to products, processes, know how, designs, customer lists, business
plans, marketing plans and strategies, and pricing strategies or any subject
matter pertaining to any business of Employer or any of its clients, licensees
or affiliates, all of which Employer and Employee agree are proprietary
information and as such are trade secrets. Employee agrees to keep confidential,
except as Employer may otherwise consent, and not to disclose, or make any use
of except for the benefit of Employer, at any time either during or subsequent
to his employment, any said trade secrets.
5.2 Return of Confidential Material. In the event of Employee's
termination of
<PAGE> 6
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
STEVEN RICCARDELLI
Pace 6
employment with Employer, for any reason whatsoever, Employee agrees to promptly
surrender and deliver to Employer all records, materials, equipment, drawings
and data of any nature pertaining to any invention or confidential information
of Employer or to his employment. Employee agrees not take with him any
description containing or pertaining to any confidential information, knowledge
or data of Employer which he may produce or obtain during the course of his
employment.
ARTICLE 6
Termination
and
Severance Pay
6.1 Termination by Death or Disability. This Agreement terminates upon
the death or disability of the Employee. Compensation provided in the case of
disability is to be determined as if the Employee had been terminated for cause
per 6.3 below. All compensation ends on the date of the Employee's death.
6.2 Termination by Employee. If the Employee terminates this Agreement
with or without cause, he shall forfeit his compensation and bonuses remaining
in this Agreement, and shall forfeit that portion of his restricted stock award
as provided elsewhere in this Agreement. Any termination by Employee shall be
with 60 days notice to the Employer.
6.3 Termination by Employer for Cause. For purposes of this Agreement,
an event or occurrence constituting "Cause" shall mean, as determined by
Employer:
6.3.1 Employee's willful failure or refusal after notice
thereof, to perform specific directives of the Chief Executive
Officer of Employer, when such directives are consistent with
the scope and nature of Employees' duties and responsibilities
as set forth in clause 2.1. hereof; or
6.3.2 Dishonesty of Employee affecting Employer; or
6.3.3 Drunkenness or use of drugs which interferes with the
performance of Employee's duties and responsibilities under this
Agreement; or
6.3.4 Any gross or willful conduct of Employee resulting in
substantial loss to Employer, substantial damage to Employer's
reputation, or theft or defalcation from Employer; or
<PAGE> 7
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
STEVEN RICCARDELLI
Page 7
6.3.5 Gross incompetence on the part of the Employee in the
performance of the duties and responsibilities under this
Agreement; or
6.3.6 Any material breach (not covered by any of subclauses
6.3.1 through 6.3.5) of Article 2 or Article 5 of this Agreement
if such breach is not cured within 10 days after written notice
thereof to Employee by Employer.
In the event the Employee is terminated pursuant to this Article
6.3, the Employer shall have the option to compensate the Employee pursuant to
this Agreement for a period of up to two months from the date of such
termination. If the Employer decides to compensate the Employee pursuant to this
Article, the Employee shall have the following duties and obligations for the
period so compensated: i) to cooperate with the Employer by providing consulting
services on site at any site reasonably requested by the Employer, ii) to not
engage in a course of conduct which competes, directly or indirectly, with the
business of the Employer, iii) to keep confidential all of Employer's trade
secrets, confidential information, knowledge or data, and iv) return all
confidential material to the Employer.
6.4 Termination of Employee Without Cause. In the event the Employee is
terminated for any reason other than for cause, the Employee shall be entitled
to the compensation and bonuses he would have been paid had the Employer not
terminated the Employee and the Employee had continued to provide services
hereunder for as long as the CEO shall deem proper which in no event shall be
less than two months from the date of termination. The Employee shall continue
to be bound by Article 5 hereof.
If the Employer compensates the Employee pursuant to this Article
6.4, the Employee shall have the following duties and obligations for the period
so compensated: i) to cooperate with the Employer by providing consulting
services on site at any site reasonably requested by the Employer, ii) to not
engage in a course of conduct which competes, directly or indirectly, with the
business of the Employer, iii) to keep confidential all of Employer's trade
secrets, confidential information, knowledge or data, and iv) return all
confidential material to the Employer.
6.5 Termination of Employee Upon Sale of Business; Change in CEO. This
Agreement shall survive a merger, consolidation or other business combination,
or change in the present CEO, Thomas E. Kees, for the longer of the remaining
term of this Agreement or one year. In the event of a merger, consolidation or
other business combination, or change in CEO, the Employer shall
6.5.1 Pay the Employee salary under the terms of this Agreement
and may choose, at Employer's sole discretion, to utilize the
services of the Employee on a consultant or independent
contractor basis;
<PAGE> 8
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
STEVEN RICCARDELLI
Page 8
6.5.2 Waive the vesting requirement as to any unvested Shares
such that the Employee will have the right to dispose of all of
the Shares contemplated by and pursuant to the Restricted Stock
Purchase Agreement; and
6.5.3 Provide the Employee with an Executive Placement Package.
6.6 Effect of Termination on other Employees. In the event of
termination, the Employee shall not for a period of at least three (3) years
after termination persuade or attempt to persuade any employee of the Employer
or any of its subsidiaries to leave the Employer's or subsidiary's employ or to
become employed by any person other than the Employer or subsidiary.
6.7 Effect of Termination on Article 5. In the event of the termination
of this Agreement, Article 5.1 and 5.2 will survive termination of this
Agreement.
6.8 Pre-Termination Election. In the event the Employee or the Employer
does not elect to renew this Agreement for a new term, for the last 12 months
of the term hereof, the Employee and the Employer may mutually elect to convert
the Employee's duties and title under this Agreement to the duties and title of
consultant. Upon the expiration of this Agreement, the Employee may continue to
utilize his services as a consultant.
6.9 Administrative Leave. CEO shall have the right to place any Employee
on Administrative Leave for a period of up to four weeks, which shall be paid or
unpaid at the sole discretion of the CEO, during which time the Employee shall
not discharge his duties to the Employer. In the event the Employee is placed on
unpaid leave pursuant to this Article 6.9, then at the expiration of thirty days
from the date of effectiveness of such leave CEO shall make a determination as
to Employee's status resulting in either termination or continued employment.
ARTICLE 7
General Provisions
7.1 Succession. This Agreement shall inure to the benefit of and shall
be binding upon Employer, its successors and assigns. The obligations and duties
of Employee hereunder shall be personal and not assignable.
7.2 Notices. Any notices to be given hereunder by either party to the
other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid with return receipt requested. Notices
delivered personally shall be deemed communicated as of actual receipt; mailed
notices shall be deemed communicated as of five (5) days after mailing. Mailed
notices shall be addressed to the parties as follows, but each party may change
his address by written notice in accordance with this paragraph:
<PAGE> 9
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
STEVEN RICCARDELLI
Page 9
If to Employer:
Legacy Brands, Inc.
2200-B Douglas Blvd., Suite 100
Roseville, California 95611
Attn: President
If to Employee:
Steven Riccardelli
5248 Shafter Ave.
Oakland, California 94618
7.3 Inclusion of Entire Agreement Herein. This Agreement supersedes any
and all other agreements, either oral or in writing, between the parties hereto
with respect to the employment of the Employee by the Employer and contains all
of the covenants and agreements between the parties with respect to such
employment in any manner whatsoever with exception of such stock bonus plans,
stock options or other deferred compensation as may from time to time be granted
to Employee by action of the Board of Directors of Employer.
7.4 Law Governing Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
It is the desire and intent of the parties to this Agreement that
the provisions of this Agreement shall be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought; and that if any particular provisions or portion of
this Agreement shall adjudicated to be invalid or unenforceable, such agreement
shall be deemed amended to delete therefrom such provision or portion
adjudicated to be invalid or unenforceable, such amendment to apply only with
respect to the operation of such provision or portion in the particular
jurisdiction in which such adjudication is made.
The parties to this Agreement recognize that the performance of
the obligations under this Agreement is special, unique and extraordinary in
character and that in the event of the breach by Employee of the terms and
conditions of this Agreement to be performed, the Employer shall be entitled, if
it so elects, to institute and prosecute proceedings in any court of competent
jurisdiction, either in law or in equity, to obtain damages for any breach of
this Agreement or to enforce the specific performance thereof by Employee or to
enjoin Employee from performing services for any such other person, firm or
corporation.
<PAGE> 10
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
STEVEN RICCARDELLI
Page 10
7.5 Arbitration. In the event of any dispute arising under this
Employment Agreement, including any dispute regarding the nature, scope or
quality of services provided by either party hereto, it is hereby agreed that
such dispute shall be resolved by binding arbitration to be conducted by the
American Arbitration Association (AAA), to be arbitrated in accordance with
their rules and procedures in Sacramento, California. In the event of any such
arbitration, pending resolution of the arbitration and award of costs by the
arbitrator, each party hereto shall advance one-half of the amounts, if any,
requested to be advanced to the arbitrator and/or the sponsoring organization.
7.6 Attorney's Fees and Costs. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which may be entitled.
7.7 Payment of Money Due Deceased Employee. If the Employee dies prior
to the expiration of the term of employment, any money that may be due him from
the Employer under this Agreement as of the date of his death shall be paid to
his executors, administrators, heirs, personal representatives, successors, and
assigns.
7.8 Modification or Extension of Agreement. This Agreement may not be
changed, modified, released, discharged, abandoned, or otherwise amended, in
whole or in part, except in writing, signed by the Employee and the Employer,
but only after written approval of the Employer's CEO. Employee agrees that any
subsequent change or changes in his duties, salary or compensation shall not
effect the validity or scope of this Agreement.
If, on the request or with the consent of Employer, Employee continues
in his employment beyond the period described in Article 1, this Agreement shall
remain in effect during continuance of such service.
<PAGE> 11
EMPLOYMENT AGREEMENT
LEGACY BRANDS, INC. AND
STEVEN RICCARDELLI
Page 11
IN WITNESS WHEREOF, the parties have executed this Agreement at the
Employer's offices in Roseville, California, this 30th day of Oct., 1996.
EMPLOYER:
LEGACY BRANDS, INC.
By: /s/ THOMAS E. KEES
-------------------------------
Name: Thomas E. Kees
Title: Pres. CEO & Chairman
EMPLOYEE:
By: /s/ STEVEN RICCARDELLI
-------------------------------
Steven Riccardelli
<PAGE> 12
EXHIBIT A
CERTIFICATE OF VESTING
<PAGE> 13
CERTIFICATE OF VESTING
The Secretary, or Assistant Secretary of Legacy Brands, Inc.,
("Company") does this ____ th of _______________, certify that ________________,
an employee of the Company, has completed ______ quarters of employment. The
Employee has the right to purchase _________________ shares of Common Stock of
the Company.
The issuance of this certificate creates an obligation in the Employee
to pay such principal amount plus interest as bears relation to the portion of
the shares of Common Stock of the Company which he is entitled to dispose of
pursuant to the terms of the Employment Agreement, Restricted Stock Purchase
Agreement and related Promissory Note.
The undersigned certifies that the foregoing is true and accurate.
By:
-------------------------------
Title:
----------------------------
<PAGE> 1
EXHIBIT 10.12
AGREEMENT AND RELEASE
[EMPLOYEE STOCK PURCHASE PLAN NOTE]
[EMPLOYMENT AGREEMENT]
This Agreement and Release ("Agreement") is made and entered into as of
the 30th day of January, 1998, by and between Thomas E. Kees ("Employee") and
Legacy Brands, Inc., a California corporation (the "Company").
R E C I T A L S
A. Employee and the Company entered into an Employment Agreement
effective as of September 1, 1996 ("Employment Date") as amended (collectively
the "Employment Agreement") to extend the effective date to September 1, 1996,
pursuant to which the Employee was granted, inter alia, the following benefits
as set forth in the specified section: Section 4.1 Basic Compensation of
$200,000 per annum for the period 1996-1997, $225,000 for the period 1997-1998
and $250,000 for the period 1998-1999; Section 4.2 providing for the payment of
formula based bonuses and Sections 4.4 and 4.5 providing for the offering to
Employee of the opportunity to purchase shares of the Company's common stock
(the "Shares") pursuant to a Restricted Stock Purchase Agreement.
B. Employee and the Company entered into a Restricted Stock Purchase
Agreement dated as of October 18, 1995 pursuant to which Employee purchased
400,000 Shares on the terms and conditions set forth in the Agreement and
certain documents referenced therein, including, without limitation, the
Company's Employee Stock Purchase Plan ("Stock Purchase Plan"), and, in
consideration for the purchase of the Shares, Employee executed a promissory
note, dated as of October 18, 1995, (the "Stock Purchase Note") to the Company.
Thereafter, Employee became vested as to the obligation with respect to
300,000 shares and interest of $10,193 has become due and payable.
C. Primarily as a result of the Company's inability to conclude the
initial underwritten public offering of its securities originally scheduled to
be completed during the second quarter of 1997 or otherwise obtain sufficient
capital to fully implement its business plan pursuant to a private placement
terminated on November 27, 1997, none of the required increases in compensation
as provided for in Sections 4.4 and 4.5 of the Employment Agreement or bonuses
provided for in Section 4.2 have been paid to Employee.
D. The Company desires to provide adequate incentives to retain the
services of Employee. One such incentive is the forgiveness of any obligations
of the Employee under the Stock Purchase Note and any stock pledge or other
security agreement which the Employee may have executed in favor of the Company
in connection with the Stock Purchase Note or pursuant to the Stock Purchase
Plan.
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing Recitals and the
mutual covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Employee and the Company hereby agree as follows:
1. Release.
The Company hereby releases, acquits and forever discharges the
Employee and its agents, successors and assigns from any and all costs, damages,
expenses, obligations, liabilities, claims, actions, rights, demands and/or
causes of action of any kind or nature (including, but not limited to, actual
attorneys' fees and costs, and court costs) which the Company has or may have
against Employee arising out of or in connection with the Stock Purchase Note,
including, without limitation, the obligation to pay any principal or accrued
but unpaid interest thereon in the aggregate amount of $1,010,193.
2. Vesting of Shares.
The Company hereby agrees that the Shares are fully vested in the
Employee, and the Company hereby waives and releases any security interest in or
other restriction (other than restrictions resulting from applicable federal and
state securities laws) imposed by the Company on the Shares, including, without
limitation, any stock pledge agreement executed by the Employee in connection
with the Stock Purchase Note.
3. Representations of the Company.
The Company hereby represents and warrants to Employee that no
other person or entity has any right, title or interest in the Stock Purchase
Note. The Company further represents and warrants that the Company has the full
right, power and authority to enter into this Agreement.
4. Acknowledgments of Employee.
Employee hereby acknowledges that the release by the Company of
the Stock Purchase Note will be treated by the Company for federal and state tax
purposes as the payment by the Company to Employee of compensation equal to the
amount of outstanding principal and interest under the Stock Purchase Note. Such
treatment may have a substantial impact upon Employee's federal and state tax
liability.
EMPLOYEE HEREBY ACKNOWLEDGES THAT HE HAS BEEN ADVISED BY THE COMPANY TO SEEK THE
ADVICE OF INDEPENDENT LEGAL AND TAX COUNSEL, AND HAS BEEN GIVEN THE OPPORTUNITY
TO SEEK SUCH ADVICE WITH RESPECT TO THE TAX CONSEQUENCES OF THIS AGREEMENT.
TEK
--------------
Acknowledgment
5. Amendment of Employment Agreement
<PAGE> 3
The compensation schedule set forth in Section 4.1 of the Employment
Agreement is hereby amended to read as follows:
<TABLE>
<CAPTION>
For the
Period: Amount
------- --------
<S> <C>
1996-1999 $200,000
</TABLE>
All Shares issued pursuant to Sections 4.5 and 4.6 have been fully paid
as of the date of this Agreement and the Stock Purchase Note deemed paid in
full.
6. WAIVER.
Each of the Company and the Employee hereby agree to waive any
claims which either may have against the other with respect only to the specific
matters which are set forth in this Agreement pertaining only to any matters
pertaining to the Employee Stock Purchase Plan and the participation therein by
Employee, the issuance of the stock by the Company to Employee and the tax
consequences which might arise out of the release of liability under the Stock
Purchase Note as set forth herein.
EACH OF THE COMPANY AND EMPLOYEE HEREBY EXPRESSLY WAIVES THE
PROVISIONS OF CALIFORNIA CIVIL CODE Section 1542, WHICH PROVIDES:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
EMPLOYEE HEREBY ACKNOWLEDGES THAT HE HAS BEEN ADVISED BY THE COMPANY TO SEEK THE
ADVICE OF INDEPENDENT LEGAL COUNSEL, AND HAS BEEN GIVEN THE OPPORTUNITY TO SEEK
SUCH ADVICE WITH RESPECT TO THE FOREGOING WAIVERS, AND THE RELEASE SET FORTH IN
PARAGRAPH 1 ABOVE, AND UNDERSTANDS AND AGREES TO THE TERMS SET FORTH HEREIN, AND
WAIVES THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, AND ANY SUCCESSOR
STATUTE, CODE, LAW OR REGULATION, TO THE FULLEST EXTENT SUCH RIGHTS AND BENEFITS
MAY BE WAIVED.
7. Miscellaneous.
(a) Governing Law.This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
(b) Further Assurances. The parties hereby agree to execute such
further documents and instruments, and perform such other actions, as may be
reasonably necessary or appropriate to carry out the intentions of the parties
with respect to this Agreement.
<PAGE> 4
(c) Counterparts; Facsimile. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which when
taken together shall constitute one and the same instrument. This Agreement may
be delivered by executed facsimile transmission, which shall be deemed an
original.
(d) Attorneys' Fees. Should any dispute arise between the parties
hereto, or their legal representatives, successors or assigns, concerning any
provision of this Agreement or the rights or duties of any party in relation
thereto, the party prevailing in such dispute shall be entitled, in addition to
any other relief that may be granted, to recover actual attorneys' fees and
costs, and court costs, in connection with any such dispute.
IN WITNESS WHEREOF, Employee and the Company have executed this
Agreement as of the date first above written.
EMPLOYEE COMPANY
LEGACY BRANDS, INC.
By:
/s/ THOMAS E. KEES /s/ CRAIG C. CONNERTY
- -------------------------- ------------------------------------
Thomas E. Kees Craig C. Connerty
Treasurer & Chief Financial Officer
<PAGE> 1
EXHIBIT 10.13
AGREEMENT AND RELEASE
[EMPLOYEE STOCK PURCHASE PLAN NOTE]
[EMPLOYMENT AGREEMENT]
This Agreement and Release ("Agreement") is made and entered into as of
the 30th day of January, 1998, by and between Michael E. Banks ("Employee") and
Legacy Brands, Inc., a California corporation (the "Company").
R E C I T A L S
A. Employee and the Company entered into an Employment Agreement
effective as of September 1, 1996 ("Employment Date") (the "Employment
Agreement") pursuant to which the Employee was granted, inter alia, the
following benefits as set forth in the specified section: Section 4.1 Basic
Compensation of $120,000 per annum for the period 1996-1997, $132,000 for the
period 1997-1998 and $145,000 for the period 1998-1999; Section 4.2 providing
for the payment of formula based bonuses and Sections 4.4 and 4.5 providing for
the offering to Employee of the opportunity to purchase shares of the Company's
common stock (the "Shares") pursuant to a Restricted Stock Purchase Agreement.
B. Employee and the Company entered into a Restricted Stock Purchase
Agreement dated as of October 18, 1995 pursuant to which Employee purchased
60,000 Shares on the terms and conditions set forth in the Agreement and certain
documents referenced therein, including, without limitation, the Company's
Employee Stock Purchase Plan ("Stock Purchase Plan"), and, in consideration for
the purchase of the Shares, Employee executed a promissory note, dated as of
October 18, 1995, (the "Stock Purchase Note") to the Company. Thereafter,
Employee became vested as to the obligation with respect to 40,000 shares
and interest of $3,360 has become due and payable.
C. Primarily as a result of the Company's inability to conclude the
initial underwritten public offering of its securities originally scheduled to
be completed during the second quarter of 1997 or otherwise obtain sufficient
capital to fully implement its business plan pursuant to a private placement
terminated on November 27, 1997, none of the required increases in compensation
as provided for in Sections 4.4 and 4.5 of the Employment Agreement or bonuses
provided for in Section 4.2 have been paid to Employee.
D. The Company desires to provide adequate incentives to retain the
services of Employee. One such incentive is the forgiveness of any obligations
of the Employee under the Stock Purchase Note and any stock pledge or other
security agreement which the Employee may have executed in favor of the Company
in connection with the Stock Purchase Note or pursuant to the Stock Purchase
Plan.
NOW, THEREFORE, in consideration of the foregoing Recitals and the
mutual covenants contained herein, and for other good and valuable
consideration, the receipt
<PAGE> 2
and sufficiency of which are hereby acknowledged, Employee and the Company
hereby agree as follows:
1. Release.
The Company hereby releases, acquits and forever discharges the
Employee and its agents, successors and assigns from any and all costs, damages,
expenses, obligations, liabilities, claims, actions, rights, demands and/or
causes of action of any kind or nature (including, but not limited to, actual
attorneys' fees and costs, and court costs) which the Company has or may have
against Employee arising out of or in connection with the Stock Purchase Note,
including, without limitation, the obligation to pay any principal or accrued
but unpaid interest thereon in the aggregate amount of $153,360.
2. Vesting of Shares.
The Company hereby agrees that the Shares are fully vested in the
Employee, and the Company hereby waives and releases any security interest in or
other restriction (other than restrictions resulting from applicable federal and
state securities laws) imposed by the Company on the Shares, including, without
limitation, any stock pledge agreement executed by the Employee in connection
with the Stock Purchase Note.
3. Representations of the Company.
The Company hereby represents and warrants to Employee that no
other person or entity has any right, title or interest in the Stock Purchase
Note. The Company further represents and warrants that the Company has the full
right, power and authority to enter into this Agreement.
4. Acknowledgments of Employee.
Employee hereby acknowledges that the release by the Company of
the Stock Purchase Note will be treated by the Company for federal and state tax
purposes as the payment by the Company to Employee of compensation equal to the
amount of outstanding principal and interest under the Stock Purchase Note. Such
treatment may have a substantial impact upon Employee's federal and state tax
liability.
EMPLOYEE HEREBY ACKNOWLEDGES THAT HE HAS BEEN ADVISED BY THE COMPANY TO SEEK THE
ADVICE OF INDEPENDENT LEGAL AND TAX COUNSEL, AND HAS BEEN GIVEN THE OPPORTUNITY
TO SEEK SUCH ADVICE WITH RESPECT TO THE TAX CONSEQUENCES OF THIS AGREEMENT.
MEB
---------------
Acknowledgment
5. Amendment of Employment Agreement
<PAGE> 3
The compensation schedule set forth in Section 4.1 of the Employment
Agreement is hereby amended to read as follows:
<TABLE>
<CAPTION>
For the
Period: Amount
------- ------
<S> <C>
1996-1999 $120,000
</TABLE>
All Shares issued pursuant to Sections 4.5 and 4.6 have been fully paid
as of the date of this Agreement and the Stock Purchase Note deemed paid in
full.
6. WAIVER.
Each of the Company and the Employee hereby agree to waive any
claims which either may have against the other with respect only to the specific
matters which are set forth in this Agreement pertaining only to any matters
pertaining to the Employee Stock Purchase Plan and the participation therein by
Employee, the issuance of the stock by the Company to Employee and the tax
consequences which might arise out of the release of liability under the Stock
Purchase Note as set forth herein.
EACH OF THE COMPANY AND EMPLOYEE HEREBY EXPRESSLY WAIVES THE
PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
EMPLOYEE HEREBY ACKNOWLEDGES THAT HE HAS BEEN ADVISED BY THE COMPANY TO SEEK THE
ADVICE OF INDEPENDENT LEGAL COUNSEL, AND HAS BEEN GIVEN THE OPPORTUNITY TO SEEK
SUCH ADVICE WITH RESPECT TO THE FOREGOING WAIVERS, AND THE RELEASE SET FORTH IN
PARAGRAPH 1 ABOVE, AND UNDERSTANDS AND AGREES TO THE TERMS SET FORTH HEREIN, AND
WAIVES THE PROVISIONS OF CALIFORNIA CIVIL CODE Section 1542, AND ANY SUCCESSOR
STATUTE, CODE, LAW OR REGULATION, TO THE FULLEST EXTENT SUCH RIGHTS AND BENEFITS
MAY BE WAIVED.
7. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
(b) Further Assurances. The parties hereby agree to execute such
further documents and instruments, and perform such other actions, as may be
reasonably necessary or appropriate to carry out the intentions of the parties
with respect to this Agreement.
<PAGE> 4
(c) Counterparts; Facsimile. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which when
taken together shall constitute one and the same instrument. This Agreement may
be delivered by executed facsimile transmission, which shall be deemed an
original.
(d) Attorneys' Fees. Should any dispute arise between the parties
hereto, or their legal representatives, successors or assigns, concerning any
provision of this Agreement or the rights or duties of any party in relation
thereto, the party prevailing in such dispute shall be entitled, in addition to
any other relief that may be granted, to recover actual attorneys' fees and
costs, and court costs, in connection with any such dispute.
IN WITNESS WHEREOF, Employee and the Company have executed this
Agreement as of the date first above written.
EMPLOYEE COMPANY
LEGACY BRANDS, INC.
By:
/s/ MICHAEL E. BANKS /s/ THOMAS E. KEES
- -------------------------- -----------------------------------
Michael E. Banks Thomas E. Kees
President & Chief Executive Officer
<PAGE> 1
EXHIBIT 10.14
AGREEMENT AND RELEASE
[EMPLOYEE STOCK PURCHASE PLAN NOTE]
[EMPLOYMENT AGREEMENT]
This Agreement and Release ("Agreement") is made and entered into as of
the 30th day of January, 1998, by and between Craig C. Connerty ("Employee") and
Legacy Brands, Inc., a California corporation (the "Company").
R E C I T A L S
A. Employee and the Company entered into an Employment Agreement
effective as of September 1, 1996 ("Employment Date") (the "Employment
Agreement") pursuant to which the Employee was granted, inter alia, the
following benefits as set forth in the specified section: Section 4.1 Basic
Compensation of $120,000 per annum for the period 1996-1997, $132,000 for the
period 1997-1998 and $145,000 for the period 1998-1999; Section 4.2 providing
for the payment of formula based bonuses and Sections 4.4 and 4.5 providing for
the offering to Employee of the opportunity to purchase shares of the Company's
common stock (the "Shares") pursuant to a Restricted Stock Purchase Agreement.
B. Employee and the Company entered into a Restricted Stock Purchase
Agreement dated as of October 18, 1995 pursuant to which Employee purchased
60,000 Shares on the terms and conditions set forth in the Agreement and certain
documents referenced therein, including, without limitation, the Company's
Employee Stock Purchase Plan ("Stock Purchase Plan"), and, in consideration for
the purchase of the Shares, Employee executed a promissory note, dated as of
October 18, 1995, (the "Stock Purchase Note") to the Company. Thereafter,
Employee became vested as to the obligation with respect to 40,000 shares
and interest of $3,360 has become due and payable.
C. Primarily as a result of the Company's inability to conclude the
initial underwritten public offering of its securities originally scheduled to
be completed during the second quarter of 1997 or otherwise obtain sufficient
capital to fully implement its business plan pursuant to a private placement
terminated on November 27, 1997, none of the required increases in compensation
as provided for in Sections 4.4 and 4.5 of the Employment Agreement or bonuses
provided for in Section 4.2 have been paid to Employee.
D. The Company desires to provide adequate incentives to retain the
services of Employee. One such incentive is the forgiveness of any obligations
of the Employee under the Stock Purchase Note and any stock pledge or other
security agreement which the Employee may have executed in favor of the Company
in connection with the Stock Purchase Note or pursuant to the Stock Purchase
Plan.
NOW, THEREFORE, in consideration of the foregoing Recitals and the
mutual covenants contained herein, and for other good and valuable
consideration, the receipt
<PAGE> 2
and sufficiency of which are hereby acknowledged, Employee and the Company
hereby agree as follows:
1. Release.
The Company hereby releases, acquits and forever discharges the
Employee and its agents, successors and assigns from any and all costs, damages,
expenses, obligations, liabilities, claims, actions, rights, demands and/or
causes of action of any kind or nature (including, but not limited to, actual
attorneys' fees and costs, and court costs) which the Company has or may have
against Employee arising out of or in connection with the Stock Purchase Note,
including, without limitation, the obligation to pay any principal or accrued
but unpaid interest thereon in the aggregate amount of $153,360.
2. Vesting of Shares.
The Company hereby agrees that the Shares are fully vested in the
Employee, and the Company hereby waives and releases any security interest in or
other restriction (other than restrictions resulting from applicable federal and
state securities laws) imposed by the Company on the Shares, including, without
limitation, any stock pledge agreement executed by the Employee in connection
with the Stock Purchase Note.
3. Representations of the Company.
The Company hereby represents and warrants to Employee that no
other person or entity has any right, title or interest in the Stock Purchase
Note. The Company further represents and warrants that the Company has the full
right, power and authority to enter into this Agreement.
4. Acknowledgments of Employee.
Employee hereby acknowledges that the release by the Company of
the Stock Purchase Note will be treated by the Company for federal and state tax
purposes as the payment by the Company to Employee of compensation equal to the
amount of outstanding principal and interest under the Stock Purchase Note. Such
treatment may have a substantial impact upon Employee's federal and state tax
liability.
EMPLOYEE HEREBY ACKNOWLEDGES THAT HE HAS BEEN ADVISED BY THE COMPANY TO SEEK THE
ADVICE OF INDEPENDENT LEGAL AND TAX COUNSEL, AND HAS BEEN GIVEN THE OPPORTUNITY
TO SEEK SUCH ADVICE WITH RESPECT TO THE TAX CONSEQUENCES OF THIS AGREEMENT.
CCC
---------------
Acknowledgment
5. Amendment of Employment Agreement
<PAGE> 3
The compensation schedule set forth in Section 4.1 of the Employment
Agreement is hereby amended to read as follows:
<TABLE>
<CAPTION>
For the
Period: Amount
------- ------
<S> <C>
1996-1999 $120,000
</TABLE>
All Shares issued pursuant to Sections 4.5 and 4.6 have been fully paid
as of the date of this Agreement and the Stock Purchase Note deemed paid in
full.
6. WAIVER.
Each of the Company and the Employee hereby agree to waive any
claims which either may have against the other with respect only to the specific
matters which are set forth in this Agreement pertaining only to any matters
pertaining to the Employee Stock Purchase Plan and the participation therein by
Employee, the issuance of the stock by the Company to Employee and the tax
consequences which might arise out of the release of liability under the Stock
Purchase Note as set forth herein.
EACH OF THE COMPANY AND EMPLOYEE HEREBY EXPRESSLY WAIVES THE
PROVISIONS OF CALIFORNIA CIVIL CODE Section 1542, WHICH PROVIDES:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
EMPLOYEE HEREBY ACKNOWLEDGES THAT HE HAS BEEN ADVISED BY THE COMPANY TO SEEK THE
ADVICE OF INDEPENDENT LEGAL COUNSEL, AND HAS BEEN GIVEN THE OPPORTUNITY TO SEEK
SUCH ADVICE WITH RESPECT TO THE FOREGOING WAIVERS, AND THE RELEASE SET FORTH IN
PARAGRAPH 1 ABOVE, AND UNDERSTANDS AND AGREES TO THE TERMS SET FORTH HEREIN, AND
WAIVES THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, AND ANY SUCCESSOR
STATUTE, CODE, LAW OR REGULATION, TO THE FULLEST EXTENT SUCH RIGHTS AND BENEFITS
MAY BE WAIVED.
7. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
(b) Further Assurances. The parties hereby agree to execute such
further documents and instruments, and perform such other actions, as may be
reasonably necessary or appropriate to carry out the intentions of the parties
with respect to this Agreement.
<PAGE> 4
(c) Counterparts; Facsimile. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which when
taken together shall constitute one and the same instrument. This Agreement may
be delivered by executed facsimile transmission, which shall be deemed an
original.
(d) Attorneys' Fees. Should any dispute arise between the parties
hereto, or their legal representatives, successors or assigns, concerning any
provision of this Agreement or the rights or duties of any party in relation
thereto, the party prevailing in such dispute shall be entitled, in addition to
any other relief that may be granted, to recover actual attorneys' fees and
costs, and court costs, in connection with any such dispute.
IN WITNESS WHEREOF, Employee and the Company have executed this
Agreement as of the date first above written.
EMPLOYEE COMPANY
LEGACY BRANDS, INC.
By:
/s/ CRAIG C. CONNERTY /s/ THOMAS E. KEES
- ------------------------------ -----------------------------------
Craig C. Connerty Thomas E. Kees
President & Chief Executive Officer
<PAGE> 1
EXHIBIT 10.15
AGREEMENT AND RELEASE
[EMPLOYEE STOCK PURCHASE PLAN NOTE]
[EMPLOYMENT AGREEMENT]
This Agreement and Release ("Agreement") is made and entered into as of
the 30th day of January, 1998, by and between Steven Riccardelli ("Employee")
and Legacy Brands, Inc., a California corporation (the "Company").
R E C I T A L S
A. Employee and the Company entered into an Employment Agreement
effective as of September 1, 1996 ("Employment Date")as amended (collectively
the "Employment Agreement") to extend the effective date to September 1, 1996,
pursuant to which the Employee was granted, inter alia, the following benefits
as set forth in the specified section: Section 4.1 Basic Compensation of $80,000
per annum for the period 1996-1997, $90,000 for the period 1997-1998 and
$100,000 for the period 1998-1999; Section 4.2 providing for the payment of
formula based bonuses and Sections 4.4 and 4.5 providing for the offering to
Employee of the opportunity to purchase shares of the Company's common stock
(the "Shares") pursuant to a Restricted Stock Purchase Agreement.
B. Employee and the Company entered into a Restricted Stock Purchase
Agreement dated as of October 18, 1995 pursuant to which Employee purchased
60,000 Shares on the terms and conditions set forth in the Agreement and certain
documents referenced therein, including, without limitation, the Company's
Employee Stock Purchase Plan ("Stock Purchase Plan"), and, in consideration for
the purchase of the Shares, Employee executed a promissory note, dated as of
October 18, 1995, (the "Stock Purchase Note") to the Company. Thereafter,
Employee became vested as to the obligation with respect to 45,000 shares
and interest of $5,096 has become due and payable.
C. Primarily as a result of the Company's inability to conclude the
initial underwritten public offering of its securities originally scheduled to
be completed during the second quarter of 1997 or otherwise obtain sufficient
capital to fully implement its business plan pursuant to a private placement
terminated on November 27, 1997, none of the required increases in compensation
as provided for in Sections 4.4 and 4.5 of the Employment Agreement or bonuses
provided for in Section 4.2 have been paid to Employee.
D. The Company desires to provide adequate incentives to retain the
services of Employee. One such incentive is the forgiveness of any obligations
of the Employee under the Stock Purchase Note and any stock pledge or other
security agreement which the Employee may have executed in favor of the Company
in connection with the Stock Purchase Note or pursuant to the Stock Purchase
Plan.
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing Recitals and the
mutual covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Employee and the Company hereby agree as follows:
1. Release.
The Company hereby releases, acquits and forever discharges the
Employee and its agents, successors and assigns from any and all costs, damages,
expenses, obligations, liabilities, claims, actions, rights, demands and/or
causes of action of any kind or nature (including, but not limited to, actual
attorneys' fees and costs, and court costs) which the Company has or may have
against Employee arising out of or in connection with the Stock Purchase Note,
including, without limitation, the obligation to pay any principal or accrued
but unpaid interest thereon in the aggregate amount of $155,096.
2. Vesting of Shares.
The Company hereby agrees that the Shares are fully vested in the
Employee, and the Company hereby waives and releases any security interest in or
other restriction (other than restrictions resulting from applicable federal and
state securities laws) imposed by the Company on the Shares, including, without
limitation, any stock pledge agreement executed by the Employee in connection
with the Stock Purchase Note.
3. Representations of the Company.
The Company hereby represents and warrants to Employee that no
other person or entity has any right, title or interest in the Stock Purchase
Note. The Company further represents and warrants that the Company has the full
right, power and authority to enter into this Agreement.
4. Acknowledgments of Employee.
Employee hereby acknowledges that the release by the Company of
the Stock Purchase Note will be treated by the Company for federal and state tax
purposes as the payment by the Company to Employee of compensation equal to the
amount of outstanding principal and interest under the Stock Purchase Note. Such
treatment may have a substantial impact upon Employee's federal and state tax
liability.
EMPLOYEE HEREBY ACKNOWLEDGES THAT HE HAS BEEN ADVISED BY THE COMPANY TO SEEK THE
ADVICE OF INDEPENDENT LEGAL AND TAX COUNSEL, AND HAS BEEN GIVEN THE OPPORTUNITY
TO SEEK SUCH ADVICE WITH RESPECT TO THE TAX CONSEQUENCES OF THIS AGREEMENT.
SR
--------------
Acknowledgment
5. Amendment of Employment Agreement
<PAGE> 3
The compensation schedule set forth in Section 4.1 of the Employment
Agreement is hereby amended to read as follows:
<TABLE>
<CAPTION>
For the
Period: Amount
--------- -------
<S> <C>
1996-1999 $80,000
</TABLE>
All Shares issued pursuant to Sections 4.5 and 4.6 have been fully paid
as of the date of this Agreement and the Stock Purchase Note deemed paid in
full.
6. WAIVER.
Each of the Company and the Employee hereby agree to waive any
claims which either may have against the other with respect only to the specific
matters which are set forth in this Agreement pertaining only to any matters
pertaining to the Employee Stock Purchase Plan and the participation therein by
Employee, the issuance of the stock by the Company to Employee and the tax
consequences which might arise out of the release of liability under the Stock
Purchase Note as set forth herein.
EACH OF THE COMPANY AND EMPLOYEE HEREBY EXPRESSLY WAIVES THE
PROVISIONS OF CALIFORNIA CIVIL CODE Section 1542, WHICH PROVIDES:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
EMPLOYEE HEREBY ACKNOWLEDGES THAT HE HAS BEEN ADVISED BY THE COMPANY TO SEEK THE
ADVICE OF INDEPENDENT LEGAL COUNSEL, AND HAS BEEN GIVEN THE OPPORTUNITY TO SEEK
SUCH ADVICE WITH RESPECT TO THE FOREGOING WAIVERS, AND THE RELEASE SET FORTH IN
PARAGRAPH 1 ABOVE, AND UNDERSTANDS AND AGREES TO THE TERMS SET FORTH HEREIN, AND
WAIVES THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542, AND ANY SUCCESSOR
STATUTE, CODE, LAW OR REGULATION, TO THE FULLEST EXTENT SUCH RIGHTS AND BENEFITS
MAY BE WAIVED.
7. Miscellaneous.
(a) Governing Law.This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
(b) Further Assurances. The parties hereby agree to execute such
further documents and instruments, and perform such other actions, as may be
reasonably necessary or appropriate to carry out the intentions of the parties
with respect to this Agreement.
<PAGE> 4
(c) Counterparts; Facsimile. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which when
taken together shall constitute one and the same instrument. This Agreement may
be delivered by executed facsimile transmission, which shall be deemed an
original.
(d) Attorneys' Fees. Should any dispute arise between the parties
hereto, or their legal representatives, successors or assigns, concerning any
provision of this Agreement or the rights or duties of any party in relation
thereto, the party prevailing in such dispute shall be entitled, in addition to
any other relief that may be granted, to recover actual attorneys' fees and
costs, and court costs, in connection with any such dispute.
IN WITNESS WHEREOF, Employee and the Company have executed this
Agreement as of the date first above written.
EMPLOYEE COMPANY
LEGACY BRANDS, INC.
By:
/s/ STEVEN RICCARDELLI /s/ THOMAS E. KEES
- -------------------------- -----------------------------------
Steven Riccardelli Thomas E. Kees
President & Chief Executive Officer
<PAGE> 1
EXHIBIT 10.16
SECOND AMENDED AND RESTATED
BRIDGE LOAN AND CONSULTING AGREEMENT
This Amended and Restated Bridge Loan And Consulting Agreement ("Second
Amended and Restated Agreement") is entered into on this day of June, 1997,
and effective by and among Pacific Acquisition Group, Inc., a Colorado
corporation ("PAG"), Legacy Brands, Inc., a California corporation ("Legacy"),
formerly known as Greg Plunkett, Inc., and Capitol Bay Securities, Inc., a
California corporation ("CBS"). PAG and Legacy are collectively referred to
herein as the "Parties."
RECITALS
WHEREAS, pursuant to that certain Bridge Loan and Consulting Agreement
(the "Agreement") executed by and between Legacy and PAG on December 20, 1995,
as amended on May 15, 1996 ("Addendum No. 1"), PAG provided merchant banking and
consulting services to Legacy in connection with arranging a private debt
financing of Six Hundred Thousand Dollars ($600,000) in the form of promissory
notes (the "Notes"), bearing interest at 15% per annum, and maturing one year
from the issuance thereof (the "Offering"), and
WHEREAS, Legacy is engaged in the marketing and distribution of premium
branded frozen food products, and PAG is engaged in the business of providing
merchant banking and consulting services to private emerging-growth stage
companies ("Client Companies"), and
WHEREAS, Legacy was in the process of filing a registration statement with
the Securities and Exchange Commission on Form SB-2 relating to an underwritten
initial public offering of 1,200,000 Shares of Common Stock and Redeemable
Warrants in the aggregate amount of up to $6,600,000 ("IPO"), and
WHEREAS, in recognition of the anticipated filing of the Underwritten
Registration Statement, the Parties entered into the Amended and Restated Bridge
Loan and Consulting Agreement (the "First Restated Agreement"), and
WHEREAS, Legacy determined that it would neither be feasible nor practical
to complete the IPO and on May _, 1997, terminated the services of the
Underwriter retained in connection with the IPO, and
WHEREAS, it is now the intention of Legacy to engage in a private
placement of its securities to raise approximately $3.7 million (the "Private
Placement") and to register its outstanding securities under the Securities
Exchange Act of 1934 (the "1934 Act") on Form l0SB (the "1934 Act
Registration"), and CBS intends to act as a placement agent with respect to the
Private Placement, and
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WHEREAS, it is the intention of Legacy to use its best efforts to cause
its shares to be traded on the electronic bulletin board or the NASDAQ Small
Cap, and
WHEREAS, the Parties now desire to restate the First Restated Agreement
reflecting the revised offering price as a result of the change from the
originally contemplated IPO to a Private Placement.
NOW, THEREFORE, in consideration of the promises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Recitals and Restatement.
1.1. The recitals set forth above are true, accurate and correct, and are
fully incorporated herein by this reference.
1.2. The First Restated Agreement is hereby amended and restated in its
entirety to read as follows:
Section 2. Services.
2.1 PAG agrees to provide consulting services and financial assistance to
Legacy in connection with the issuance of the Notes to be provided on an
as-needed basis as determined by Legacy. The services will consist of the
following:
2.1.1 completion of a due diligence review of the internal
business and financial operations and procedures of Legacy, and provision of
advice and assistance in connection with the compliance of such operations and
procedures with those generally acceptable to the relevant financial and
business services community;
2.1.2 advice and assistance in connection with financial public
relations, shareholder relations and related services;
2.1.3 advice and assistance in connection with the preparation
and structure of the Offering;
2.1.4 advice and assistance in connection with the retention of
and communications with other professionals, including legal counsel,
accountants and auditors, and escrow and transfer agents;
2.1.5 advice and assistance in connection with the issuance of
the Notes, including providing introductions to existing clients of PAG and
other potential investors for the purpose of investment in the Notes. In
connection with the issuance of the Notes, Legacy shall pay
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Broker Dealer firms, licensed by the National Association of Securities Dealers,
a commission and due diligence fees totaling fifteen percent (15%) on the sale
of Notes; and
2.1.6 PAG agrees to guarantee the payment of all principal and
accrued interest on the Notes (the "Guarantee") in the form of shares of its
Series B Convertible Preferred Stock ("PAG Stock") upon an event of default by
Legacy (as defined in the Notes). In the event of a default, the holders of the
Notes (the "Holders") will receive one share of PAG Stock per $6.50 of principal
amount of Notes in default, subject to (i) the agreement of each Holder
exercising such Guarantee to assign all its right, title and interest in the
Note(s) held by it to PAG, and (ii) the exhaustion of all collection efforts
against Legacy, including foreclosure on any liens or security interests
provided to Holders. The terms of the Guarantee are more completely described in
the form of Guarantee attached hereto as Exhibit A, which terms are incorporated
herein by reference.
2.2 The Parties understand and agree that the services to be provided by
PAG, as described herein, are not intended to include any activity by PAG to
effect the purchase or sale of the Notes, other than the introduction of Legacy
to NASD member Broker Dealer firms.
2.3 The Parties further understand and agree that Legacy may be required
to employ additional professionals in connection with the Offering and may incur
additional expenses in connection therewith, including, without limitation,
selling commissions and fees, escrow and transfer agent fees. The Parties agree
that additional reasonable professional fees and reasonable out-of-pocket
expenses shall be borne by Legacy and are not included in the Bridge Loan and
Consulting Fees described in Section 3 hereof. The Parties also understand and
agree that this Second Amended and Restated Agreement does not contemplate the
offer, placement or sale of securities of Legacy by PAG to its investor clients.
Section 3. Compensation; Registration Rights.
3.1 For services rendered by PAG under this Agreement, Legacy
agrees to issue that number of shares of Common Stock to PAG or pursuant to its
instructions that shall have a market value of approximately $1,300,000 as
determined pursuant to the provisions herein
3.1.1 PAG has been issued a total of 190,000 shares in partial
consideration for the services render pursuant hereto ("Initial Holdings");
3.1.2 At the expiration of twelve (12) months from the date upon
which the Common Stock shall have commenced trading on the electronic bulletin
board or the NASDAQ Small Cap (such period shall be the Valuation Period"), a
valuation shall be made with respect to the Initial Holdings which valuation
(the "Initial Valuation") shall be based upon the highest average closing price
for shares of Common Stock for any consecutive ten (10) days in which the Common
Stock shall have traded. In the event that the Initial Valuation shall be less
than
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$1,300,000 then additional shares (the "Additional Shares") shall be issuable in
accordance with the following schedule based upon trading prices of the Common
Stock as indicated:
<TABLE>
<CAPTION>
10 Day Average $3.00 or $3.01 to $4.01 to $5.01 to $6.01 to $7.01 or
Trading Price Per Share Less $4.00 $5.00 $6.00 $7.00 Above
- ----------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assumed Value of $570,000 $ 665,000 $ 855,000 $1,045,000 $1,235,000 $1,425,000
Initial Holdings
Additional Shares
Issuable
200,000 $600,000
181,500 $ 635,250
99,000 $ 455,500
46,400 $255,200
10,000 $65,000
0 0
Total Valuation $1,170,000 $1,300,250 $1,300,500 $1,300,200 $1,300,000 $1,425,000
---------- ---------- ---------- ---------- ---------- ----------
Total Shares Held 390,000 371,500 289,000 236,400 200,000 190,000
========== ========== ========== ========== ========== ==========
</TABLE>
The following is by way of example: In the event that the highest 10 day
average trading price per share shall have been $3.25, then an additional
181,500 shares shall be issuable. The maximum number of additional shares which
shall be issuable shall be 200,000.
3.1.3 Such Additional Shares shall be issued within five (5)
business days of the expiration of the Valuation Period and when issued, shall
be deemed to be validly issued, fully paid and non-assessable. It is understood
that approximately _________________ shares of such Initial Holdings are being
held by PAG for the account of PAG shareholders (the "Shareholder Shares"). The
remaining _________ shares are for the account of PAG or its directors, officers
or employees (the "Company Shares") (the Shareholder Shares and the Company
Shares shall sometimes collectively be referred to as the "PAG Shares"). PAG
hereby disclaims beneficial ownership of the Shareholder Shares.
3.2 Legacy shall reimburse PAG for all reasonable and necessary offering
expenses, marketing expenses, and materials costs directly incurred by it in
performing the services described hereunder, including, but not limited to,
travel, lodging, meals, telephone, postage, and bonding. PAG hereby
acknowledges that all amounts payable to it pursuant to the provisions hereof
have been received and Legacy has no further payment obligations.
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3.3 Piggyback Registration Rights. For the purposes of this Section
3.3, references to PAG or shares held by PAG shall mean and refer to Shareholder
Shares and Company Shares as such terms are defined and used in Section 3.1.3
herein.
3.3.1 Inclusion in Registration Statement If, at any time during
the Term, as defined in Section ? below, Legacy intends to file a registration
statement with the Securities and Exchange Commission (other than registrations
filed on Form S-8 or on Form S-4, or any similar or successor forms then in
effect under the 1933 Act) (collectively referred to as a "Registration
Statement") to register any of its securities pursuant to the 1933 Act, whether
or not for its own account (the "Registration"), then Legacy shall provide
written notice to PAG of its intention to do so. (PAG's rights under this
Section 3.3.1 are hereinafter referred to as "Piggyback Registration Rights.")
Upon the written request of PAG, made within ten (10) days of receipt of such
notice, and subject to the provisions set forth herein, Legacy shall include the
PAG Shares in the Registration Statement. Legacy shall keep such Registration
Statement effective for a minimum of sixty (60) days and shall comply with all
federal and state laws or regulations necessary for PAG to effect a sale or
disposition during such period.
3.3.2 Limitations on Amount of PAG Shares to be Included Legacy
shall be obligated to include the PAG Shares, or any part thereof, in a
Registration Statement, only if the Underwriter, as herein defined, determines,
in its sole discretion, that the inclusion of such PAG Shares and the shares of
any other holder of shares, excluding Legacy (collectively referred to as the
"Non-Legacy Shares"), intended to be included in such Registration Statement
will not have a material adverse affect on a current or proposed offering of
Legacy (the "Public Offering"). To the extent the Underwriter shall determine
not to include some or all of the PAG Shares, such exclusion shall only be on a
pro-rata basis among all of the holders of the Non-Legacy Shares according to
the number of shares sought to be included in the Public Offering. To the extent
that any PAG Shares shall not have been included in such Public Offering, then
the Piggyback Registration Rights shall continue to be in force and effect as to
such portion of the PAG Shares which has not been registered. PAG shall not be
entitled to more than one Piggyback Registration in any one fiscal year of
Legacy. For the purposes of this Agreement, the term "the Underwriter," shall
include the representative or representatives of the Underwriters in any
proposed Public Offering and any other investment banker or placement agent with
which Legacy has or may have a contractual relationship from time to time.
3.3.3 Information and Documents In the event Legacy shall be
required by the provisions of this Section ? to effect the registration of the
PAG Shares, PAG shall furnish, in writing, such information as is requested by
Legacy or the Underwriter or their representatives, including their legal
counsel and accountants, for inclusion in the Registration Statement relating to
such Public Offering and such other information and documentation as Legacy
shall reasonably request. In addition, PAG shall execute and deliver such
agreements, certifications and other documents, including, without limitation,
selling shareholder instructions, powers-of-attorney, and custody agreements, as
Legacy or Underwriter may reasonably request. Legacy's obligation to
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<PAGE> 6
register the PAG Shares shall be subject to the fulfilment of the duty of PAG to
cooperate fully with Legacy and the Underwriter and their representatives in the
preparation of the Registration Statement covering the PAG Shares and to
otherwise not be in default of any provisions of this Agreement.
3.3.4 Expenses All expenses incurred in connection with any
Registration under this Section ?, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and expenses of any audits
incident to or required by any such registration are herein called "Registration
Expenses." All underwriting discounts and selling commissions applicable to any
offer and sale of securities herein are called "Selling Expenses." Legacy will
pay all Registration Expenses attributable to the PAG Shares in connection with
any Registration pursuant to this Section 3.3.4. All Selling Expenses in
connection with any registration pursuant to this Section 3.3.4 shall be borne
by Legacy and PAG, pro rata as the shares registered thereby being sold or
registered by each of them bears to the total number of shares being registered.
PAG shall bear the fees and costs of his own counsel. Notwithstanding the
foregoing provisions of this Section ?, PAG shall pay for all Registration and
Selling Expenses which applicable state securities or other regulatory agencies
(whether governmental or otherwise) require to be paid by persons selling shares
in the Public Offering as a condition to qualification or registration of the
securities being sold or registered.
3.3.5 Prospectus Delivery PAG shall comply with the prospectus
delivery requirements of applicable federal or state securities laws in
connection with any registration. If any prospectus becomes outdated,
inaccurate, or misleading, PAG shall cease using all such prospectuses upon
notice thereof from Legacy and shall return all copies of such prospectuses
under PAG's control to Legacy.
3.3.6 No Registration Required Legacy shall not be required to
effect a registration under this Section 3.3.6 if PAG would otherwise be able to
sell, in its entirety on the day following the receipt by PAG of the Notice
under Section 3.3. 1, without registration, the number of shares sought to be
registered at the time of the registration, pursuant to Rule 144 promulgated by
the Securities and Exchange Commission as then in effect or pursuant to any
other exemption from the registration provisions of the 1933 Act then available
to PAG (collectively referred to as "Rule 144"), so long as the purchaser
thereof shall acquire shares that are not subject to any restriction on resale
as may otherwise be imposed pursuant to Rule 144.
3.3.7 Termination of Rights Legacy's obligations to register PAG
Shares pursuant to this Section ? shall cease and terminate as to the PAG Shares
upon the occurrence of the earlier of the following: (i) the termination of this
Agreement according to its terms; (ii) at any time the PAG Shares become freely
transferable without registration under the 1933 Act, in the opinion of PAG's
counsel, which counsel shall be experienced in the matters which are the subject
of such counsel's opinion and retained at PAG's sole cost and expense; or iii)
twenty four (24) months from the effective date of any such Registration
Statement (the "Closing").
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<PAGE> 7
3.3.8 "Lock-Up" Agreement Except as shall be provided in Section
3.3.6, PAG shall not sell or otherwise transfer or dispose of any PAG Shares or
any other shares of Common Stock acquired or otherwise held by it during the
Term as set forth in Section 5 (in the aggregate referred to as the "PAG
Holdings"), for such period as is determined by any Underwriter in connection
with any offering of securities by Legacy, whether public or in a private
placement (the "Lock-Up"). In connection with the Private Placement referenced
in the Recitals hereto, PAG hereby agrees to execute an agreement with the
Underwriter (Placement Agent) therein providing that it shall not sell, pledge,
hypothecate, transfer or in any other manner dispose of the PAG Shares, or agree
to do any of the foregoing (collectively referred to as a "Transfer") for a
period of thirteen months from the date of the Closing, (the "Lock-Up Period")
except as provided in Section 3.3.6. PAG shall seek the written consent of the
Underwriter to transfer, convey or assign any equity securities of Legacy during
the Lock-Up Period. PAG shall surrender any and all certificates representing
shares of the Common Stock which are subject to the provisions of Section 3.3.8
and 3.3.9 hereof to enable Legacy or its transfer agent to place thereon an
appropriate legend reflecting the restrictions contained herein.
3.3.9 The Right of First Refusal
3.3.9.1 Term of Right of First Refusal PAG hereby grants
to CBS a right of first refusal ("First Refusal Right") to acquire any PAG
Shares applicable to any Transfer transaction entered into by PAG for a period
commencing on the Closing and continuing for a period ending on the earlier of:
i) twenty four (24) months from the Closing; or ii) such time as all of the PAG
Holdings shall otherwise have been disposed of in compliance with the
limitations and restrictions contained in this Agreement.
3.3.9.2 Time for Notice and Exercise PAG shall provide
notice, in writing, to CBS or its designed nominee, with a copy to Legacy at
such time as he wishes to consummate a Transfer with a bona fide purchaser for
value (as such terms are used in the California Commercial Code), which party is
unrelated and unaffiliated (as such terms are used in Section 16 of the
Securities Exchange Act of 1934, as amended and the regulations promulgated
thereunder) with or to PAG (the "Transfer Notice"). In the event such Transfer
Notice shall set forth all of the terms and conditions of the proposed Transfer,
including, but not limited to, the name and addresses) of the proposed
Transferee, the consideration to be provided, and the time when the Transfer
will be completed. Any documents relating to such Transfer shall also be
provided as a part of the Transfer Notice. The Transfer Notice shall be deemed
to have been delivered until such time as all constituent documents and required
information have been provided. CBS or its designated nominee shall have a
period of five (5) business days from the date that a complete Transfer Notice
shall have been provided ("Acceptance Period") in order to accept such proposed
Transfer by providing to PAG, notice of acceptance, in writing ("Acceptance
Notice"). Such Acceptance Notice shall constitute an irrevocable acceptance of
the Transfer to be completed by CBS on the terms and conditions set forth in the
Transfer Notice. In the event that CBS shall not have delivered its Acceptance
Notice to PAG within the Acceptance Period, PAG may complete the Transfer. In
the event that PAG shall fail to complete the Transfer on the same terms and
conditions as set forth in
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<PAGE> 8
the Transfer Notice for any reason, then the Transfer shall be deemed to have
been terminated and the First Refusal Right with respect to such PAG Shares
shall be deemed reinstated and in full force and effect.
3.3.9.2.1 In the event that the proposed Transfer
shall be a transaction pursuant to Rule 144, (Rule 144 Transaction") the notice
required to be filed and delivered pursuant thereto, shall be deemed to be the
Transfer Notice.
3.3.9.2.2 In the event that the proposed Transfer
shall be in the form of a transaction whereby the PAG Shares shall be pledged,
hypothecated or in any other manner subject to or held as security for the
performance of the obligations of PAG, the secured party in such transaction
shall be notified of the First Refusal Right provided herein and such secured
party shall be subject to the provisions thereof including, but not limited to
the obligation to provide a Transfer Notice prior to any disposition of any PAG
Shares in satisfaction of any obligation secured thereby.
Section 4. Agents and Assistants. To the extent reasonably necessary to enable
PAG to perform its duties as set forth herein, PAG shall be authorized to engage
the services of any agent that it deems proper, and may further employ, engage,
or retain the services of such other persons or organizations to aid or assist
it in the proper performance of its duties. The costs of the services of such
agents or assistants shall be included in the Compensation described in Section
3 herein, unless otherwise specifically authorized by Legacy in writing. PAG
acknowledges that no further agents or assistants shall be engaged and that the
costs for the services of all such agents or assistants have been paid as
required and there are no further amounts due.
Section 5. Duration. The term of this Second Amended and Restated Agreement
shall commence upon the date of the Agreement (December 20, 1995) and shall
extend for a period of twelve (12) months from such date with respect to the
provisions of the following Sections of this Second Amended and Restated
Agreement: 2. 1. 1 through 2.1.5; 2.2; 2.3; 3.2; 4; 6; 11 and 12; and for such
period as set forth with respect to the obligations under Section 2.1.6. With
respect to all other provisions hereof, the term shall continue for a period of
twenty four (24) months from the date of the Closing (such latter one year
period shall be referred to as the "Term").
Section 6. No Guarantee. The Parties agree that nothing in this Second Amended
and Restated Agreement may be construed as a promise or guarantee about the
outcome of any offering or sale of securities or placement of the Notes by
Legacy. Any comments made by PAG concerning any of the matters contemplated
herein are expressions of opinion only.
Section 7. Confidential/Proprietary Information. PAG agrees that it will not
disclose and will hold in confidence any and all documents, proprietary
information and other matters owned by Legacy and brought to PAG's attention
(collectively the "Information") by Legacy during the course of this Second
Amended and Restated Agreement, whether in written or oral form. Without the
prior written consent of Legacy, PAG agrees not to use the Information for any
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purpose other than the performance of the Services performed directly for
Legacy, or to disclose the information to any third party, other than its agents
described in Section 3 hereof. PAG, however, shall not be so restricted where
(i) Information is now or becomes public through no fault of PAG, or (ii) PAG
already had Information in its possession from its business dealings prior to
the date of this Second Amended and Restated Agreement, or (iii) PAG received
Information from a third party on a non-confidential basis and not derived from
Company.
Section 8. Notices. All notices and other communications required or permitted
under this Second Amended and Restated Agreement shall be validly given, made,
or served if in writing and delivered personally or sent by registered mail, to
the following addresses:
Legacy:
Thomas E. Kees
President and Chief Executive Officer
Legacy Brands, Inc.
2200-B Douglas Boulevard, Suite 130
Roseville, California 95661
PAG:
James E. Hock, Jr.
Pacific Acquisition Group, Inc.
21800 Burbank Blvd., Third Floor
Woodland Hills, CA 91367
CBS
Stephen C. Kircher
President and Chief Executive Officer
Capitol Bay Securities, Inc.
2200-B Douglas Boulevard, Suite 130
Roseville, California 95661
or any other address as any party may, from time to time, designate by notice
given in compliance with this section.
Section 9. Assignment. Neither this Second Amended and Restated Agreement nor
any duties or obligations hereunder shall be assigned by PAG without the prior
written consent of Legacy, although PAG may delegate duties as contemplated in
Paragraph 3 hereof. In the event of an assignment by PAG, consented to by
Legacy, the assignee or his legal representative shall agree in writing with
Legacy to personally assume, perform, and be bound by the obligations and
agreements; contained herein.
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Section 10. Indemnification.
10.1 Legacy agrees to indemnify and hold PAG and its partners, officers,
directors, employees., agents and affiliates harmless from and against any and
all loss, claim, damage, liability and expense (including without limitation,
costs of investigation, legal and other fees and expenses incurred in connection
with, and any amounts paid in settlement of, any action, suit or proceeding, or
any claim asserted), to which PAG may become subject under the United States
securities laws or any applicable statute or regulation of any jurisdiction, or
at common law, or otherwise, insofar as such loss, claim, damage, liability or
expense arises from, or is based upon, in whole or in part: (i) a material
breach of Sections 2.1.1 through 2.1.5 of this Second Amended and Restated
Agreement by Legacy, (ii) an untrue statement of a material fact or omission to
state a material fact, or allegation of an untrue statement of a material fact
or omission to state a material fact, by Legacy in any documents or information
provided to PAG or prepared by PAG and approved by Legacy in connection with
services to be provided by PAG as described therein, which was necessary in
order to make the statements made, in light of the circumstances under which
they were made, not misleading, to the extent such breach, untrue statement or
omission is a cause of the loss, claim, damage, liability or expense.
10.2 PAG agrees to indemnify and hold Legacy and its partners, officers,
directors, employees., agents and affiliates harmless from and against any and
all loss, claim, damage, liability and expense (including without limitation,
costs of investigation, legal and other fees and expenses incurred in connection
with, and any amounts paid in settlement of, any action, suit or proceeding or
any claim asserted), to which Legacy may become subject under the United States
securities laws or any applicable statute or regulation of any jurisdiction, or
at common law, or otherwise, insofar as such loss, claim, damage, liability or
expense arises from, or is based upon, in whole or in part: (i) a material
breach of Sections 2.1.1 through 2.1.5 of this Second Amended and Restated
Agreement by PAG, (ii) any untrue statement of a material fact or omission to
state a material fact, or allegation of an untrue statement of a material fact
or omission to state a material fact, by PAG in any documents or information
provided to Investors in connection with services to be provided by PAG as
described therein, which was necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading, to the
extent such breach, untrue statement or omission is a cause of the loss, claim,
damage, liability or expense.
10.3 The rights to indemnification set forth herein shall expire one
year from the date of the services to be provided under Sections 2.1.1 through
2.1.5 of this Second Amended and Restated Agreement.
Section 11 Noncircumvention. PAG may from time to time introduce potential
investors, Broker Dealer Firms and sales agents (collectively referred to as
"Investors") to Legacy. Legacy covenants not to circumvent PAG, either directly
or indirectly, with respect to any Investor introduced to Legacy by PAG, or
registered in writing by PAG with Legacy, including but not limited to
soliciting the Investors' services or investment capital directly or indirectly,
under the
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circumstances, without the prior written consent of PAG for a period of two (2)
years from the date of such introduction, which period is hereby agreed by the
Parties to expire December 20, 1997.
Section 12. Equitable Relief. The Parties agree that money damages may not be a
sufficient remedy for breach of the noncircumvention, confidentiality and other
obligations of Section 11 of this Second Amended and Restated Agreement.
Accordingly, in addition to all other remedies that either party may have, each
party shall be entitled to specific performance and injunctive or other
equitable relief as a remedy for any breach of the noncircumvention,
confidentiality and other obligations of this Second Amended and Restated
Agreement. The defaulting party agrees to waive any requirement for a bond in
connection with any such injunctive or other equitable relief.
Section 13. Attorney Fees. In the event of any arbitration, litigation or
proceeding of any kind, between the parties to declare or enforce any provision
of this Second Amended and Restated Agreement, the prevailing party or parties
shall be entitled to recover from the losing party or parties, in addition to
any other recovery and costs, reasonable attorney fees incurred in such
litigation, in both the trial and in all appellate courts.
Section 14. Law Governing. This Second Amended and Restated Agreement shall be
governed by and construed in accordance with the laws of the State of
California.
Section 15. Computation of Time. In computing any period of time pursuant to
this Second Amended and Restated Agreement, the day of the act, event or default
from which the designated period of time begins to run shall be included, unless
it is a Saturday, Sunday or a legal holiday, in which event the period shall
begin to run on the next day which is not a Saturday, Sunday or legal holiday,
in which event the period shall run until the end of the next day thereafter
which is not a Saturday, Sunday or legal holiday.
Section 16. Entire Agreement. This Second Amended and Restated Agreement,
including exhibits hereto, contains the entire understanding between and among
the parties and supersedes any prior understandings and agreements among them
respecting the subject matter of this Second Amended and Restated Agreement,
including, but not by way of limitation the Agreement and Addendum No. 1.
Section 17. Agreement Binding. This Second Amended and Restated Agreement shall
be binding upon the heirs, executors, administrators, successors and assigns of
the parties hereto.
Section 18. Arbitration. If at any time during the term of this Second Amended
and Restated Agreement any dispute, difference, or disagreement shall arise upon
or in respect of the Second Amended and Restated Agreement, and the meaning and
construction hereof, every such dispute, difference. and disagreement shall be
referred to a single arbiter agreed upon by the parties, or
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if no single arbiter can be agreed upon, an arbiter or arbiters shall be
selected in accordance with the rules of the American Arbitration Association
and such dispute, difference, or disagreement shall be settled by arbitration in
accordance with the then prevailing commercial rules of the American Arbitration
Association, and judgment upon the award rendered by the arbiter may be entered
in any court having jurisdiction thereof.
Section 19. Further Action. The parties hereto shall execute and deliver all
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Second Amended
and Restated Agreement.
Section 20. Counterparts. This Second Amended and Restated Agreement may be
executed in several counterparts, all of which taken together shall constitute
one and the same agreement, binding on all Parties hereto even though all
Parties are not signatories to the original or the same Counterpart.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, the Parties have executed this Second Amended and
Restated Agreement as of the first written above.
PACIFIC ACQUISITION GROUP, INC.,
a Colorado corporation
/s/ JAMES E. HOCK, JR.
- ---------------------------------------------
James E. Hock, Jr.
President, Chief Executive Officer
LEGACY BRANDS, INC.,
a California corporation
/s/ THOMAS E. KEES
- ---------------------------------------------
Thomas E. Kees
President, Chief Executive Officer
CAPITOL BAY SECURITIES, INC.,
A California corporation
As to Sections 3.3.8, 3.3.9 and 13 through 20
/s/ STEPHEN C. KIRCHER
- ---------------------------------------------
Stephen C. Kircher
President, Chief Executive Officer
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<PAGE> 1
EXHIBIT 10.17
SUPPLEMENT TO
SECOND AMENDED AND RESTATED
BRIDGE LOAN AND CONSULTING AGREEMENT
This Supplement to the Second Amended and Restated Bridge Loan And
Consulting Agreement (" Supplemental Agreement") is entered into on this 29th
day of May, 1998, by and between Pacific Acquisition Group, Inc., a Colorado
corporation ("PAG") and Legacy Brands, Inc., a California corporation
("Legacy"). PAG and Legacy are collectively referred to herein as the "Parties."
Capitol Bay Securities, Inc., a California corporation, ("CBS") is a party with
respect only to certain specified portions hereof.
R E C I T A L S
WHEREAS, pursuant to that Second Amended and Restated Bridge Loan and
Consulting Agreement (the "Agreement"), entered into, inter alia, between Legacy
and PAG on June 12, 1997, certain rights to the issuance of additional shares
were granted by Legacy to PAG, subject to certain circumstances as set forth
therein (the "PAG Contingency"); and
WHEREAS, Legacy is now in the process of filing a registration
statement with the Securities and Exchange Commission relating to an
underwritten initial public offering of up to 1,500,000 units, each unit
consisting of one share of common stock and one warrant to purchase a share of
common stock, in the aggregate amount of up to $7,500,000 (the "IPO"); and
WHEREAS, the Underwriter and the Parties hereto believe it to be in the
best interests of consummating the IPO to resolve the PAG Contingency prior to
proceeding with the IPO; and
WHEREAS, the Underwriter and Legacy have determined it to be in the
best interests of consummating the IPO to reduce the number of shares of common
stock of Legacy outstanding prior to the IPO which will be accomplished through
a reverse split of the outstanding common stock whereby 1 share of common stock
of Legacy will be issued for each 3.2 shares of common stock outstanding (the
"Reverse Stock Split"), which Reverse Stock Split will become effective at about
the time that the registration statement with respect to the IPO shall have been
filed with the SEC.
NOW, THEREFORE, in consideration of the promises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
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Section 1. Recitals and Restatement.
1.1. The recitals set forth above are true, accurate and correct, and
are fully incorporated herein by this reference.
1.2. The Second Amended and Restated Agreement is hereby amended only
to the extent specifically set forth herein. All other provisions thereof remain
as set forth therein.
1.3 The following sections of the Agreement are restated in their
entirety to read as follows:
Section 2. Intentionally omitted.
Section 3. Compensation; Registration Rights.
3.1 For services rendered by PAG under the Agreement, Legacy agrees to
issue that number of shares of its common stock to PAG or pursuant to its
instructions as set forth herein:
3.1.1 PAG has been issued a total of 190,000 shares of common
stock (59,375 shares upon effectiveness of the Reverse Stock Split) in partial
consideration for the services rendered pursuant thereto ("Initial Holdings");
3.1.2 Legacy hereby agrees to issue an additional 120,625
shares of its common stock, after giving effect to the Reverse Stock Split, (the
"Additional Shares") to PAG which Additional Shares shall be released to PAG, or
its assignees, at the earlier of: (i) 30 days following the closing of the IPO;
or (ii) 30 days following the termination of the IPO; provided, however,
pursuant to Rule 144 of the 1933 Act, neither the Initial Holdings nor the
Additional Shares may be resold prior to the earlier of 91 days following the
closing or termination of the IPO, whichever is earlier.
3.1.3 Such Additional Shares shall be deemed to be validly
issued, fully paid and non-assessable. It is understood that approximately 75%
of such Initial Holdings and Additional Shares are being held by PAG for the
account of PAG shareholders (the "Shareholder Shares"). The remaining 25% are
held for the account of PAG or its directors, officers or employees (the
"Company Shares") (the Shareholder Shares and the Company Shares shall sometimes
collectively be referred to as the "PAG Shares"). PAG hereby disclaims
beneficial ownership of the Shareholder Shares.
3.2 Intentionally omitted.
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<PAGE> 3
3.3 Piggyback Registration Rights. For the purposes of this Section
3.3, references to PAG or shares held by PAG shall mean and refer to Shareholder
Shares and Company Shares as such terms are defined and used in Section 3.1.3
herein.
3.3.1 Inclusion in Registration Statement If, at any time
during the Term, as defined in Section 5 below, Legacy intends to file a
registration statement with the Securities and Exchange Commission (other than
registrations filed on Form S-8 or on Form S-4, or any similar or successor
forms then in effect under the 1933 Act) (collectively referred to as a
"Registration Statement") to register any of its securities pursuant to the 1933
Act, whether or not for its own account (the "Registration"), then Legacy shall
provide written notice to PAG of its intention to do so. (PAG's rights under
this Section 3.3.1 are hereinafter referred to as "Piggyback Registration
Rights.") Upon the written request of PAG, made within ten (10) days of receipt
of such notice, and subject to the provisions set forth herein, Legacy shall
include such PAG Shares in the Registration Statement as set forth in the notice
from PAG. Legacy shall keep such Registration Statement effective for a minimum
of sixty (60) days and shall comply with all federal and state laws or
regulations necessary for PAG to effect a sale or disposition during such
period.
3.3.2 Limitations on Amount of PAG Shares to be Included
Legacy shall be obligated to include the PAG Shares, or any part thereof, in a
Registration Statement, only if the Underwriter, as herein defined, determines,
in its sole discretion, that the inclusion of such PAG Shares and the shares of
any other holder of shares, excluding Legacy (collectively referred to as the
"Non-Legacy Shares"), intended to be included in such Registration Statement
will not have a material adverse affect on a current or proposed offering of
Legacy (the "Public Offering"). To the extent the Underwriter shall determine
not to include some or all of the PAG Shares, such exclusion shall only be on a
pro-rata basis among all of the holders of the Non-Legacy Shares according to
the number of shares sought to be included in the Public Offering. To the extent
that any PAG Shares shall not have been included in such Public Offering, then
the Piggyback Registration Rights shall continue to be in force and effect as to
such portion of the PAG Shares which has not been registered. PAG shall not be
entitled to more than one Piggyback Registration in any one fiscal year of
Legacy. For the purposes of this Agreement, the term "the Underwriter," shall
include the representative or representatives of the Underwriters in any
proposed Public Offering and any other investment banker or placement agent with
which Legacy has or may have a contractual relationship from time to time.
3.3.3 Information and Documents In the event Legacy shall be
required by the provisions of this Section 3.3 to effect the registration of the
PAG Shares, PAG shall timely furnish, in writing, such information as is
requested by Legacy or the Underwriter or their representatives, including their
legal counsel and accountants, for inclusion in the Registration Statement
relating to such Public Offering and such other information and documentation as
Legacy shall reasonably request. In addition, PAG shall execute and deliver such
agreements, certifications and other documents, including, without limitation,
selling shareholder instructions, powers-of-attorney, and custody agreements, as
Legacy
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<PAGE> 4
or Underwriter may reasonably request. Legacy's obligation to register the PAG
Shares shall be subject to the fulfilment of the duty of PAG to cooperate fully
with Legacy and the Underwriter and their representatives in the preparation of
the Registration Statement covering the PAG Shares and to otherwise not be in
default of any provisions of this Supplemental Agreement or the Agreement.
3.3.4 Expenses All expenses incurred in connection with any
Registration under this Section 3.3.4, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and expenses of any audits
incident to or required by any such registration are herein called "Registration
Expenses." All underwriting discounts and selling commissions applicable to any
offer and sale of securities herein are called "Selling Expenses." Legacy will
pay all Registration Expenses attributable to the PAG Shares in connection with
any Registration pursuant to this Section 3.3.4. All Selling Expenses in
connection with any registration pursuant to this Section 3.3.4 shall be borne
by Legacy and PAG, pro rata as the shares registered thereby being sold or
registered by each of them bears to the total number of shares being registered.
PAG shall bear the fees and costs of its own counsel. Notwithstanding the
foregoing provisions of this Section 3.3.4, PAG shall pay for all Registration
and Selling Expenses which applicable state securities or other regulatory
agencies (whether governmental or otherwise) require to be paid by persons
selling shares in the Public Offering as a condition to qualification or
registration of the securities being sold or registered.
3.3.5 Prospectus Delivery PAG shall comply with the prospectus
delivery requirements of applicable federal or state securities laws in
connection with any registration. If any prospectus becomes outdated,
inaccurate, or misleading, PAG shall cease using all such prospectuses upon
notice thereof from Legacy and shall return all copies of such prospectuses
under PAG's control to Legacy.
3.3.6 No Registration Required Legacy shall not be required to
effect a registration under this Section 3.3 if PAG would otherwise be able to
sell, in its entirety on the day following the receipt by PAG of the Notice
under Section 3.3.1, without registration, the number of shares sought to be
registered at the time of the registration, pursuant to Rule 144 promulgated by
the Securities and Exchange Commission as then in effect or pursuant to any
other exemption from the registration provisions of the 1933 Act then available
to PAG (collectively referred to as "Rule 144"), so long as the purchaser
thereof shall acquire shares that are not subject to any restriction on resale
as may otherwise be imposed pursuant to Rule 144.
3.3.7 Termination of Rights Legacy's obligations to register
PAG Shares pursuant to this Section 3.3 shall cease and terminate as to the PAG
Shares upon the occurrence of the earlier of the following: (i) the termination
of this Agreement according to its terms; (ii) at any time the PAG Shares become
freely transferable without registration under the 1933 Act, in the opinion of
Legacy's counsel, retained at Legacy's sole cost and
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<PAGE> 5
expense, which counsel may rely upon the opinion of PAG's counsel, which counsel
shall be experienced in the matters which are the subject of such counsel's
opinion and retained at PAG's sole cost and expense; or iii) twenty four (24)
months from the effective date of any such Registration Statement (the
"Closing").
3.3.9 The Right of First Refusal
3.3.9.1 Term of Right of First Refusal PAG hereby
grants to CBS a right of first refusal ("First Refusal Right") to acquire any
PAG Shares applicable to any Transfer transaction entered into by PAG for a
period commencing on the Closing and continuing for a period ending on the
earlier of: (i) twenty four (24) months from the Closing; or (ii) such time as
all of the PAG Holdings shall otherwise have been disposed of in compliance with
the limitations and restrictions contained in this Agreement.
3.3.9.2 Time for Notice and Exercise PAG shall
provide notice, in writing, to CBS or its designed nominee, with a copy to
Legacy at such time as he wishes to consummate a Transfer with a bona fide
purchaser for value (as such terms are used in the California Commercial Code),
which party is unrelated and unaffiliated (as such terms are used in Section 16
of the Securities Exchange Act of 1934, as amended and the regulations
promulgated thereunder) with or to PAG (the "Transfer Notice"). In the event
such Transfer Notice shall set forth all of the terms and conditions of the
proposed Transfer, including, but not limited to, the name and address(es) of
the proposed Transferee, the consideration to be provided, and the time when the
Transfer will be completed. Any documents relating to such Transfer shall also
be provided as a part of the Transfer Notice. The Transfer Notice shall be
deemed to have been delivered until such time as all constituent documents and
required information have been provided. CBS or its designated nominee shall
have a period of five (5) business days from the date that a complete Transfer
Notice shall have been provided ("Acceptance Period") in order to
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<PAGE> 6
accept such proposed Transfer by providing to PAG, notice of acceptance, in
writing ("Acceptance Notice"). Such Acceptance Notice shall constitute an
irrevocable acceptance of the Transfer to be completed by CBS on the terms and
conditions set forth in the Transfer Notice. In the event that CBS shall not
have delivered its Acceptance Notice to PAG within the Acceptance Period, PAG
may complete the Transfer. In the event that PAG shall fail to complete the
Transfer on the same terms and conditions as set forth in the Transfer Notice
for any reason, then the Transfer shall be deemed to have been terminated and
the First Refusal Right with respect to such PAG Shares shall be deemed
reinstated and in full force and effect.
3.3.9.2.1 In the event that the proposed Transfer
shall be a transaction pursuant to Rule 144, (Rule 144 Transaction") the notice
required to be filed and delivered pursuant thereto, shall be deemed to be the
Transfer Notice.
3.3.9.2.2 In the event that the proposed Transfer
shall be in the form of a transaction whereby the PAG Shares shall be pledged,
hypothecated or in any other manner subject to or held as security for the
performance of the obligations of PAG, the secured party in such transaction
shall be notified of the First Refusal Right provided herein and such secured
party shall be subject to the provisions thereof including, but not limited to
the obligation to provide a Transfer Notice prior to any disposition of any PAG
Shares in satisfaction of any obligation secured thereby.
Section 4. Intentionally omitted.
Section 5. Term, Accord & Satisfaction, Releases. Except as to the provisions
specifically set forth herein, all provisions of the Agreement have expired and
all provisions thereof have been fully satisfied according to their terms. The
execution of this Supplemental Agreement shall constitute a full accord and
satisfaction with respect to the provisions of the Agreement which are not set
forth in this Supplemental Agreement. With respect to the provisions hereof, the
term shall continue for a period of twenty four (24) months from the earlier of:
(i) the date of the Closing; or (ii) the date upon which the Underwriter and
Legacy shall agree to terminate the IPO (the "Term"). This Supplemental
Agreement shall also constitute a mutual general release with respect to the
terms and conditions set forth in the Agreement, but not with respect to any
matters specifically arising out of the provisions of this Supplemental
Agreement. Except with respect to the performance of the obligations set forth
in this Supplemental Agreement, PAG and Legacy each fully and forever releases
and discharges the other and their respective directors, officers, partners and
agents from any and all claims, demands, causes of action, obligations,
controversies, debts, damages, losses and liabilities of any kind or nature
whatsoever, whether known or unknown, suspected or unsuspected, which they now
own or hold or have at any time owned or held against each other or which they
may have at any time in the future, arising out of or in any way related to the
facts, events or circumstances described or set forth in the Agreement and any
documents referred to therein.
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<PAGE> 7
Section 1542 Waiver. To the extent that the foregoing releases are
releases to which Section 1542 of the California Civil Code or similar
provisions of other applicable law applies, it is the intention of the parties
that the foregoing releases shall be effective as a bar to any and all actions,
fees, damages, losses, claims, liabilities and demands of whatsoever character,
nature and kind, known or unknown, suspected or unsuspected specified herein and
in furtherance of this intention, the Parties expressly waive any and all rights
and benefits conferred upon them by the provisions of Section 1542 of the
California Civil Code or similar provisions of applicable law which are as
follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
Section 6. No Guarantee. The Parties agree that nothing in the Agreement or this
Supplemental Agreement may be construed as a promise or guarantee about the
outcome of any offering or sale of securities by Legacy.
Section 7. Confidential/Proprietary Information. PAG agrees that it will not
disclose and will hold in confidence any and all documents, proprietary
information and other matters owned by Legacy and brought to PAG's attention
(collectively the "Information") by Legacy during the course of this
Supplemental Agreement or the Agreement, whether in written or oral form.
Without the prior written consent of Legacy, PAG agrees not to use the
Information for any purpose other than the performance of the Services performed
directly for Legacy, or to disclose the information to any third party, other
than its agents described in Section 3 hereof. PAG, however, shall not be so
restricted where (i) Information is now or becomes public through no fault of
PAG, or (ii) PAG already had Information in its possession from its business
dealings prior to the date of this Second Amended and Restated Agreement, or
(iii) PAG received Information from a third party on a non-confidential basis
and not derived from Company.
Section 8. Notices. All notices and other communications required or permitted
under this Supplemental Agreement shall be validly given, made, or served if in
writing and delivered personally or sent by registered mail, to the following
addresses:
If to LEGACY:
Thomas E. Kees
President and Chief Executive Officer
Legacy Brands, Inc.
2424 Professional Drive, Suite A
Roseville, California 95661
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If to PAG:
James E. Hock, Jr.
President and Chief Executive Officer
Pacific Acquisition Group, Inc.
21800 Burbank Blvd., Third Floor
Woodland Hills, CA 91367
If to CBS:
Stephen C. Kircher
President and Chief Executive Officer
Capitol Bay Securities, Inc.
2424 Professional Drive
Roseville, California 95661
or any other address as any party may, from time to time, designate by notice
given in compliance with this section.
Section 9. Assignment. Neither this Supplemental Agreement nor any rights,
duties or obligations hereunder shall be assigned by PAG without the prior
written consent of Legacy. In the event of an assignment by PAG, consented to by
Legacy, the assignee or his legal representative shall agree in writing with
Legacy to personally assume, perform, and be bound by the obligations and
agreements contained herein.
Section 10. Intentionally omitted.
Section 11. Intentionally omitted.
Section 12. Intentionally omitted.
Section 13. Attorney Fees. In the event of any arbitration, litigation or
proceeding of any kind, between the parties to declare or enforce any provision
of this Supplemental Agreement or the Agreement, the prevailing party or parties
shall be entitled to recover from the losing party or parties, in addition to
any other recovery and costs, reasonable attorney fees incurred in such
litigation, in both the trial and in all appellate courts.
Section 14. Law Governing. This Supplemental Agreement shall be governed by and
construed in accordance with the laws of the State of California.
Section 15. Computation of Time. In computing any period of time in this
Supplemental Agreement, the day of the act, event or default from which the
designated period of time begins to run shall be included, unless it is a
Saturday, Sunday or a legal holiday, in which event the period shall begin to
run on the next day which is not a Saturday, Sunday or legal
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holiday, in which event the period shall run until the end of the next day
thereafter which is not a Saturday, Sunday or legal holiday.
Section 16. Entire Agreement. This Supplemental Agreement, including exhibits
hereto, contains the entire remaining understandings between the Parties with
respect to the matters set forth herein and supersedes any prior understandings
and agreements among them respecting the subject matter of this Supplemental
Agreement, including, but not by way of limitation, the Second Amended and
Restated Agreement.
Section 17. Agreement Binding. This Supplemental Agreement shall be binding upon
the heirs, executors, administrators, successors and assigns of the parties
hereto.
Section 18. Arbitration. If at any time during the term of this Supplemental
Agreement any dispute, difference, or disagreement shall arise upon or in
respect of the Supplemental Agreement, and the meaning and construction hereof,
every such dispute, difference, and disagreement shall be referred to a single
arbiter agreed upon by the parties, or if no single arbiter can be agreed upon,
an arbiter or arbiters shall be selected in accordance with the rules of the
American Arbitration Association and such dispute, difference, or disagreement
shall be settled by arbitration in accordance with the then prevailing
commercial rules of the American Arbitration Association, and judgment upon the
award rendered by the arbiter may be entered in any court having jurisdiction
thereof.
Section 19. Further Action. The parties hereto shall execute and deliver all
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Supplemental
Agreement.
Section 20. Counterparts. This Supplemental Agreement may be executed in several
counterparts, all of which taken together shall constitute one and the same
agreement, binding on all Parties hereto even though all Parties are not
signatories to the original or the same counterpart.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, the Parties have executed this Supplemental
Agreement as of the date first written above.
PACIFIC ACQUISITION GROUP, INC.,
a Colorado corporation
/s/JAMES E. HOCK /s/JAMES E. HOCK
- ----------------------------------- -----------------------------------
James E. Hock, Jr. Corporate Secretary
President, Chief Executive Officer
LEGACY BRANDS, INC.,
a California corporation
/s/THOMAS E. KEES /s/CRAIG C. CONNERTY
- ----------------------------------- -----------------------------------
Thomas E. Kees Craig C. Connerty
President, Chief Executive Officer Corporate Secretary
CAPITOL BAY SECURITIES, INC.,
a California corporation
As to Sections 3.3.9 and 13 through 20
/s/STEPHEN C. KIRCHER [SIG]
- ----------------------------------- -----------------------------------
Stephen C. Kircher Corporate Secretary
President, Chief Executive Officer
10
<PAGE> 1
EXHIBIT 10.18
INVESTMENT BANKING COMPENSATION AGREEMENT
THIS INVESTMENT BANKING COMPENSATION AGREEMENT is entered into by and between
Greg Plunkett, Inc., a California corporation ("Plunkett") and Greg Plunkett
("Greg") on the one hand and Randy Haag ("Haag") and Steve Jasmanian on the
other effective as of March 7, 1995.
RECITALS
A. Haag and Jasmanian have acted as finders of financing for
Plunkett and have been successful in helping to locate significant sums of
monies for Plunkett.
B. Haag and Plunkett entered into a Finders Agreement in December,
1994, which provided for certain compensation payable to Haag for his financing
efforts on behalf of Plunkett.
C. Haag and Plunkett desire to ratify and confirm this compensation
and certain other agreements and rights earned and to be granted to Haag and
Jasmanian by Plunkett.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual agreements, covenants,
representations and warranties contained in this Agreement, the parties hereby
agree as follows:
1. Right of First Refusal. Plunkett hereby grants to Haag and
Jasmanian the right of first refusal to purchase that portion of all new
securities issued by Plunkett (the "New Securities" as defined below) within
three years after the date hereof (the date hereof referred to as the
"Closing") as the number of shares owned and/or purchaseable under options,
warrants or other rights held by Haag and Jasmanian on the date that each
receives the "Offer" (as defined below) bears to the total number of shares of
Plunkett issued and outstanding on the date of the Offer on the following terms
and conditions (the "Preemptive Rights"):
a. Definition. "New Securities" shall mean any capital stock of
Plunkett issued after the Closing, whether now authorized or not, and rights,
options, or warrants to purchase said capital stock, and securities of any type
whatsoever that are, or may become, convertible into said common stock or
preferred stock of Plunkett issued after the Closing; provided, however, that
"New Securities" shall not include (i) up to 2,000,000 new options and the
shares issuable thereunder to employees and consultants of Plunkett (including
investment bankers) under any employee benefit plan at exercise prices no less
that fair market value on date of grant (adjusted appropriately for stock
splits, combinations and the like), or (ii) any shares issued by Plunkett in
connection with a Form S-1 or Form S-3 (or any successor in interest form)
public registration of such shares, whereby in connection with such
registration Plunkett is included on the NASDAQ National Market System or a
national stock exchange and which is declared effective by the Securities and
Exchange Commission.
<PAGE> 2
b. EXERCISE OF RIGHT. If Plunkett intends to issue New Securities
after the Closing, it shall give Haag and Jasmanian written notice of its
intention, describing the type of New Securities, the price, and the terms upon
which Plunkett proposes to issue the same (the "Offer"). With respect to any
New Securities proposed to be issued for assets or property other than cash,
the price set forth in the notice shall be based upon the fair market value of
such assets or property as determined by the Board of Directors of Plunkett in
its reasonable good faith judgment. Haag and Jasmanian shall have thirty (30)
days from the effective date of such notice to agree to purchase its portion of
the New Securities for the cash equivalent price and upon the other general
terms specified in the Offer by giving written notice to Plunkett and stating
therein the quantity of New Securities to be purchased, accompanied by the cash
equivalent purchase price as set forth in the Offer.
c. FAILURE TO EXERCISE. If Haag or Jasmanian fail to notify
Plunkett during such thirty (30) day notice period of their respective election
to exercise his respective Preemptive Rights, such respective right to
participate in such Offer will terminate. If Plunkett fails to sell the New
Securities on the terms set forth in the Offer within ninety (90) days after
the termination of such thirty (30) day notice period, it must once again
comply with the Preemptive Rights.
2. WARRANT CONSIDERATION. In partial consideration of Haag's and
Jasmanian's financing efforts on behalf of Plunkett in raising $925,000 (the
"Financing"), Plunkett hereby issues an aggregate of 1,300,000 three-year
warrants with an exercise price of $0.10 per share in the respective amounts of
625,000, 625,000 and 50,000 warrants to Randolph Haag, Michael J. Staskus and
Thomas O'Stasic, Sr., respectively, in the form attached hereto as Exhibit A
(the "Warrant Agreement"). Upon such issuance, each of the above individuals
shall acknowledge that no further warrants shall be issued as compensation for
the Financing.
3. GOING PUBLIC.
a. REPORTING ISSUER. Plunkett agrees to use its best efforts to
commence on, or before, August 31, 1995, efforts to become a "reporting issuer"
under the Securities Exchange Act of 1934, and in any event shall file a Form
10 with the Securities and Exchange Commission on, or before, December 31,
1995, if it has not become a "reporting issuer" prior to such date whether by
registration or through a merger with a publicly traded "reporting issuer"
company.
b. DEMAND REGISTRATION RIGHTS. Upon the written request from Haag at
any time after the earlier to occur of (A) six months after Plunkett's first
registered underwritten offering to the general public of its securities for
its own account or (B) March 7, 1996, that Plunkett effect a registration with
respect to (i) all or any portion of the securities issued pursuant to the
Financing, (ii) the shares issuable under any Warrant Agreements and/or (iii)
any securities purchased by Haag or Jasmanian pursuant to the Right of First
Refusal set forth in Section 1 above (collectively, the "Registrable
Securities"), Plunkett will:
i. Promptly give written notice of the proposed registration to
all persons holding Registrable Securities; and
<PAGE> 3
ii. as soon as practicable, use its diligent best efforts to
effect such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualifications under
blue sky or other state securities laws and appropriate compliance with
applicable regulations issued under the Securities Act) as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion or such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any person or
persons joining in such request as is specified in a written request given
within thirty (30) days after receipt of such written notice from Plunkett;
provided that Plunkett shall not be obligated to take any action to effect any
such registration, qualification or compliance pursuant hereto:
x) in any particular jurisdiction in which Plunkett would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless Plunkett is already subject to
service in such jurisdiction and except as may be required by the Securities
Act;
y) if the holders of the Registrable Securities propose to
sell a number of shares of Registrable Securities at an aggregate proposed
offering price to the public of less than $1,000,000;
z) if Plunkett has previously undertaken at least two
registrations pursuant hereto.
Subject to the foregoing clauses, Plunkett shall file a registration
statement covering the Registrable Securities so requested to be registered as
soon as practicable after receipt of the request from Haag.
4. Expense Reimbursement. Upon submission by Haag of reasonable
documentation, Plunkett shall reimburse Haag for up to $5,000 of costs and
expenses incurred by Haag or others in connection with a European financing trip
undertaken by Haag and others on behalf of Plunkett.
5. Board Seat/Consulting Agreement. Plunkett and Greg shall use their
best efforts to cause Jasmanian to be elected to Plunkett's Board of
Directors for a period of three years or until such time that neither Haag or
Jasmanian own either any warrants or equity in Plunkett, whichever occurs
first. Plunkett further agrees to enter into a one year consulting agreement
with Jasmanian to provide up to 20 hours of consulting services per month in
consideration of the issuance of 200,000 three-year warrants exercisable at
$0.10 per share in the form of the Warrant Agreement.
6. Plunkett Indemnification. Plunkett and Greg shall indemnify, defend
and protect Haag and Jasmanian and shall hold Haag and Jasmanian harmless from
and against any and all claims, demands, losses, costs, expenses, obligations,
liabilities, damages, recoveries and deficiencies, including interest, penalties
and reasonable attorneys' fees, that Haag or Jasmanian may incur or suffer,
which arise from or relate to any liability to any person or entity relating to
or resulting from any misrepresentation or omission by Plunkett to Haag or
Jasmanian or any investor related to, in connection with or arising out of
directly or indirectly Plunkett; provided, however, that Plunkett shall not be
obligated to indemnify Haag or Jasmanian to the extent such liability results
from a material misrepresentation made by Haag or Jasmanian, as the case may be,
to an investor concerning Plunkett.
<PAGE> 4
7. Miscellaneous.
a. Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
b. Entire Agreement. This Agreement constitutes the full and
entire understanding and agreement between and among the parties with regard to
the subjects hereof and thereof.
c. Notices. All notices, requests, demands, instructions or other
communications required or permitted to be given under this Agreement shall be
in writing and (i) shall be deemed to have been duly given upon delivery, if
delivered personally or by one-day courier, or by facsimile transmission where
receipt is acknowledged by the receiving machine or if given by prepaid
telegram, or (ii) if mailed first-class, postage prepaid, registered or
certified mail, return receipt requested, shall be deemed to have been delivered
three (3) business days after deposit in the United States mails, to the
applicable party's address set forth on the signature page. Either party hereto
may change the address to which such communications are to be directed by given
written notice to the other parties hereto of such change in the manner provided
above.
d. Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for the convenience of reference only and
are not to be considered in construing this Agreement.
e. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
f. Attorneys' Fees, Costs. In the event a party breaches this
Agreement, the prevailing party shall pay all costs and attorney's fees
incurred by any other party in connection with such breach, whether or not any
litigation is commenced.
g. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
RANDY HAAG GREG PLUNKETT, INC.
359 Jacaranda Dr. 600 California, Suite 1300
Danville, CA 94506 San Francisco, CA 94108
- ----------------------- ----------------------------
(Address) (Address)
/s/ RANDY HAAG By /s/ GREG PLUNKETT
- ----------------------- ------------------------
(Signature) (Signature)
Greg Plunkett, President
------------------------
(Print Name & Title)
GREG PLUNNETT, INC. STEVE JASMANIAN
600 California, Suite 1300 2570 Chestnut St.
San Francisco, CA 94108 San Francisco, CA 94123
- ---------------------------- -----------------------------
(Address) (Address)
/s/ GREG PLUNKETT /s/ G. STEPHEN JASMANIAN
- --------------------------- ----------------------------
(Signature) (Signature)
<PAGE> 1
EXHIBIT 10.19
AGREEMENT for TERMINATION, RELEASE and WAIVER OF RIGHTS
This Agreement for Termination, Release and Waiver of Rights (see "Waiver
Agreement") is entered into by Legacy Brands Inc. ("Legacy"), Randolph Haag,
and Steve Jizmagian, (collectively the "Releasors") (Legacy and the Releasors
sometimes collectively referred to herein as the "Parties") as of the 31st day
of December, 1997, and is intended to settle all the rights between the Parties
with respect to the facts below.
WHEREAS, the Parties have previously entered into an Investment Banking
Compensation Agreement dated March 7, 1995 (the "Investment Banking
Agreement"), attached hereto as Exhibit A.
WHEREAS, the Releasors desire to terminate the Investment Banking Agreement in
consideration of the mutual agreements, covenants and representations contained
in this Waiver Agreement.
WHEREAS, as partial consideration for entering into this Waiver Agreement and
as contemplated by the Investment Banking Agreement to be terminated as
provided below, the Company shall issue warrants to certain individuals,
including the Releasors, named in the Investment Banking Agreement in the form
of Exhibits B and C attached hereto with respect to Mr. Haag and substantially
in the form of Exhibit B attached hereto with respect to all other persons.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
1. WAIVER AND RELEASE BY RELEASORS. Subject to and conditioned upon Legacy's
fulfillment of its obligations hereunder, Releasors and Legacy hereby release,
acquit, and forever discharge the other, from any and all rights, actions,
claims, debts, demands, costs, contracts, liabilities, obligations, damages and
causes of action whether known, suspected or unknown, whether in law or in
equity, which Releasors or Legacy, as the case may be, had or now have or may
claim to have by reason of those matters set forth in the Investment Banking
Agreement, and any other matters which may relate, or which may have been
related, to any subject matter which was, or could have been, raised in
connection to the Investment Banking Agreement. Subject to and conditioned upon
Legacy's fulfillment of its obligations hereunder, the Parties agree to
terminate the Investment Banking Agreement and that Releasors rights, actions,
claims and demands relating to the rights contained in the Investment Banking
Agreement including, but not limited to, the issuance of any securities of
Legacy shall be governed exclusively by and limited to those rights set forth
in this Waiver Agreement.
2. ISSUANCE OF WARRANTS.
a. WARRANTS FOR PAST CONSIDERATION. Simultaneously with Releasors'
execution of this Waiver Agreement, Legacy shall deliver (i) a Warrant
in form and substance as attached hereto as Exhibit B and incorporated
herein by reference, to those
<PAGE> 2
individuals (herein collectively referred to as the "Warrant
Holders") and for that number of shares as provided in the
Investment Banking Agreement (adjusted for subsequent reverse
stock split(s)) and (ii) a Warrant in form and substance as
attached hereto as Exhibit C and incorporated herein by
reference to Haag to purchase One Hundred Thousand (100,000)
shares of Common Stock of Legacy.
b. Appointment of Haag as Agent for Warrant Holders. Each of the
Warrant Holders hereby appoint Haag as their agent and grant to
Haag a power of attorney to act on their behalf and in their
place with respect to all matters pertaining to any registration
rights granted pursuant to the Warrants, which power shall be
deemed to be coupled with an interest, shall be irrevocable for
the term of the Warrants and any purchaser, acquirer, transferee
or holder of such Warrant shall be subject to such power and
shall grant and execute such power of attorney as the Company
may deem reasonably necessary to fulfill the intent of the
foregoing provisions.
c. Finder's Fee Warrant. Legacy shall issue to Haag, upon the
first closing of a "Transaction" (as defined below), an
additional Warrant in form and substance as set forth in Exhibit
C for an additional One Hundred Thousand (100,000) shares of the
Common Stock of Legacy.
d. "Transaction" Defined. As used in this Waiver Agreement, the
term "Transaction" shall mean, whether in one or a series of
transactions, (i) the acquisition, directly or indirectly,
through purchases, sales or otherwise, by an investor, of all or
any portion of the securities of Legacy, or (ii) any merger,
consolidation, reorganization, recapitalization, restructuring
or other business combination or joint venture involving Legacy
and in investor, or (iii) any other form of financing provided
to Legacy by an investor, where (x) such investor(s) have been
introduced to Legacy by Haag on or before December 31, 1998,
(y) the Transaction is consummated on or before December 31,
1999, and (z) the aggregate "Consideration" for such Transaction
is equal to or greater than $1 million.
e. "Consideration" Defined: As used in this Waiver Agreement, the
term "Consideration" shall mean the total proceeds and other
consideration paid and to be paid or contributed and to be
contributed, directly or indirectly, in connection with a
Transaction (which consideration shall be deemed to include
amounts paid or to be paid into an escrow) to Legacy or its
shareholders, including, without limitation: (i) cast; (ii)
notes, securities and other property (including all options,
warrants or other instruments or arrangements convertible into
or exercisable for any of the foregoing) at the fair market
value thereof; (iii) liabilities assumed; (iv) payments to be
made in installments; (v) amounts paid or payable under
management, consulting, supply, service, distribution,
technology transfer or licensing agreements, and real property
or equipment lease agreements or agreements not to compete and
other similar arrangements (including such payments to
management), entered into other than in
2
<PAGE> 3
the ordinary course of business; and (vi) contingent payments
(whether or not related to future earnings or operations). The
fair market value of non-cash consideration consisting of
securities shall be determined based upon: (A) the closing sale
price for such securities on the registered national securities
exchange providing the primary market therefor on the last
trading day prior to the date of receipt thereof by Legacy or
its shareholders; (B) if such securities are not so traded, the
average of the closing bid and asked prices, as reported by the
National Association of Securities Dealers Automated Quotation
System on the last trading day prior to the date of receipt
thereof by Legacy or its shareholders; or (C) if such securities
are not so traded or reported, as agreed upon between Legacy and
Haag. The fair market value of any non-cash consideration other
than securities shall be determined by agreement between Legacy
and Haag. If all or any portion of the consideration is to be
paid over time, then that portion of the Consideration
attributable thereto shall be payable, in the sole discretion of
Haag, either, (i) as and when such payments are made or (ii)
upon consummation of the Transaction, calculated based upon the
present value of such Consideration utilizing a discount rate of
7% per annum.
3. Section 1542 Waiver. To the extent that the foregoing releases are
releases to which Section 1542 of the California Civil Code or similar
provisions of other applicable law applies, it is the intention of the Parties
that the foregoing releases shall be effective as a bar to any and all actions,
fees, damages, losses, claims, liabilities and demands of whatsoever character,
nature and kind, known or unknown, suspected or unsuspected specified herein.
In furtherance of this intention, the Releasors and Legacy expressly waive any
and all rights and benefits conferred upon them by the provisions of Section
1542 of the California Civil Code or similar provisions of applicable law which
are as follows:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor."
The Parties acknowledge that the foregoing waiver of the provisions of
Section 1542 of the California Civil Code was bargained for separately.
Thus, notwithstanding the provisions of Section 1542, and for the purpose
of implementing a full and complete release and discharge of Legacy, Releasors,
and each of them, expressly acknowledge that this Waiver Agreement is intended
to include in its effect without limitation all of the claims, causes of action
and liabilities which Releasors and Legacy, and each of them do not know or
suspect to exist in their favor at the time of execution of this Waiver
Agreement, and this Waiver Agreement, contemplates extinguishment of all such
claims, causes of action and liabilities.
4. Representations, Warranties and Covenants. Each party hereby represents and
warrants that he/she/it has the authority to enter into this Waiver Agreement
and execute and deliver the documents required under this Waiver Agreement, if
any.
3
<PAGE> 4
5. No Assignment or Transfer of Claims. The Parties, and each of them,
represent that they have not heretofore assigned or transferred, or purported
to assign or transfer, to any person or entity, any of the rights, claims or
causes of action, including those contained in the Investment Banking Agreement
or any other document, or any portion thereof, or any interests therein.
6. Headings. The headings that are made in this Waiver Agreement are provided
for the purpose of convenience only and shall not be construed in interpreting
the provisions contained in this Waiver Agreement.
7. Successors. This Waiver Agreement and all of its terms and provisions
shall inure to the benefit of, and shall be binding upon the heirs, legal
representatives, successors and assigns of the Parties and each of them.
8. Governing Law. This Waiver Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of California.
9. Construction of this Waiver Agreement. The language of all the parts of
this Waiver Agreement shall in all cases be construed as a whole, according to
its fair meaning, and not strictly for or against any of the Parties. As used
in this Waiver Agreement, the masculine or neuter gender and singular or plural
number shall be deemed to include the others wherever the context so indicates
or requires.
10. Entire Agreement. This Waiver Agreement embodies the entire agreement and
understanding of the Parties hereto in respect of the subject matter contained
herein and is an integrated contract.
11. Counterparts. This Waiver Agreement may be executed in one or more
counterparts, all of which together shall be deemed to be of one instrument.
12. Waiver. No waiver of any portion of this Waiver Agreement shall be
effective unless made in writing. No waiver of any breach of any provision of
the Waiver Agreement shall constitute a waiver of any subsequent breach of the
same or any other provision of this Waiver Agreement.
13. Savings Clause. If any provision of this Waiver Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Waiver Agreement, or the application of such
provision to persons or circumstances other than those as to which is held
invalid, shall not be affected thereby.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.
4
<PAGE> 5
14. Attorney's Fees. In any action or proceeding involved in the enforcement
of, or defence against, any provision of this Waiver Agreement, the prevailing
party in such action or proceeding shall be entitled to reasonable attorney's
fees and all costs and expenses incurred in connection with such action or
proceeding. In addition, the nonprevailing party shall pay all costs and
expenses incurred in enforcing such award or judgment, and this obligation
shall be severable from the other provisions of this section and shall survive
any judgment, order or award and shall not be deemed to be merged therewith.
LEGACY BRANDS, INC.
Date: ___________ By: ________________________________
Thomas E. Kees
Chief Executive Officer
Date: ___________ By: ________________________________
Craig Connerty
Chief Financial Officer
__________________________________________
Date: 3/6/98 By: /s/ RANDOLPH HAAG
___________ ________________________________
Randolph Haag
Date: ___________ By: ________________________________
Steve Jizmagian
Acknowledged and Agreed as to Section 2 Only:
Date: ___________ By: ________________________________
Michael J. Staskus
Date: 2-9-98 By: /s/ THOMAS O'STASIK, JR.
___________ ________________________________
Thomas O'Stasik, Jr.
5
<PAGE> 6
EXHIBIT A
Investment Banking Compensation Agreement dated March 7, 1995
6
<PAGE> 7
14. Attorney's Fees. In any action or proceeding involved in the enforcement
of, or defence against, any provision of this Waiver Agreement, the prevailing
party in such action or proceeding shall be entitled to reasonable attorney's
fees and all costs and expenses incurred in connection with such action or
proceeding. In addition, the nonprevailing party shall pay all costs and
expenses incurred in enforcing such award or judgment, and this obligation
shall be severable from the other provisions of this section and shall survive
any judgment, order or award and shall not be deemed to be merged therewith.
LEGACY BRANDS, INC.
Date: ___________ By: ________________________________
Thomas E. Kees
Chief Executive Officer
Date: ___________ By: ________________________________
Craig Connerty
Chief Financial Officer
__________________________________________
Date: ___________ By: ________________________________
Randolph Haag
Date: ___________ By: ________________________________
Steve Jizmagian
Acknowledged and Agreed as to Section 2 Only:
Date: 3/5/98 By: [SIG]
___________ ________________________________
Michael J. Staskus
Date: ___________ By: ________________________________
Thomas O'Stasik, Jr.
5
<PAGE> 8
14. Attorney's Fees. In any action or proceeding involved in the enforcement
of, or defence against, any provision of this Waiver Agreement, the prevailing
party in such action or proceeding shall be entitled to reasonable attorney's
fees and all costs and expenses incurred in connection with such action or
proceeding. In addition, the nonprevailing party shall pay all costs and
expenses incurred in enforcing such award or judgment, and this obligation
shall be severable from the other provisions of this section and shall survive
any judgment, order or award and shall not be deemed to be merged therewith.
LEGACY BRANDS, INC.
Date: ___________ By: ________________________________
Thomas E. Kees
Chief Executive Officer
Date: ___________ By: ________________________________
Craig Connerty
Chief Financial Officer
__________________________________________
Date: ___________ By: ________________________________
Randolph Haag
Date: 3/3/98 By: [SIG]
___________ ________________________________
Steve Jizmagian
Acknowledged and Agreed as to Section 2 Only:
Date: ___________ By: ________________________________
Michael J. Staskus
Date: ___________ By: ________________________________
Thomas O'Stasik, Jr.
5
<PAGE> 1
EXHIBIT 10.20
THIS WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED
FOR INVESTMENT FOR THE HOLDER'S OWN ACCOUNT AND NOT WITH A VIEW TO OR FOR SALE
IN CONNECTION WITH ANY DISTRIBUTION OF THE SECURITIES. NEITHER THE WARRANT NOR
THE SECURITIES HAVE BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF
1933 ("SECURITIES ACT") OR UNDER ANY APPLICABLE STATE SECURITIES LAWS ("BLUE SKY
LAWS"). AN OFFER TO SELL OR TRANSFER OR THE SALE OR TRANSFER OF THIS WARRANT OR
THESE SECURITIES IS UNLAWFUL UNLESS MADE PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR PERMIT, AS APPLICABLE, UNDER THE SECURITIES ACT OR APPLICABLE BLUE
SKY LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION AND/OR QUALIFICATION UNDER THE
SECURITIES ACT AND APPLICABLE BLUE SKY LAWS IS AVAILABLE AND AN OPINION OF
COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY IS PROVIDED TO
THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION OR QUALIFICATION IS NOT
REQUIRED UNDER THE SECURITIES ACT AND APPLICABLE BLUE SKY LAWS.
THIS WARRANT IS SUBJECT TO A POWER OF ATTORNEY REGARDING THE EXERCISE OF
REGISTRATION RIGHTS
Warrant No. 98-001
COMMON STOCK PURCHASE WARRANT
JANUARY 1, 1998
THIS CERTIFIES THAT, for value received, Randy Haag ("Warrantholder") is
entitled to subscribe for and purchase from Legacy Brands, Inc., a California
corporation (the "Company"), that number of shares of the Company's Common
Stock, no par value, as set forth in Section 4 (b) hereof at the Exercise Price
(as hereafter determined) at any time from the date hereof to and including the
Expiration Date (as defined below), subject to the terms and conditions stated
herein. For purposes of this Warrant, the term "Expiration Date" shall mean 5:00
p.m. Pacific time on April 15, 1999, except as set forth in Section 1(b) hereof.
1. Exercise of Warrant.
<PAGE> 2
a) The rights represented by this Warrant may be exercised, in
whole or in part (subject to the minimum exercise limitation set forth in this
Section 1), by the holder hereof at any time on or before the Expiration date by
the surrender of this Warrant and delivery of an executed Subscription Agreement
in the form attached hereto as Exhibit A to the Company at its principal
executive office, or such other place as the Company shall designate in writing,
accompanied by payment for the Warrant Stock (as defined in Section 10) so
subscribed for in cash or check, in good funds or, subject to the good faith
determination by the Company as to the creditworthiness of the holder at the
time, the issuance by the holder of its promissory note to the Company (the
"Note") for up to the full exercise price of all of the warrants, with any
differential payable by cash or check, which Note shall bear interest at the
rate of seven percent (7%) per annum, all due and payable one year from the date
of issuance. Any shares for which a Note shall have been given to the Company as
payment shall not be deemed issued until such time as that portion of the Note
pertaining to such shares shall have been paid in full and the holder of such
shares shall have no rights with respect thereto, including, but not by way of
limitation, the right to vote, nor may such shares be transferred. In the event
of a partial exercise of this Warrant, a substitute Warrant representing the
number of shares of Warrant Stock which were not acquired upon the exercise of
the Warrant shall be issued to the holder of this Warrant. No exercise of this
Warrant may be made for less than one fourth of the number of shares of Warrant
Stock initially subject to this Warrant or such lesser number as shall then
constitute the balance of shares purchasable hereunder.
b) If at any time prior to the Expiration Date, the Company shall be
engaged in an offering of its securities, including any time determined, in good
faith by the Company or its Underwriter as hereinafter defined, to be "quiet
periods" during which its securities may not be offered for sale or sold, or if
at any other time or for any reason the Company or its Underwriter (as
hereinafter defined) shall, in good faith, determine that these Warrants may not
be exercised ( the period during which such inability to exercise shall exist
shall be referred to as the "Offering Period," which Offering Period may not in
each instance exceed a period of 90 days, it being recognized that such an
Offering Period may both precede and follow an offering of the securities of the
Company, with each such period being a separate Offering Period for the purposes
of this provision), the Expiration Date shall be extended by the same number of
days as the Offering Period.
2. Investment Representation. The holder by accepting this Warrant
represents that the Warrant is acquired for the holder's own account for
investment purposes and not with a view to any offering or distribution and that
the holder has no present intention of selling or otherwise disposing of the
Warrant or the Warrant Stock in violation of applicable securities laws. Upon
exercise, the holder will confirm, in respect of securities obtained upon such
exercise, that the holder is acquiring such securities for the holder's own
account and not with a view to any offering or
<PAGE> 3
distribution in violation of applicable securities laws. The holder acknowledges
that the certificate(s) representing the Warrant Stock issued upon exercise of
this Warrant shall be endorsed with the legend set forth on this Warrant and all
other legends, if any, required by applicable federal, state and foreign
securities laws to be placed on the certificate(s).
3. Validity of Warrant Stock. The Company warrants and agrees that all
shares of Warrant Stock which may be issued upon the exercise of this Warrant
will, upon issuance, be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof. The Company
further warrants and agrees that during the period within which this Warrant may
be exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of Warrant Stock to provide for the exercise of this
Warrant.
4. Exercise Price; Number of Warrant Shares.
(a) The Exercise Price shall be $1.00, subject to adjustment
pursuant to this Section 4.
(b) The number of shares of Warrant Stock to be issued upon
exercise of this Warrant shall be 60,000.
(c) Upon occurrence of any of the following, the Exercise Price
and the number of shares of Warrant Stock to be issued upon exercise of this
Warrant shall be adjusted as follows:
(i) If at any time after the date hereof the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, on the record date of such stock dividend, subdivision, or
split-up, the Exercise Price shall be appropriately decreased and the number of
shares of Warrant Stock issuable on exercise of this Warrant shall be
appropriately increased in proportion to such increase of outstanding shares.
(ii) If at any time after the date hereof, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, on the effective date of such
combination, the Exercise Price shall be appropriately increased and the
number of shares of Warrant Stock issuable on exercise of this Warrant
shall be appropriately decreased in proportion to such decrease in
outstanding shares.
(d) All calculations under this Section 4 shall be made to the
nearest cent
<PAGE> 4
or to the nearest whole share, as the case may be. No fractional shares of
Warrant Stock shall be issued upon exercise of this Warrant. Any fractional
shares of Warrant Stock which might otherwise be issued upon exercise of this
Warrant shall be rounded to the nearest whole share (with one-half rounded up).
(e) If the Exercise Price shall be adjusted, the Company shall
prepare and mail to the holder hereof a certificate setting forth the event
requiring the adjustment, the amount of the adjustment, the method by which the
adjustment was calculated, and (after giving effect to the adjustment) the
Exercise Price.
(f) A calculation of any adjustment under this Section 4
evidenced by a certificate of any firm of independent certified public
accountants of recognized standing selected by the Company and satisfactory to
the holder hereof (which may be the firm of independent certified public
accountants regularly employed by the Company) shall be presumed a correct
calculation of the adjustment for purposes of this Section 4. The foregoing
presumption shall constitute a rebuttable presumption, with the party disputing
the calculation bearing the burden of proving the incorrectness of the
calculation.
5. Notice of Certain Events. If at any time:
(a) The Company shall declare any dividend upon the Common Stock,
whether payable in cash, property or capital stock, or make any distribution to
the holders of Common Stock;
(b) There shall be any recapitalization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company with
another corporation;
(c) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(d) The Company shall propose to enter into a transaction not
covered by the preceding paragraphs (a) through (c), then, in each case, the
Company shall give to the holder of this Warrant, at the holder's address
registered on the books of the Company, not less than 20 days' prior written
notice of the proposed event, by first class certified mail, postage prepaid and
return receipt requested, of (i) the date on which the books of the Company
shall close or a record shall be taken for purposes of ascertaining which
stockholders will be entitled to vote on such reclassification, reorganization,
consolidation, merger, dissolution, liquidation or winding up, as the case may
be; (ii) the date on which the vote shall be taken concerning such
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be; and (iii) the date on which such
dividend or distribution is to be paid or such
<PAGE> 5
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be, is to be effective. Such notice
shall also specify the date as of which the record holders of capital stock of
the Company shall participate in said dividend or distribution or shall be
entitled to exchange their shares of capital stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, dissolution, liquidation or winding up, as the case may be.
6. Transfer of Warrant.
(a) Subject to Section 6 (b) below, the holder of this Warrant
agrees to give the Company not less than 20 days' prior written notice before
transferring this Warrant. The foregoing notice shall describe the manner of any
proposed transfer of this Warrant or any interest therein and the consideration
to be received by the holder.
(b) Each assignment of this Warrant shall be deemed a partitioned
right which is separately enforceable by the assignee, transferee or other
beneficiary. Each assignee, transferee or other beneficiary shall be entitled to
the full benefit of the Warrant assigned, subject to any conditions to which the
Warrant is subject and provided always that such assignee, transferee or other
beneficiary shall carry out all the obligations, liabilities and
responsibilities of the holder of the Warrant hereunder. No person, company or
other entity may enjoy the benefit of any Warrant unless it is an accredited
investor as that term is defined in Regulation D of the Securities Act of 1933,
as amended (the "Act"), and such party executes and delivers to the Company
certain subscription documents evidencing the investor's status and has a
pre-existing business or financial relationship with the Warrantholder.
(c) No transfer or assignment of this Warrant shall be made
without compliance with the provisions of Section 2 and the legend set forth on
the first page of this Warrant.
(d) Notwithstanding the provisions of Section 6(b) above, this
Warrant may not be assigned, held in trust, or otherwise transferred to any
person or entity in amounts of less than one fourth of the number of shares
subject to this Warrant.
7. No Stockholder Rights. This Warrant shall not entitle the holder
hereof to any voting rights or other rights as a stockholder of the Company, or
to any other rights whatsoever except the rights herein expressed, and no cash
dividend paid out of earnings or surplus or interest shall be payable or accrue
in respect of this Warrant or the interest represented hereby or the shares
which may be subscribed for and purchased hereunder until and unless and except
to the extent that the rights represented by this Warrant shall be exercised.
8. Reporting Company; Registration Rights
<PAGE> 6
(a) Registration Rights The Warrantholder shall, until December
31, 1999 (the "Registration Period"), which Registration Period shall be
extended by the amount of time equal to any Offering Period, have the following
registration rights on two occasions only.
(i) If the Warrantholder requests ("Demand Registration
Request") that the Company file a registration statement under the Act
("Registration Statement"), the Company agrees to use its best efforts to file a
Registration Statement covering the shares of Common Stock underlying this
Warrant (collectively the "Demand Registrable Securities") if so requested and
to obtain effectiveness thereof, to file post-effective amendments, and to make
appropriate qualifications under federal and state securities laws as may be
requested except in any jurisdiction where the Company would be required to
execute a general consent to service of process unless otherwise required to do
so by the Act or any applicable law. The Company shall keep such Registration
Statement effective for a period of twelve (12) months. Such rights are
hereinafter referred to as the "Demand Registration Rights." The Company shall
be obligated to file a Registration Statement and include the Demand Registrable
Securities, or any part thereof, only if the Underwriter, as herein defined,
determines, in its sole discretion, that the filing of a Registration Statement
and inclusion of such Demand Registrable Securities will not have a material
adverse affect on a current or proposed offering of any securities of the
Company (the "Offering"), provided that the Underwriter shall not unreasonably
withhold its consent to the inclusion of the Demand Registrable Securities in
the registration statement and that such Registration Statement includes
securities only on behalf of the Company and has been filed or will be filed
within sixty days of the Company's receipt of a Demand Registration Request. The
Demand Registration Rights may be delayed by the Company for a period of sixty
days on one occasion only every twelve months, except in the event of an initial
public offering ("IPO") of its securities. To the extent the Underwriter shall
determine not to include some or all of the Demand Registrable Securities, then
the Demand Registration Rights shall continue to be in force and effect as to
such Demand Registrable Securities which has not been registered. In the event
the Company has filed a Registration Statement under the Act pursuant to an IPO
or will do so within sixty days of its receipt of a Demand Registration request,
the Company shall have the right to delay the exercise of the Demand
Registration Rights until the completion of the Company's IPO; but in no event
shall such delay exceed an aggregate of one hundred twenty (120) days. The
Warrantholder shall not be entitled to more than one Demand Registration request
in any one fiscal year of the Company. For the purposes of this Section 8, the
term, the Underwriter, shall include the representatives of the Underwriters in
any proposed Offering and any other Underwriter or investment banker with which
the Company has or may have a contractual relationship from time to time.
(ii) In the event of an IPO whereby only securities on behalf of
the
<PAGE> 7
Company are being registered and not those of any selling shareholder, the
Warrantholder agrees not to sell, transfer, or otherwise dispose of any Warrant
Stock or Registrable Securities for a period of one hundred eighty (180) days
and shall enter into a customary lock-up agreement required by the Underwriter.
The Warrantholder agrees that stop transfer instructions may be given to the
Company's transfer agent regarding the foregoing lock-up arrangement.
(b) Information and Documents In the event the Company shall be
required by the provisions of this Section 8 to effect the registration of any
securities, the Warrantholder shall furnish, in writing, such information as is
reasonably requested by the Company or the Underwriter or their representatives,
including their representative legal counsel and accountants, for inclusion in
the Registration Statement relating to such Offering and such other information
and documentation as the Company shall request. In addition, the Warrantholder
shall execute and deliver such agreements certifications and other documents,
including, without limitation, selling shareholder instructions,
powers-of-attorney, and custody agreements, as the Company or Underwriter may
reasonably request. The Company's obligation to register any securities
hereunder shall be subject to the fulfilment of the duty of the Warrantholder to
cooperate fully with the Company and the Underwriter and their representatives
in the preparation of the Registration Statement covering any securities
registrable pursuant to Section 8.
(c) Expenses. All expenses incurred in connection with any
registration under this Section 8, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and expenses of any special
audits incident to or required by any such registration are herein called
"Registration Expenses." All underwriting discounts and selling commissions
applicable to any sales of securities herein are called "Selling Expenses." The
Company will pay all Registration Expenses in connection with any registration
pursuant to this Section 8. To the extent allowed by law, the Company shall bear
the Selling Expenses. Otherwise, all Selling Expenses in connection with any
registration pursuant to Section 8 shall be borne by the Company, the
Warrantholder and any other shareholders whose shares are to be included in the
Registration Statement, pro rata in proportion to the shares registered thereby
being sold or registered by each of them. The Warrantholder shall bear the fees
and costs of its own counsel.
(d) Prospectus Delivery The Warrantholder shall comply with the
prospectus delivery requirements of federal or state securities laws in
connection with any registration. If any prospectus becomes outdated,
inaccurate, or misleading, any Warrantholder shall cease using all such
prospectuses upon notice thereof from the Company and shall return all copies of
such prospectuses under control of such person to the Company.
<PAGE> 8
(e) "Market Stand-off" Agreement The Warrantholder shall not sell
or otherwise transfer or dispose of any Registrable Securities or any other
shares of Common Stock held by such persons, for a period of 180 days in
connection with any IPO of the Company covering only the Company's securities
and not those of any selling shareholder. The Warrantholder shall seek the
written consent of the Underwriter to transfer, convey or assign any securities
of the Company during the 180 day period specified above.
(f) No Registration Required The Company shall not be required to
effect a registration under this Section 8 if the Warrantholder would otherwise
be able to publicly sell the number of shares sought to be registered at the
time of the registration without registration pursuant to Rule 144 promulgated
by the SEC as then in effect or pursuant to any other exemption from the
registration provisions of the Act then available to the Warrantholder
(collectively referred to as "Rule 144") so long as the purchaser thereof shall
acquire shares that are not subject to any restriction on resale as may
otherwise be imposed pursuant to Rule 144.
(g) Termination of Rights The Company's obligations to register
the Registrable Securities pursuant to this Section 8 shall cease and terminate
as to the Registrable Securities upon the occurrence of either of the following:
(i) the registration of the Registrable Securities under the Act pursuant to the
provisions of this Warrant; or (ii) at any time the Registrable Securities
become freely transferable without registration under the Act. Upon becoming
subject to the reporting requirements of the 1934 Act, the Company agrees to use
its best efforts to make Rule 144 available to the Warrantholder and to continue
do so until the expiration of the registration rights specified in Section 8
herein.
(h) Duty to Cooperate The Company's obligations to register the
Registrable Securities shall be further contingent upon the Warrantholder
providing its full and complete cooperation to the Company in timely providing
such information, documents, certifications and representations as the Company
and its counsel or any Underwriter may determine to be necessary in order to
prepare, file and otherwise complete the registration process with respect to
the Registrable Securities.
(i) Grant of Power of Attorney. The Warrantholder has granted to
Randy Haag its full power of attorney to act on its behalf and in its stead with
respect to all matters arising out of this Section 8, which power of attorney is
deemed to be coupled with an interest and shall be irrevocable for the term of
the Warrant.
9. No Impairment. The Company will not, by amendment of its articles of
incorporation or bylaws or through any reorganization, transfer of assets,
consolidation, merger, dissolution, or any voluntary action avoid or seek to
avoid the observance or
<PAGE> 9
performance of any of the terms of this Warrant.
10. Miscellaneous Matters.
(a) As used herein, the term "Warrant Stock" shall mean the
Company's presently authorized Common Stock no par value, and stock of any other
series or class into which such presently authorized Common Stock may hereafter
have been converted or changed pursuant to any recapitalization or change in
such Common Stock.
(b) As used herein, the word "person" shall mean an individual or
entity.
(c) This Warrant and the name and address of the holder will be
registered in a Warrant Register that is kept at the principal office of the
Company, and the Company may treat the holder so registered as the owner of this
Warrant for all purposes.
(d) This Warrant shall be governed by and interpreted in
accordance with the internal laws, and not the law of conflicts, of the State of
California.
(e) Successors and assigns. Except as otherwise expressly
provided herein, all covenants and agreements contained in this Warrant by or on
behalf of any of the parties hereto shall bind and inure to the benefit of
respective successors and assigns of the parties to the extent permitted by law.
(f) Attorney Fees. In the event arbitration, suit or action is
brought by any party under this Warrant to enforce any of its terms, and in any
appeal therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorneys' fees to be fixed by the arbitrator, trial court, or
appellate court.
(g) Savings Clause. If any provision of this Warrant, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Warrant, or the application of such provision to
persons or circumstances other than those as to which it is held invalid, shall
not be affected thereby.
(h) Specific Performance. Each party's obligation under this
Warrant is unique. If any party should default in its obligations under this
Warrant, the parties each acknowledge that it may be extremely impracticable to
measure the resulting damages; accordingly, the non-defaulting party, in
addition to any other rights or remedies available, may sue in equity for
specific performance, and upon satisfactory proof thereof, it may be entitled to
obtain such specific performance.
<PAGE> 10
IN WITNESS WHEREOF, the Company has executed this Warrant effective as
of the date first written above.
LEGACY BRANDS, INC.,
a California corporation
By: /s/ THOMAS E. KEES
--------------------------------
THOMAS E. KEES, President
By: /s/ CRAIG CONNERTY
--------------------------------
CRAIG CONNERTY, Chief
Financial Officer
<PAGE> 11
EXHIBIT A
SUBSCRIPTION AGREEMENT
__________________________ , 19___
To: Legacy Brands, Inc.
The undersigned, pursuant to the provisions set forth in Warrant
No. 96- , hereby agrees to subscribe for and purchase shares of the Warrant
Stock covered by such Warrant, and makes payment herewith in full for such
Warrant Stock at the Exercise Price.
Signature:
----------------------------
Printed Name
--------------------------
and Title:
----------------------------
Address:
-----------------------------
-----------------------------
-----------------------------
--------------------------------
ASSIGNMENT
FOR VALUE RECEIVED ___________________________________________
hereby sells, assigns and transfers all of the rights of the undersigned under
Warrant No. 96- , with respect to the number of shares of Warrant Stock covered
thereby set forth below unto:
<TABLE>
<CAPTION>
<S> <C> <C>
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
</TABLE>
- -------------------------------------------------------------------------
------------------------------------------
Dated: _________________________ , 19__
Signature:
----------------------------
Printed Name
--------------------------
and Title:
----------------------------
Address:
-----------------------------
-----------------------------
-----------------------------
<PAGE> 12
THIS WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED
FOR INVESTMENT FOR THE HOLDER'S OWN ACCOUNT AND NOT WITH A VIEW TO OR FOR SALE
IN CONNECTION WITH ANY DISTRIBUTION OF THE SECURITIES. NEITHER THE WARRANT NOR
THE SECURITIES HAVE BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF
1933 ("SECURITIES ACT") OR UNDER ANY APPLICABLE STATE SECURITIES LAWS ("BLUE SKY
LAWS"). AN OFFER TO SELL OR TRANSFER OR THE SALE OR TRANSFER OF THIS WARRANT OR
THESE SECURITIES IS UNLAWFUL UNLESS MADE PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR PERMIT, AS APPLICABLE, UNDER THE SECURITIES ACT OR APPLICABLE BLUE
SKY LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION AND/OR QUALIFICATION UNDER THE
SECURITIES ACT AND APPLICABLE BLUE SKY LAWS IS AVAILABLE AND AN OPINION OF
COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY IS PROVIDED TO
THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION OR QUALIFICATION IS NOT
REQUIRED UNDER THE SECURITIES ACT AND APPLICABLE BLUE SKY LAWS.
THIS WARRANT IS SUBJECT TO A POWER OF ATTORNEY REGARDING THE
EXERCISE OF REGISTRATION RIGHTS
Warrant No. 98-002
COMMON STOCK PURCHASE WARRANT
JANUARY 1, 1998
THIS CERTIFIES THAT, for value received, Michael J. Staskus
("Warrantholder") is entitled to subscribe for and purchase from Legacy Brands,
Inc., a California corporation (the "Company"), that number of shares of the
Company's Common Stock, no par value, as set forth in Section 4 (b) hereof at
the Exercise Price (as hereafter determined) at any time from the date hereof to
and including the Expiration Date (as defined below), subject to the terms and
conditions stated herein. For purposes of this Warrant, the term "Expiration
Date" shall mean 5:00 p.m. Pacific time on April 15, 1999, except as set forth
in Section 1(b) hereof.
1. Exercise of Warrant.
<PAGE> 13
a) The rights represented by this Warrant may be exercised, in
whole or in part (subject to the minimum exercise limitation set forth in this
Section 1), by the holder hereof at any time on or before the Expiration date by
the surrender of this Warrant and delivery of an executed Subscription Agreement
in the form attached hereto as Exhibit A to the Company at its principal
executive office, or such other place as the Company shall designate in writing,
accompanied by payment for the Warrant Stock (as defined in Section 10) so
subscribed for in cash or check, in good funds or, subject to the good faith
determination by the Company as to the creditworthiness of the holder at the
time, the issuance by the holder of its promissory note to the Company (the
"Note") for up to the full exercise price of all of the warrants, with any
differential payable by cash or check, which Note shall bear interest at the
rate of seven percent (7%) per annum, all due and payable one year from the date
of issuance. Any shares for which a Note shall have been given to the Company as
payment shall not be deemed issued until such time as that portion of the Note
pertaining to such shares shall have been paid in full and the holder of such
shares shall have no rights with respect thereto, including, but not by way of
limitation, the right to vote, nor may such shares be transferred. In the event
of a partial exercise of this Warrant, a substitute Warrant representing the
number of shares of Warrant Stock which were not acquired upon the exercise of
the Warrant shall be issued to the holder of this Warrant. No exercise of this
Warrant may be made for less than one fourth of the number of shares of Warrant
Stock initially subject to this Warrant or such lesser number as shall then
constitute the balance of shares purchasable hereunder.
b) If at any time prior to the Expiration Date, the Company shall be
engaged in an offering of its securities, including any time determined, in good
faith by the Company or its Underwriter as hereinafter defined, to be "quiet
periods" during which its securities may not be offered for sale or sold, or if
at any other time or for any reason the Company or its Underwriter (as
hereinafter defined) shall, in good faith, determine that these Warrants may not
be exercised ( the period during which such inability to exercise shall exist
shall be referred to as the "Offering Period," which Offering Period may not in
each instance exceed a period of 90 days, it being recognized that such an
Offering Period may both precede and follow an offering of the securities of the
Company, with each such period being a separate Offering Period for the purposes
of this provision), the Expiration Date shall be extended by the same number of
days as the Offering Period.
2. Investment Representation. The holder by accepting this Warrant
represents that the Warrant is acquired for the holder's own account for
investment purposes and not with a view to any offering or distribution and that
the holder has no present intention of selling or otherwise disposing of the
Warrant or the Warrant Stock in violation of applicable securities laws. Upon
exercise, the holder will confirm, in respect of securities obtained upon such
exercise, that the holder is acquiring such securities for the holder's own
account and not with a view to any offering or
<PAGE> 14
distribution in violation of applicable securities laws. The holder acknowledges
that the certificate(s) representing the Warrant Stock issued upon exercise of
this Warrant shall be endorsed with the legend set forth on this Warrant and all
other legends, if any, required by applicable federal, state and foreign
securities laws to be placed on the certificate(s).
3. Validity of Warrant Stock. The Company warrants and agrees that all
shares of Warrant Stock which may be issued upon the exercise of this Warrant
will, upon issuance, be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof. The Company
further warrants and agrees that during the period within which this Warrant may
be exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of Warrant Stock to provide for the exercise of this
Warrant.
4. Exercise Price; Number of Warrant Shares.
(a) The Exercise Price shall be $1.00, subject to adjustment
pursuant to this Section 4.
(b) The number of shares of Warrant Stock to be issued upon
exercise of this Warrant shall be 60,000.
(c) Upon occurrence of any of the following, the Exercise Price
and the number of shares of Warrant Stock to be issued upon exercise of this
Warrant shall be adjusted as follows:
(i) If at any time after the date hereof the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, on the record date of such stock dividend, subdivision, or
split-up, the Exercise Price shall be appropriately decreased and the number of
shares of Warrant Stock issuable on exercise of this Warrant shall be
appropriately increased in proportion to such increase of outstanding shares.
(ii) If at any time after the date hereof, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, on the effective date of such
combination, the Exercise Price shall be appropriately increased and the
number of shares of Warrant Stock issuable on exercise of this Warrant
shall be appropriately decreased in proportion to such decrease in
outstanding shares.
(d) All calculations under this Section 4 shall be made to the
nearest cent
<PAGE> 15
or to the nearest whole share, as the case may be. No fractional shares of
Warrant Stock shall be issued upon exercise of this Warrant. Any fractional
shares of Warrant Stock which might otherwise be issued upon exercise of this
Warrant shall be rounded to the nearest whole share (with one-half rounded up).
(e) If the Exercise Price shall be adjusted, the Company shall
prepare and mail to the holder hereof a certificate setting forth the event
requiring the adjustment, the amount of the adjustment, the method by which the
adjustment was calculated, and (after giving effect to the adjustment) the
Exercise Price.
(f) A calculation of any adjustment under this Section 4
evidenced by a certificate of any firm of independent certified public
accountants of recognized standing selected by the Company and satisfactory to
the holder hereof (which may be the firm of independent certified public
accountants regularly employed by the Company) shall be presumed a correct
calculation of the adjustment for purposes of this Section 4. The foregoing
presumption shall constitute a rebuttable presumption, with the party disputing
the calculation bearing the burden of proving the incorrectness of the
calculation.
5. Notice of Certain Events. If at any time:
(a) The Company shall declare any dividend upon the Common Stock,
whether payable in cash, property or capital stock, or make any distribution to
the holders of Common Stock;
(b) There shall be any recapitalization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company with
another corporation;
(c) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(d) The Company shall propose to enter into a transaction not
covered by the preceding paragraphs (a) through (c), then, in each case, the
Company shall give to the holder of this Warrant, at the holder's address
registered on the books of the Company, not less than 20 days' prior written
notice of the proposed event, by first class certified mail, postage prepaid and
return receipt requested, of (i) the date on which the books of the Company
shall close or a record shall be taken for purposes of ascertaining which
stockholders will be entitled to vote on such reclassification, reorganization,
consolidation, merger, dissolution, liquidation or winding up, as the case may
be; (ii) the date on which the vote shall be taken concerning such
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be; and (iii) the date on which such
dividend or distribution is to be paid or such
<PAGE> 16
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be, is to be effective. Such notice
shall also specify the date as of which the record holders of capital stock of
the Company shall participate in said dividend or distribution or shall be
entitled to exchange their shares of capital stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, dissolution, liquidation or winding up, as the case may be.
6. Transfer of Warrant.
(a) Subject to Section 6 (b) below, the holder of this Warrant
agrees to give the Company not less than 20 days' prior written notice before
transferring this Warrant. The foregoing notice shall describe the manner of any
proposed transfer of this Warrant or any interest therein and the consideration
to be received by the holder.
(b) Each assignment of this Warrant shall be deemed a partitioned
right which is separately enforceable by the assignee, transferee or other
beneficiary. Each assignee, transferee or other beneficiary shall be entitled to
the full benefit of the Warrant assigned, subject to any conditions to which the
Warrant is subject and provided always that such assignee, transferee or other
beneficiary shall carry out all the obligations, liabilities and
responsibilities of the holder of the Warrant hereunder. No person, company or
other entity may enjoy the benefit of any Warrant unless it is an accredited
investor as that term is defined in Regulation D of the Securities Act of 1933,
as amended (the "Act"), and such party executes and delivers to the Company
certain subscription documents evidencing the investor's status and has a
pre-existing business or financial relationship with the Warrantholder.
(c) No transfer or assignment of this Warrant shall be made
without compliance with the provisions of Section 2 and the legend set forth on
the first page of this Warrant.
(d) Notwithstanding the provisions of Section 6(b) above, this
Warrant may not be assigned, held in trust, or otherwise transferred to any
person or entity in amounts of less than one fourth of the number of shares
subject to this Warrant.
7. No Stockholder Rights. This Warrant shall not entitle the holder
hereof to any voting rights or other rights as a stockholder of the Company, or
to any other rights whatsoever except the rights herein expressed, and no cash
dividend paid out of earnings or surplus or interest shall be payable or accrue
in respect of this Warrant or the interest represented hereby or the shares
which may be subscribed for and purchased hereunder until and unless and except
to the extent that the rights represented by this Warrant shall be exercised.
8. Reporting Company; Registration Rights
<PAGE> 17
(a) Registration Rights The Warrantholder shall, until December
31, 1999 (the "Registration Period"), which Registration Period shall be
extended by the amount of time equal to any Offering Period, have the following
registration rights on two occasions only.
(i) If the Warrantholder requests ("Demand Registration
Request") that the Company file a registration statement under the Act
("Registration Statement"), the Company agrees to use its best efforts to file a
Registration Statement covering the shares of Common Stock underlying this
Warrant (collectively the "Demand Registrable Securities") if so requested and
to obtain effectiveness thereof, to file post-effective amendments, and to make
appropriate qualifications under federal and state securities laws as may be
requested except in any jurisdiction where the Company would be required to
execute a general consent to service of process unless otherwise required to do
so by the Act or any applicable law. The Company shall keep such Registration
Statement effective for a period of twelve (12) months. Such rights are
hereinafter referred to as the "Demand Registration Rights." The Company shall
be obligated to file a Registration Statement and include the Demand Registrable
Securities, or any part thereof, only if the Underwriter, as herein defined,
determines, in its sole discretion, that the filing of a Registration Statement
and inclusion of such Demand Registrable Securities will not have a material
adverse affect on a current or proposed offering of any securities of the
Company (the "Offering"), provided that the Underwriter shall not unreasonably
withhold its consent to the inclusion of the Demand Registrable Securities in
the registration statement and that such Registration Statement includes
securities only on behalf of the Company and has been filed or will be filed
within sixty days of the Company's receipt of a Demand Registration Request. The
Demand Registration Rights may be delayed by the Company for a period of sixty
days on one occasion only every twelve months, except in the event of an initial
public offering ("IPO") of its securities. To the extent the Underwriter shall
determine not to include some or all of the Demand Registrable Securities, then
the Demand Registration Rights shall continue to be in force and effect as to
such Demand Registrable Securities which has not been registered. In the event
the Company has filed a Registration Statement under the Act pursuant to an IPO
or will do so within sixty days of its receipt of a Demand Registration request,
the Company shall have the right to delay the exercise of the Demand
Registration Rights until the completion of the Company's IPO; but in no event
shall such delay exceed an aggregate of one hundred twenty (120) days. The
Warrantholder shall not be entitled to more than one Demand Registration request
in any one fiscal year of the Company. For the purposes of this Section 8, the
term, the Underwriter, shall include the representatives of the Underwriters in
any proposed Offering and any other Underwriter or investment banker with which
the Company has or may have a contractual relationship from time to time.
(ii) In the event of an IPO whereby only securities on behalf of
the
<PAGE> 18
Company are being registered and not those of any selling shareholder, the
Warrantholder agrees not to sell, transfer, or otherwise dispose of any Warrant
Stock or Registrable Securities for a period of one hundred eighty (180) days
and shall enter into a customary lock-up agreement required by the Underwriter.
The Warrantholder agrees that stop transfer instructions may be given to the
Company's transfer agent regarding the foregoing lock-up arrangement.
(b) Information and Documents In the event the Company shall be
required by the provisions of this Section 8 to effect the registration of any
securities, the Warrantholder shall furnish, in writing, such information as is
reasonably requested by the Company or the Underwriter or their representatives,
including their representative legal counsel and accountants, for inclusion in
the Registration Statement relating to such Offering and such other information
and documentation as the Company shall request. In addition, the Warrantholder
shall execute and deliver such agreements certifications and other documents,
including, without limitation, selling shareholder instructions,
powers-of-attorney, and custody agreements, as the Company or Underwriter may
reasonably request. The Company's obligation to register any securities
hereunder shall be subject to the fulfilment of the duty of the Warrantholder to
cooperate fully with the Company and the Underwriter and their representatives
in the preparation of the Registration Statement covering any securities
registrable pursuant to Section 8.
(c) Expenses. All expenses incurred in connection with any
registration under this Section 8, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and expenses of any special
audits incident to or required by any such registration are herein called
"Registration Expenses." All underwriting discounts and selling commissions
applicable to any sales of securities herein are called "Selling Expenses." The
Company will pay all Registration Expenses in connection with any registration
pursuant to this Section 8. To the extent allowed by law, the Company shall bear
the Selling Expenses. Otherwise, all Selling Expenses in connection with any
registration pursuant to Section 8 shall be borne by the Company, the
Warrantholder and any other shareholders whose shares are to be included in the
Registration Statement, pro rata in proportion to the shares registered thereby
being sold or registered by each of them. The Warrantholder shall bear the fees
and costs of its own counsel.
(d) Prospectus Delivery The Warrantholder shall comply with the
prospectus delivery requirements of federal or state securities laws in
connection with any registration. If any prospectus becomes outdated,
inaccurate, or misleading, any Warrantholder shall cease using all such
prospectuses upon notice thereof from the Company and shall return all copies of
such prospectuses under control of such person to the Company.
<PAGE> 19
(e) "Market Stand-off" Agreement The Warrantholder shall not sell
or otherwise transfer or dispose of any Registrable Securities or any other
shares of Common Stock held by such persons, for a period of 180 days in
connection with any IPO of the Company covering only the Company's securities
and not those of any selling shareholder. The Warrantholder shall seek the
written consent of the Underwriter to transfer, convey or assign any securities
of the Company during the 180 day period specified above.
(f) No Registration Required The Company shall not be required to
effect a registration under this Section 8 if the Warrantholder would otherwise
be able to publicly sell the number of shares sought to be registered at the
time of the registration without registration pursuant to Rule 144 promulgated
by the SEC as then in effect or pursuant to any other exemption from the
registration provisions of the Act then available to the Warrantholder
(collectively referred to as "Rule 144") so long as the purchaser thereof shall
acquire shares that are not subject to any restriction on resale as may
otherwise be imposed pursuant to Rule 144.
(g) Termination of Rights The Company's obligations to register
the Registrable Securities pursuant to this Section 8 shall cease and terminate
as to the Registrable Securities upon the occurrence of either of the following:
(i) the registration of the Registrable Securities under the Act pursuant to the
provisions of this Warrant; or (ii) at any time the Registrable Securities
become freely transferable without registration under the Act. Upon becoming
subject to the reporting requirements of the 1934 Act, the Company agrees to use
its best efforts to make Rule 144 available to the Warrantholder and to continue
do so until the expiration of the registration rights specified in Section 8
herein.
(h) Duty to Cooperate The Company's obligations to register the
Registrable Securities shall be further contingent upon the Warrantholder
providing its full and complete cooperation to the Company in timely providing
such information, documents, certifications and representations as the Company
and its counsel or any Underwriter may determine to be necessary in order to
prepare, file and otherwise complete the registration process with respect to
the Registrable Securities.
(i) Grant of Power of Attorney. The Warrantholder has granted to
Randy Haag its full power of attorney to act on its behalf and in its stead with
respect to all matters arising out of this Section 8, which power of attorney is
deemed to be coupled with an interest and shall be irrevocable for the term of
the Warrant.
9. No Impairment. The Company will not, by amendment of its articles of
incorporation or bylaws or through any reorganization, transfer of assets,
consolidation, merger, dissolution, or any voluntary action avoid or seek to
avoid the observance or
<PAGE> 20
performance of any of the terms of this Warrant.
10. Miscellaneous Matters.
(a) As used herein, the term "Warrant Stock" shall mean the
Company's presently authorized Common Stock no par value, and stock of any other
series or class into which such presently authorized Common Stock may hereafter
have been converted or changed pursuant to any recapitalization or change in
such Common Stock.
(b) As used herein, the word "person" shall mean an individual or
entity.
(c) This Warrant and the name and address of the holder will be
registered in a Warrant Register that is kept at the principal office of the
Company, and the Company may treat the holder so registered as the owner of this
Warrant for all purposes.
(d) This Warrant shall be governed by and interpreted in
accordance with the internal laws, and not the law of conflicts, of the State of
California.
(e) Successors and assigns. Except as otherwise expressly
provided herein, all covenants and agreements contained in this Warrant by or on
behalf of any of the parties hereto shall bind and inure to the benefit of
respective successors and assigns of the parties to the extent permitted by law.
(f) Attorney Fees. In the event arbitration, suit or action is
brought by any party under this Warrant to enforce any of its terms, and in any
appeal therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorneys' fees to be fixed by the arbitrator, trial court, or
appellate court.
(g) Savings Clause. If any provision of this Warrant, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Warrant, or the application of such provision to
persons or circumstances other than those as to which it is held invalid, shall
not be affected thereby.
(h) Specific Performance. Each party's obligation under this
Warrant is unique. If any party should default in its obligations under this
Warrant, the parties each acknowledge that it may be extremely impracticable to
measure the resulting damages; accordingly, the non-defaulting party, in
addition to any other rights or remedies available, may sue in equity for
specific performance, and upon satisfactory proof thereof, it may be entitled to
obtain such specific performance.
<PAGE> 21
IN WITNESS WHEREOF, the Company has executed this Warrant effective as
of the date first written above.
LEGACY BRANDS, INC.,
a California corporation
By: /s/ THOMAS E. KEES
------------------------------------------
THOMAS E. KEES, President
By: /s/ CRAIG CONNERTY
------------------------------------------
CRAIG CONNERTY, Chief Financial Officer
<PAGE> 22
EXHIBIT A
SUBSCRIPTION AGREEMENT
________________________ , 19__
To: Legacy Brands, Inc.
The undersigned, pursuant to the provisions set forth in Warrant
No. 96-____, hereby agrees to subscribe for and purchase shares of the Warrant
Stock covered by such Warrant, and makes payment herewith in full for such
Warrant Stock at the Exercise Price.
Signature:
-------------------------------
Printed Name
and Title:
------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
--------------------------------------
ASSIGNMENT
FOR VALUE RECEIVED ______________________________hereby sells,
assigns and transfers all of the rights of the undersigned under Warrant No.
96-__, with respect to the number of shares of Warrant Stock covered thereby set
forth below unto:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
______________________________________________________________________________
____________________________________
Dated:____________________________ , 19__
Signature:
-------------------------------
Printed Name
and Title:
------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
<PAGE> 23
THIS WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED
FOR INVESTMENT FOR THE HOLDER'S OWN ACCOUNT AND NOT WITH A VIEW TO OR FOR SALE
IN CONNECTION WITH ANY DISTRIBUTION OF THE SECURITIES. NEITHER THE WARRANT NOR
THE SECURITIES HAVE BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF
1933 ("SECURITIES ACT") OR UNDER ANY APPLICABLE STATE SECURITIES LAWS ("BLUE SKY
LAWS"). AN OFFER TO SELL OR TRANSFER OR THE SALE OR TRANSFER OF THIS WARRANT OR
THESE SECURITIES IS UNLAWFUL UNLESS MADE PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR PERMIT, AS APPLICABLE, UNDER THE SECURITIES ACT OR APPLICABLE BLUE
SKY LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION AND/OR QUALIFICATION UNDER THE
SECURITIES ACT AND APPLICABLE BLUE SKY LAWS IS AVAILABLE AND AN OPINION OF
COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY IS PROVIDED TO
THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION OR QUALIFICATION IS NOT
REQUIRED UNDER THE SECURITIES ACT AND APPLICABLE BLUE SKY LAWS.
THIS WARRANT IS SUBJECT TO A POWER OF ATTORNEY REGARDING THE
EXERCISE OF REGISTRATION RIGHTS
Warrant No. 98-003
COMMON STOCK PURCHASE WARRANT
JANUARY 1, 1998
THIS CERTIFIES THAT, for value received, Thomas O' Stasic, Sr.
("Warrantholder") is entitled to subscribe for and purchase from Legacy Brands,
Inc., a California corporation (the "Company"), that number of shares of the
Company's Common Stock, no par value, as set forth in Section 4 (b) hereof at
the Exercise Price (as hereafter determined) at any time from the date hereof to
and including the Expiration Date (as defined below), subject to the terms and
conditions stated herein. For purposes of this Warrant, the term "Expiration
Date" shall mean 5:00 p.m. Pacific time on April 15, 1999, except as set forth
in Section 1(b) hereof.
1. Exercise of Warrant.
<PAGE> 24
a) The rights represented by this Warrant may be exercised, in
whole or in part (subject to the minimum exercise limitation set forth in this
Section 1), by the holder hereof at any time on or before the Expiration date by
the surrender of this Warrant and delivery of an executed Subscription Agreement
in the form attached hereto as Exhibit A to the Company at its principal
executive office, or such other place as the Company shall designate in writing,
accompanied by payment for the Warrant Stock (as defined in Section 10) so
subscribed for in cash or check, in good funds or, subject to the good faith
determination by the Company as to the creditworthiness of the holder at the
time, the issuance by the holder of its promissory note to the Company (the
"Note") for up to the full exercise price of all of the warrants, with any
differential payable by cash or check, which Note shall bear interest at the
rate of seven percent (7%) per annum, all due and payable one year from the date
of issuance. Any shares for which a Note shall have been given to the Company as
payment shall not be deemed issued until such time as that portion of the Note
pertaining to such shares shall have been paid in full and the holder of such
shares shall have no rights with respect thereto, including, but not by way of
limitation, the right to vote, nor may such shares be transferred. In the event
of a partial exercise of this Warrant, a substitute Warrant representing the
number of shares of Warrant Stock which were not acquired upon the exercise of
the Warrant shall be issued to the holder of this Warrant. No exercise of this
Warrant may be made for less than one fourth of the number of shares of Warrant
Stock initially subject to this Warrant or such lesser number as shall then
constitute the balance of shares purchasable hereunder.
b) If at any time prior to the Expiration Date, the Company shall be
engaged in an offering of its securities, including any time determined, in good
faith by the Company or its Underwriter as hereinafter defined, to be "quiet
periods" during which its securities may not be offered for sale or sold, or if
at any other time or for any reason the Company or its Underwriter (as
hereinafter defined) shall, in good faith, determine that these Warrants may not
be exercised ( the period during which such inability to exercise shall exist
shall be referred to as the "Offering Period," which Offering Period may not in
each instance exceed a period of 90 days, it being recognized that such an
Offering Period may both precede and follow an offering of the securities of the
Company, with each such period being a separate Offering Period for the purposes
of this provision), the Expiration Date shall be extended by the same number of
days as the Offering Period.
2. Investment Representation. The holder by accepting this Warrant
represents that the Warrant is acquired for the holder's own account for
investment purposes and not with a view to any offering or distribution and that
the holder has no present intention of selling or otherwise disposing of the
Warrant or the Warrant Stock in violation of applicable securities laws. Upon
exercise, the holder will confirm, in respect of securities obtained upon such
exercise, that the holder is acquiring such securities for the holder's own
account and not with a view to any offering or
<PAGE> 25
distribution in violation of applicable securities laws. The holder acknowledges
that the certificate(s) representing the Warrant Stock issued upon exercise of
this Warrant shall be endorsed with the legend set forth on this Warrant and all
other legends, if any, required by applicable federal, state and foreign
securities laws to be placed on the certificate(s).
3. Validity of Warrant Stock. The Company warrants and agrees that all
shares of Warrant Stock which may be issued upon the exercise of this Warrant
will, upon issuance, be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof. The Company
further warrants and agrees that during the period within which this Warrant may
be exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of Warrant Stock to provide for the exercise of this
Warrant.
4. Exercise Price; Number of Warrant Shares.
(a) The Exercise Price shall be $1.00, subject to adjustment
pursuant to this Section 4.
(b) The number of shares of Warrant Stock to be issued upon
exercise of this Warrant shall be 5,000.
(c) Upon occurrence of any of the following, the Exercise Price
and the number of shares of Warrant Stock to be issued upon exercise of this
Warrant shall be adjusted as follows:
(i) If at any time after the date hereof the number of
shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of
shares of Common Stock, then, on the record date of such stock dividend,
subdivision, or split-up, the Exercise Price shall be appropriately
decreased and the number of shares of Warrant Stock issuable on exercise
of this Warrant shall be appropriately increased in proportion to such
increase of outstanding shares.
(ii) If at any time after the date hereof, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, on the effective date of such
combination, the Exercise Price shall be appropriately increased and the
number of shares of Warrant Stock issuable on exercise of this Warrant
shall be appropriately decreased in proportion to such decrease in
outstanding shares.
(d) All calculations under this Section 4 shall be made to the
nearest cent
<PAGE> 26
or to the nearest whole share, as the case may be. No fractional shares of
Warrant Stock shall be issued upon exercise of this Warrant. Any fractional
shares of Warrant Stock which might otherwise be issued upon exercise of this
Warrant shall be rounded to the nearest whole share (with one-half rounded up).
(e) If the Exercise Price shall be adjusted, the Company shall
prepare and mail to the holder hereof a certificate setting forth the event
requiring the adjustment, the amount of the adjustment, the method by which the
adjustment was calculated, and (after giving effect to the adjustment) the
Exercise Price.
(f) A calculation of any adjustment under this Section 4
evidenced by a certificate of any firm of independent certified public
accountants of recognized standing selected by the Company and satisfactory to
the holder hereof (which may be the firm of independent certified public
accountants regularly employed by the Company) shall be presumed a correct
calculation of the adjustment for purposes of this Section 4. The foregoing
presumption shall constitute a rebuttable presumption, with the party disputing
the calculation bearing the burden of proving the incorrectness of the
calculation.
5. Notice of Certain Events. If at any time:
(a) The Company shall declare any dividend upon the Common Stock,
whether payable in cash, property or capital stock, or make any distribution to
the holders of Common Stock;
(b) There shall be any recapitalization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company with
another corporation;
(c) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(d) The Company shall propose to enter into a transaction not
covered by the preceding paragraphs (a) through (c), then, in each case, the
Company shall give to the holder of this Warrant, at the holder's address
registered on the books of the Company, not less than 20 days' prior written
notice of the proposed event, by first class certified mail, postage prepaid and
return receipt requested, of (i) the date on which the books of the Company
shall close or a record shall be taken for purposes of ascertaining which
stockholders will be entitled to vote on such reclassification, reorganization,
consolidation, merger, dissolution, liquidation or winding up, as the case may
be; (ii) the date on which the vote shall be taken concerning such
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be; and (iii) the date on which such
dividend or distribution is to be paid or such
<PAGE> 27
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be, is to be effective. Such notice
shall also specify the date as of which the record holders of capital stock of
the Company shall participate in said dividend or distribution or shall be
entitled to exchange their shares of capital stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, dissolution, liquidation or winding up, as the case may be.
6. Transfer of Warrant.
(a) Subject to Section 6 (b) below, the holder of this Warrant
agrees to give the Company not less than 20 days' prior written notice before
transferring this Warrant. The foregoing notice shall describe the manner of any
proposed transfer of this Warrant or any interest therein and the consideration
to be received by the holder.
(b) Each assignment of this Warrant shall be deemed a partitioned
right which is separately enforceable by the assignee, transferee or other
beneficiary. Each assignee, transferee or other beneficiary shall be entitled to
the full benefit of the Warrant assigned, subject to any conditions to which the
Warrant is subject and provided always that such assignee, transferee or other
beneficiary shall carry out all the obligations, liabilities and
responsibilities of the holder of the Warrant hereunder. No person, company or
other entity may enjoy the benefit of any Warrant unless it is an accredited
investor as that term is defined in Regulation D of the Securities Act of 1933,
as amended (the "Act"), and such party executes and delivers to the Company
certain subscription documents evidencing the investor's status and has a
pre-existing business or financial relationship with the Warrantholder.
(c) No transfer or assignment of this Warrant shall be made
without compliance with the provisions of Section 2 and the legend set forth on
the first page of this Warrant.
(d) Notwithstanding the provisions of Section 6(b) above, this
Warrant may not be assigned, held in trust, or otherwise transferred to any
person or entity in amounts of less than one fourth of the number of shares
subject to this Warrant.
7. No Stockholder Rights. This Warrant shall not entitle the holder
hereof to any voting rights or other rights as a stockholder of the Company, or
to any other rights whatsoever except the rights herein expressed, and no cash
dividend paid out of earnings or surplus or interest shall be payable or accrue
in respect of this Warrant or the interest represented hereby or the shares
which may be subscribed for and purchased hereunder until and unless and except
to the extent that the rights represented by this Warrant shall be exercised.
8. Reporting Company; Registration Rights
<PAGE> 28
(a) Registration Rights. The Warrantholder shall, until December
31, 1999 (the "Registration Period"), which Registration Period shall be
extended by the amount of time equal to any Offering Period, have the following
registration rights on two occasions only.
(i) If the Warrantholder requests ("Demand Registration
Request") that the Company file a registration statement under the Act
("Registration Statement"), the Company agrees to use its best efforts to file a
Registration Statement covering the shares of Common Stock underlying this
Warrant (collectively the "Demand Registrable Securities") if so requested and
to obtain effectiveness thereof, to file post-effective amendments, and to make
appropriate qualifications under federal and state securities laws as may be
requested except in any jurisdiction where the Company would be required to
execute a general consent to service of process unless otherwise required to do
so by the Act or any applicable law. The Company shall keep such Registration
Statement effective for a period of twelve (12) months. Such rights are
hereinafter referred to as the "Demand Registration Rights." The Company shall
be obligated to file a Registration Statement and include the Demand Registrable
Securities, or any part thereof, only if the Underwriter, as herein defined,
determines, in its sole discretion, that the filing of a Registration Statement
and inclusion of such Demand Registrable Securities will not have a material
adverse affect on a current or proposed offering of any securities of the
Company (the "Offering"), provided that the Underwriter shall not unreasonably
withhold its consent to the inclusion of the Demand Registrable Securities in
the registration statement and that such Registration Statement includes
securities only on behalf of the Company and has been filed or will be filed
within sixty days of the Company's receipt of a Demand Registration Request. The
Demand Registration Rights may be delayed by the Company for a period of sixty
days on one occasion only every twelve months, except in the event of an initial
public offering ("IPO") of its securities. To the extent the Underwriter shall
determine not to include some or all of the Demand Registrable Securities, then
the Demand Registration Rights shall continue to be in force and effect as to
such Demand Registrable Securities which has not been registered. In the event
the Company has filed a Registration Statement under the Act pursuant to an IPO
or will do so within sixty days of its receipt of a Demand Registration request,
the Company shall have the right to delay the exercise of the Demand
Registration Rights until the completion of the Company's IPO; but in no event
shall such delay exceed an aggregate of one hundred twenty (120) days. The
Warrantholder shall not be entitled to more than one Demand Registration request
in any one fiscal year of the Company. For the purposes of this Section 8, the
term, the Underwriter, shall include the representatives of the Underwriters in
any proposed Offering and any other Underwriter or investment banker with which
the Company has or may have a contractual relationship from time to time.
(ii) In the event of an IPO whereby only securities on behalf of
the
<PAGE> 29
Company are being registered and not those of any selling shareholder, the
Warrantholder agrees not to sell, transfer, or otherwise dispose of any Warrant
Stock or Registrable Securities for a period of one hundred eighty (180) days
and shall enter into a customary lock-up agreement required by the Underwriter.
The Warrantholder agrees that stop transfer instructions may be given to the
Company's transfer agent regarding the foregoing lock-up arrangement.
(b) Information and Documents. In the event the Company shall be
required by the provisions of this Section 8 to effect the registration of any
securities, the Warrantholder shall furnish, in writing, such information as is
reasonably requested by the Company or the Underwriter or their representatives,
including their representative legal counsel and accountants, for inclusion in
the Registration Statement relating to such Offering and such other information
and documentation as the Company shall request. In addition, the Warrantholder
shall execute and deliver such agreements certifications and other documents,
including, without limitation, selling shareholder instructions,
powers-of-attorney, and custody agreements, as the Company or Underwriter may
reasonably request. The Company's obligation to register any securities
hereunder shall be subject to the fulfilment of the duty of the Warrantholder to
cooperate fully with the Company and the Underwriter and their representatives
in the preparation of the Registration Statement covering any securities
registrable pursuant to Section 8.
(c) Expenses. All expenses incurred in connection with any
registration under this Section 8, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and expenses of any special
audits incident to or required by any such registration are herein called
"Registration Expenses." All underwriting discounts and selling commissions
applicable to any sales of securities herein are called "Selling Expenses." The
Company will pay all Registration Expenses in connection with any registration
pursuant to this Section 8. To the extent allowed by law, the Company shall bear
the Selling Expenses. Otherwise, all Selling Expenses in connection with any
registration pursuant to Section 8 shall be borne by the Company, the
Warrantholder and any other shareholders whose shares are to be included in the
Registration Statement, pro rata in proportion to the shares registered thereby
being sold or registered by each of them. The Warrantholder shall bear the fees
and costs of its own counsel.
(d) Prospectus Delivery. The Warrantholder shall comply with the
prospectus delivery requirements of federal or state securities laws in
connection with any registration. If any prospectus becomes outdated,
inaccurate, or misleading, any Warrantholder shall cease using all such
prospectuses upon notice thereof from the Company and shall return all copies of
such prospectuses under control of such person to the Company.
<PAGE> 30
(e) "Market Stand-off" Agreement. The Warrantholder shall not
sell or otherwise transfer or dispose of any Registrable Securities or any other
shares of Common Stock held by such persons, for a period of 180 days in
connection with any IPO of the Company covering only the Company's securities
and not those of any selling shareholder. The Warrantholder shall seek the
written consent of the Underwriter to transfer, convey or assign any securities
of the Company during the 180 day period specified above.
(f) No Registration Required. The Company shall not be required
to effect a registration under this Section 8 if the Warrantholder would
otherwise be able to publicly sell the number of shares sought to be registered
at the time of the registration without registration pursuant to Rule 144
promulgated by the SEC as then in effect or pursuant to any other exemption from
the registration provisions of the Act then available to the Warrantholder
(collectively referred to as "Rule 144") so long as the purchaser thereof shall
acquire shares that are not subject to any restriction on resale as may
otherwise be imposed pursuant to Rule 144.
(g) Termination of Rights. The Company's obligations to register
the Registrable Securities pursuant to this Section 8 shall cease and terminate
as to the Registrable Securities upon the occurrence of either of the following:
(i) the registration of the Registrable Securities under the Act pursuant to the
provisions of this Warrant; or (ii) at any time the Registrable Securities
become freely transferable without registration under the Act. Upon becoming
subject to the reporting requirements of the 1934 Act, the Company agrees to use
its best efforts to make Rule 144 available to the Warrantholder and to continue
do so until the expiration of the registration rights specified in Section 8
herein.
(h) Duty to Cooperate. The Company's obligations to register the
Registrable Securities shall be further contingent upon the Warrantholder
providing its full and complete cooperation to the Company in timely providing
such information, documents, certifications and representations as the Company
and its counsel or any Underwriter may determine to be necessary in order to
prepare, file and otherwise complete the registration process with respect to
the Registrable Securities.
(i) Grant of Power of Attorney. The Warrantholder has granted to
Randy Haag its full power of attorney to act on its behalf and in its stead with
respect to all matters arising out of this Section 8, which power of attorney is
deemed to be coupled with an interest and shall be irrevocable for the term of
the Warrant.
9. No Impairment. The Company will not, by amendment of its articles of
incorporation or bylaws or through any reorganization, transfer of assets,
consolidation, merger, dissolution, or any voluntary action avoid or seek to
avoid the observance or
<PAGE> 31
performance of any of the terms of this Warrant.
10. Miscellaneous Matters.
(a) As used herein, the term "Warrant Stock" shall mean the
Company's presently authorized Common Stock no par value, and stock of any other
series or class into which such presently authorized Common Stock may hereafter
have been converted or changed pursuant to any recapitalization or change in
such Common Stock.
(b) As used herein, the word "person" shall mean an individual or
entity.
(c) This Warrant and the name and address of the holder will be
registered in a Warrant Register that is kept at the principal office of the
Company, and the Company may treat the holder so registered as the owner of this
Warrant for all purposes.
(d) This Warrant shall be governed by and interpreted in
accordance with the internal laws, and not the law of conflicts, of the State of
California.
(e) Successors and assigns. Except as otherwise expressly
provided herein, all covenants and agreements contained in this Warrant by or on
behalf of any of the parties hereto shall bind and inure to the benefit of
respective successors and assigns of the parties to the extent permitted by law.
(f) Attorney Fees. In the event arbitration, suit or action is
brought by any party under this Warrant to enforce any of its terms, and in any
appeal therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorneys' fees to be fixed by the arbitrator, trial court, or
appellate court.
(g) Savings Clause. If any provision of this Warrant, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Warrant, or the application of such provision to
persons or circumstances other than those as to which it is held invalid, shall
not be affected thereby.
(h) Specific Performance. Each party's obligation under this
Warrant is unique. If any party should default in its obligations under this
Warrant, the parties each acknowledge that it may be extremely impracticable to
measure the resulting damages; accordingly, the non-defaulting party, in
addition to any other rights or remedies available, may sue in equity for
specific performance, and upon satisfactory proof thereof, it may be entitled to
obtain such specific performance.
<PAGE> 32
IN WITNESS WHEREOF, the Company has executed this Warrant effective as
of the date first written above.
LEGACY BRANDS, INC.,
a California corporation
By: /s/ THOMAS E. KEES
----------------------------------------------
THOMAS E. KEES, President
By: /s/ CRAIG CONNERTY
----------------------------------------------
CRAIG CONNERTY, Chief Financial Officer
<PAGE> 33
EXHIBIT A
SUBSCRIPTION AGREEMENT
________________________ , 19__
To: Legacy Brands, Inc.
The undersigned, pursuant to the provisions set forth in Warrant
No. 96-____, hereby agrees to subscribe for and purchase ____________ shares of
the Warrant Stock covered by such Warrant, and makes payment herewith in full
for such Warrant Stock at the Exercise Price.
Signature:
-----------------------------
Printed Name
and Title:
------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
ASSIGNMENT
FOR VALUE RECEIVED __________ hereby sells, assigns and transfers
all of the rights of the undersigned under Warrant No. 96-____, with respect to
the number of shares of Warrant Stock covered thereby set forth below unto:
<TABLE>
<CAPTION>
<S> <C> <C>
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
- ------------------------------------------------------------------------------
</TABLE>
Dated:______________________________, 19__
Signature:
-----------------------------
Printed Name
and Title:
------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
<PAGE> 34
THIS WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED
FOR INVESTMENT FOR THE HOLDER'S OWN ACCOUNT AND NOT WITH A VIEW TO OR FOR SALE
IN CONNECTION WITH ANY DISTRIBUTION OF THE SECURITIES. NEITHER THE WARRANT NOR
THE SECURITIES HAVE BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF
1933 ("SECURITIES ACT") OR UNDER ANY APPLICABLE STATE SECURITIES LAWS ("BLUE SKY
LAWS"). AN OFFER TO SELL OR TRANSFER OR THE SALE OR TRANSFER OF THIS WARRANT OR
THESE SECURITIES IS UNLAWFUL UNLESS MADE PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR PERMIT, AS APPLICABLE, UNDER THE SECURITIES ACT OR APPLICABLE BLUE
SKY LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION AND/OR QUALIFICATION UNDER THE
SECURITIES ACT AND APPLICABLE BLUE SKY LAWS IS AVAILABLE AND AN OPINION OF
COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY IS PROVIDED TO
THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION OR QUALIFICATION IS NOT
REQUIRED UNDER THE SECURITIES ACT AND APPLICABLE BLUE SKY LAWS.
THIS WARRANT IS SUBJECT TO A POWER OF ATTORNEY REGARDING THE
EXERCISE OF REGISTRATION RIGHTS
Warrant No. 98-004
COMMON STOCK PURCHASE WARRANT
JANUARY 1, 1998
THIS CERTIFIES THAT, for value received, Steve Jizmagian
("Warrantholder") is entitled to subscribe for and purchase from Legacy Brands,
Inc., a California corporation (the "Company"), that number of shares of the
Company's Common Stock, no par value, as set forth in Section 4 (b) hereof at
the Exercise Price (as hereafter determined) at any time from the date hereof to
and including the Expiration Date (as defined below), subject to the terms and
conditions stated herein. For purposes of this Warrant, the term "Expiration
Date" shall mean 5:00 p.m. Pacific time on April 15, 1999, except as set forth
in Section 1(b) hereof.
1. Exercise of Warrant.
<PAGE> 35
a) The rights represented by this Warrant may be exercised, in
whole or in part (subject to the minimum exercise limitation set forth in this
Section 1), by the holder hereof at any time on or before the Expiration date by
the surrender of this Warrant and delivery of an executed Subscription Agreement
in the form attached hereto as Exhibit A to the Company at its principal
executive office, or such other place as the Company shall designate in writing,
accompanied by payment for the Warrant Stock (as defined in Section 10) so
subscribed for in cash or check, in good funds or, subject to the good faith
determination by the Company as to the creditworthiness of the holder at the
time, the issuance by the holder of its promissory note to the Company (the
"Note") for up to the full exercise price of all of the warrants, with any
differential payable by cash or check, which Note shall bear interest at the
rate of seven percent (7%) per annum, all due and payable one year from the date
of issuance. Any shares for which a Note shall have been given to the Company as
payment shall not be deemed issued until such time as that portion of the Note
pertaining to such shares shall have been paid in full and the holder of such
shares shall have no rights with respect thereto, including, but not by way of
limitation, the right to vote, nor may such shares be transferred. In the event
of a partial exercise of this Warrant, a substitute Warrant representing the
number of shares of Warrant Stock which were not acquired upon the exercise of
the Warrant shall be issued to the holder of this Warrant. No exercise of this
Warrant may be made for less than one fourth of the number of shares of Warrant
Stock initially subject to this Warrant or such lesser number as shall then
constitute the balance of shares purchasable hereunder.
b) If at any time prior to the Expiration Date, the Company shall be
engaged in an offering of its securities, including any time determined, in good
faith by the Company or its Underwriter as hereinafter defined, to be "quiet
periods" during which its securities may not be offered for sale or sold, or if
at any other time or for any reason the Company or its Underwriter (as
hereinafter defined) shall, in good faith, determine that these Warrants may not
be exercised ( the period during which such inability to exercise shall exist
shall be referred to as the "Offering Period," which Offering Period may not in
each instance exceed a period of 90 days, it being recognized that such an
Offering Period may both precede and follow an offering of the securities of the
Company, with each such period being a separate Offering Period for the purposes
of this provision), the Expiration Date shall be extended by the same number of
days as the Offering Period.
2. Investment Representation. The holder by accepting this Warrant
represents that the Warrant is acquired for the holder's own account for
investment purposes and not with a view to any offering or distribution and that
the holder has no present intention of selling or otherwise disposing of the
Warrant or the Warrant Stock in violation of applicable securities laws. Upon
exercise, the holder will confirm, in respect of securities obtained upon such
exercise, that the holder is acquiring such securities for the holder's own
account and not with a view to any offering or
<PAGE> 36
distribution in violation of applicable securities laws. The holder acknowledges
that the certificate(s) representing the Warrant Stock issued upon exercise of
this Warrant shall be endorsed with the legend set forth on this Warrant and all
other legends, if any, required by applicable federal, state and foreign
securities laws to be placed on the certificate(s).
3. Validity of Warrant Stock. The Company warrants and agrees that all
shares of Warrant Stock which may be issued upon the exercise of this Warrant
will, upon issuance, be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof. The Company
further warrants and agrees that during the period within which this Warrant may
be exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of Warrant Stock to provide for the exercise of this
Warrant.
4. Exercise Price; Number of Warrant Shares.
(a) The Exercise Price shall be $1.00, subject to adjustment
pursuant to this Section 4.
(b) The number of shares of Warrant Stock to be issued upon
exercise of this Warrant shall be 20,000.
(c) Upon occurrence of any of the following, the Exercise Price
and the number of shares of Warrant Stock to be issued upon exercise of this
Warrant shall be adjusted as follows:
(i) If at any time after the date hereof the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, on the record date of such stock dividend, subdivision, or
split-up, the Exercise Price shall be appropriately decreased and the number of
shares of Warrant Stock issuable on exercise of this Warrant shall be
appropriately increased in proportion to such increase of outstanding shares.
(ii) If at any time after the date hereof, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, on the effective date of such
combination, the Exercise Price shall be appropriately increased and the
number of shares of Warrant Stock issuable on exercise of this Warrant
shall be appropriately decreased in proportion to such decrease in
outstanding shares.
(d) All calculations under this Section 4 shall be made to the
nearest cent
<PAGE> 37
or to the nearest whole share, as the case may be. No fractional shares of
Warrant Stock shall be issued upon exercise of this Warrant. Any fractional
shares of Warrant Stock which might otherwise be issued upon exercise of this
Warrant shall be rounded to the nearest whole share (with one-half rounded up).
(e) If the Exercise Price shall be adjusted, the Company shall
prepare and mail to the holder hereof a certificate setting forth the event
requiring the adjustment, the amount of the adjustment, the method by which the
adjustment was calculated, and (after giving effect to the adjustment) the
Exercise Price.
(f) A calculation of any adjustment under this Section 4
evidenced by a certificate of any firm of independent certified public
accountants of recognized standing selected by the Company and satisfactory to
the holder hereof (which may be the firm of independent certified public
accountants regularly employed by the Company) shall be presumed a correct
calculation of the adjustment for purposes of this Section 4. The foregoing
presumption shall constitute a rebuttable presumption, with the party disputing
the calculation bearing the burden of proving the incorrectness of the
calculation.
5. Notice of Certain Events. If at any time:
(a) The Company shall declare any dividend upon the Common Stock,
whether payable in cash, property or capital stock, or make any distribution to
the holders of Common Stock;
(b) There shall be any recapitalization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company with
another corporation;
(c) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(d) The Company shall propose to enter into a transaction not
covered by the preceding paragraphs (a) through (c), then, in each case, the
Company shall give to the holder of this Warrant, at the holder's address
registered on the books of the Company, not less than 20 days' prior written
notice of the proposed event, by first class certified mail, postage prepaid and
return receipt requested, of (i) the date on which the books of the Company
shall close or a record shall be taken for purposes of ascertaining which
stockholders will be entitled to vote on such reclassification, reorganization,
consolidation, merger, dissolution, liquidation or winding up, as the case may
be; (ii) the date on which the vote shall be taken concerning such
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be; and (iii) the date on which such
dividend or distribution is to be paid or such
<PAGE> 38
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be, is to be effective. Such notice
shall also specify the date as of which the record holders of capital stock of
the Company shall participate in said dividend or distribution or shall be
entitled to exchange their shares of capital stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, dissolution, liquidation or winding up, as the case may be.
6. Transfer of Warrant.
(a) Subject to Section 6 (b) below, the holder of this Warrant
agrees to give the Company not less than 20 days' prior written notice before
transferring this Warrant. The foregoing notice shall describe the manner of any
proposed transfer of this Warrant or any interest therein and the consideration
to be received by the holder.
(b) Each assignment of this Warrant shall be deemed a partitioned
right which is separately enforceable by the assignee, transferee or other
beneficiary. Each assignee, transferee or other beneficiary shall be entitled to
the full benefit of the Warrant assigned, subject to any conditions to which the
Warrant is subject and provided always that such assignee, transferee or other
beneficiary shall carry out all the obligations, liabilities and
responsibilities of the holder of the Warrant hereunder. No person, company or
other entity may enjoy the benefit of any Warrant unless it is an accredited
investor as that term is defined in Regulation D of the Securities Act of 1933,
as amended (the "Act"), and such party executes and delivers to the Company
certain subscription documents evidencing the investor's status and has a
pre-existing business or financial relationship with the Warrantholder.
(c) No transfer or assignment of this Warrant shall be made
without compliance with the provisions of Section 2 and the legend set forth on
the first page of this Warrant.
(d) Notwithstanding the provisions of Section 6(b) above, this
Warrant may not be assigned, held in trust, or otherwise transferred to any
person or entity in amounts of less than one fourth of the number of shares
subject to this Warrant.
7. No Stockholder Rights. This Warrant shall not entitle the holder
hereof to any voting rights or other rights as a stockholder of the Company, or
to any other rights whatsoever except the rights herein expressed, and no cash
dividend paid out of earnings or surplus or interest shall be payable or accrue
in respect of this Warrant or the interest represented hereby or the shares
which may be subscribed for and purchased hereunder until and unless and except
to the extent that the rights represented by this Warrant shall be exercised.
8. Reporting Company; Registration Rights
<PAGE> 39
(a) Registration Rights The Warrantholder shall, until December
31, 1999 (the "Registration Period"), which Registration Period shall be
extended by the amount of time equal to any Offering Period, have the following
registration rights on two occasions only.
(i) If the Warrantholder requests ("Demand Registration
Request") that the Company file a registration statement under the Act
("Registration Statement"), the Company agrees to use its best efforts to file a
Registration Statement covering the shares of Common Stock underlying this
Warrant (collectively the "Demand Registrable Securities") if so requested and
to obtain effectiveness thereof, to file post-effective amendments, and to make
appropriate qualifications under federal and state securities laws as may be
requested except in any jurisdiction where the Company would be required to
execute a general consent to service of process unless otherwise required to do
so by the Act or any applicable law. The Company shall keep such Registration
Statement effective for a period of twelve (12) months. Such rights are
hereinafter referred to as the "Demand Registration Rights." The Company shall
be obligated to file a Registration Statement and include the Demand Registrable
Securities, or any part thereof, only if the Underwriter, as herein defined,
determines, in its sole discretion, that the filing of a Registration Statement
and inclusion of such Demand Registrable Securities will not have a material
adverse affect on a current or proposed offering of any securities of the
Company (the "Offering"), provided that the Underwriter shall not unreasonably
withhold its consent to the inclusion of the Demand Registrable Securities in
the registration statement and that such Registration Statement includes
securities only on behalf of the Company and has been filed or will be filed
within sixty days of the Company's receipt of a Demand Registration Request. The
Demand Registration Rights may be delayed by the Company for a period of sixty
days on one occasion only every twelve months, except in the event of an initial
public offering ("IPO") of its securities. To the extent the Underwriter shall
determine not to include some or all of the Demand Registrable Securities, then
the Demand Registration Rights shall continue to be in force and effect as to
such Demand Registrable Securities which has not been registered. In the event
the Company has filed a Registration Statement under the Act pursuant to an IPO
or will do so within sixty days of its receipt of a Demand Registration request,
the Company shall have the right to delay the exercise of the Demand
Registration Rights until the completion of the Company's IPO; but in no event
shall such delay exceed an aggregate of one hundred twenty (120) days. The
Warrantholder shall not be entitled to more than one Demand Registration request
in any one fiscal year of the Company. For the purposes of this Section 8, the
term, the Underwriter, shall include the representatives of the Underwriters in
any proposed Offering and any other Underwriter or investment banker with which
the Company has or may have a contractual relationship from time to time.
(ii) In the event of an IPO whereby only securities on behalf of
the
<PAGE> 40
Company are being registered and not those of any selling shareholder, the
Warrantholder agrees not to sell, transfer, or otherwise dispose of any Warrant
Stock or Registrable Securities for a period of one hundred eighty (180) days
and shall enter into a customary lock-up agreement required by the Underwriter.
The Warrantholder agrees that stop transfer instructions may be given to the
Company's transfer agent regarding the foregoing lock-up arrangement.
(b) Information and Documents In the event the Company shall be
required by the provisions of this Section 8 to effect the registration of any
securities, the Warrantholder shall furnish, in writing, such information as is
reasonably requested by the Company or the Underwriter or their representatives,
including their representative legal counsel and accountants, for inclusion in
the Registration Statement relating to such Offering and such other information
and documentation as the Company shall request. In addition, the Warrantholder
shall execute and deliver such agreements certifications and other documents,
including, without limitation, selling shareholder instructions,
powers-of-attorney, and custody agreements, as the Company or Underwriter may
reasonably request. The Company's obligation to register any securities
hereunder shall be subject to the fulfilment of the duty of the Warrantholder to
cooperate fully with the Company and the Underwriter and their representatives
in the preparation of the Registration Statement covering any securities
registrable pursuant to Section 8.
(c) Expenses. All expenses incurred in connection with any
registration under this Section 8, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and expenses of any special
audits incident to or required by any such registration are herein called
"Registration Expenses." All underwriting discounts and selling commissions
applicable to any sales of securities herein are called "Selling Expenses." The
Company will pay all Registration Expenses in connection with any registration
pursuant to this Section 8. To the extent allowed by law, the Company shall bear
the Selling Expenses. Otherwise, all Selling Expenses in connection with any
registration pursuant to Section 8 shall be borne by the Company, the
Warrantholder and any other shareholders whose shares are to be included in the
Registration Statement, pro rata in proportion to the shares registered thereby
being sold or registered by each of them. The Warrantholder shall bear the fees
and costs of its own counsel.
(d) Prospectus Delivery The Warrantholder shall comply with the
prospectus delivery requirements of federal or state securities laws in
connection with any registration. If any prospectus becomes outdated,
inaccurate, or misleading, any Warrantholder shall cease using all such
prospectuses upon notice thereof from the Company and shall return all copies of
such prospectuses under control of such person to the Company.
<PAGE> 41
(e) "Market Stand-off" Agreement The Warrantholder shall not sell
or otherwise transfer or dispose of any Registrable Securities or any other
shares of Common Stock held by such persons, for a period of 180 days in
connection with any IPO of the Company covering only the Company's securities
and not those of any selling shareholder. The Warrantholder shall seek the
written consent of the Underwriter to transfer, convey or assign any securities
of the Company during the 180 day period specified above.
(f) No Registration Required The Company shall not be required to
effect a registration under this Section 8 if the Warrantholder would otherwise
be able to publicly sell the number of shares sought to be registered at the
time of the registration without registration pursuant to Rule 144 promulgated
by the SEC as then in effect or pursuant to any other exemption from the
registration provisions of the Act then available to the Warrantholder
(collectively referred to as "Rule 144") so long as the purchaser thereof shall
acquire shares that are not subject to any restriction on resale as may
otherwise be imposed pursuant to Rule 144.
(g) Termination of Rights The Company's obligations to register
the Registrable Securities pursuant to this Section 8 shall cease and terminate
as to the Registrable Securities upon the occurrence of either of the following:
(i) the registration of the Registrable Securities under the Act pursuant to the
provisions of this Warrant; or (ii) at any time the Registrable Securities
become freely transferable without registration under the Act. Upon becoming
subject to the reporting requirements of the 1934 Act, the Company agrees to use
its best efforts to make Rule 144 available to the Warrantholder and to continue
do so until the expiration of the registration rights specified in Section 8
herein.
(h) Duty to Cooperate The Company's obligations to register the
Registrable Securities shall be further contingent upon the Warrantholder
providing its full and complete cooperation to the Company in timely providing
such information, documents, certifications and representations as the Company
and its counsel or any Underwriter may determine to be necessary in order to
prepare, file and otherwise complete the registration process with respect to
the Registrable Securities.
(i) Grant of Power of Attorney. The Warrantholder has granted to
Randy Haag its full power of attorney to act on its behalf and in its stead with
respect to all matters arising out of this Section 8, which power of attorney is
deemed to be coupled with an interest and shall be irrevocable for the term of
the Warrant.
9. No Impairment. The Company will not, by amendment of its articles of
incorporation or bylaws or through any reorganization, transfer of assets,
consolidation, merger, dissolution, or any voluntary action avoid or seek to
avoid the observance or
<PAGE> 42
performance of any of the terms of this Warrant.
10. Miscellaneous Matters.
(a) As used herein, the term "Warrant Stock" shall mean the
Company's presently authorized Common Stock no par value, and stock of any other
series or class into which such presently authorized Common Stock may hereafter
have been converted or changed pursuant to any recapitalization or change in
such Common Stock.
(b) As used herein, the word "person" shall mean an individual or
entity.
(c) This Warrant and the name and address of the holder will be
registered in a Warrant Register that is kept at the principal office of the
Company, and the Company may treat the holder so registered as the owner of this
Warrant for all purposes.
(d) This Warrant shall be governed by and interpreted in
accordance with the internal laws, and not the law of conflicts, of the State of
California.
(e) Successors and assigns. Except as otherwise expressly
provided herein, all covenants and agreements contained in this Warrant by or on
behalf of any of the parties hereto shall bind and inure to the benefit of
respective successors and assigns of the parties to the extent permitted by law.
(f) Attorney Fees. In the event arbitration, suit or action is
brought by any party under this Warrant to enforce any of its terms, and in any
appeal therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorneys' fees to be fixed by the arbitrator, trial court, or
appellate court.
(g) Savings Clause. If any provision of this Warrant, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Warrant, or the application of such provision to
persons or circumstances other than those as to which it is held invalid, shall
not be affected thereby.
(h) Specific Performance. Each party's obligation under this
Warrant is unique. If any party should default in its obligations under this
Warrant, the parties each acknowledge that it may be extremely impracticable to
measure the resulting damages; accordingly, the non-defaulting party, in
addition to any other rights or remedies available, may sue in equity for
specific performance, and upon satisfactory proof thereof, it may be entitled to
obtain such specific performance.
<PAGE> 43
IN WITNESS WHEREOF, the Company has executed this Warrant effective as
of the date first written above.
LEGACY BRANDS, INC.,
a California corporation
By: /s/ THOMAS E. KEES
-----------------------------------------
THOMAS E. KEES, President
By: /s/ CRAIG CONNERTY
----------------------------------------
CRAIG CONNERTY, Chief Financial Officer
<PAGE> 44
EXHIBIT A
SUBSCRIPTION AGREEMENT
_____________________, 19___
To: Legacy Brands, Inc.
The undersigned, pursuant to the provisions set forth in Warrant
No. 96-__ , hereby agrees to subscribe for and purchase ________________ shares
of the Warrant Stock covered by such Warrant, and makes payment herewith in full
for such Warrant Stock at the Exercise Price.
Signature:
------------------------------
Printed Name
and Title:
-----------------------------
Address:
-------------------------------
-------------------------------
-------------------------------
------------------------------------
ASSIGNMENT
FOR VALUE RECEIVED ___________________________________hereby
sells, assigns and transfers all of the rights of the undersigned under Warrant
No. 96-__, with respect to the number of shares of Warrant Stock covered thereby
set forth below unto:
<TABLE>
<CAPTION>
<S> <C> <C>
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
- ------------------------------------------------------------------------------
</TABLE>
------------------------------------------
Dated: _________________________ , 19 __
Signature:
------------------------------
Printed Name
and Title:
-----------------------------
Address:
-------------------------------
-------------------------------
-------------------------------
<PAGE> 45
THIS WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED
FOR INVESTMENT FOR THE HOLDER'S OWN ACCOUNT AND NOT WITH A VIEW TO OR FOR SALE
IN CONNECTION WITH ANY DISTRIBUTION OF THE SECURITIES. NEITHER THE WARRANT NOR
THE SECURITIES HAVE BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF
1933 ("SECURITIES ACT") OR UNDER ANY APPLICABLE STATE SECURITIES LAWS ("BLUE SKY
LAWS"). AN OFFER TO SELL OR TRANSFER OR THE SALE OR TRANSFER OF THIS WARRANT OR
THESE SECURITIES IS UNLAWFUL UNLESS MADE PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR PERMIT, AS APPLICABLE, UNDER THE SECURITIES ACT OR APPLICABLE BLUE
SKY LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION AND/OR QUALIFICATION UNDER THE
SECURITIES ACT AND APPLICABLE BLUE SKY LAWS IS AVAILABLE AND AN OPINION OF
COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY IS PROVIDED TO
THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION OR QUALIFICATION IS NOT
REQUIRED UNDER THE SECURITIES ACT AND APPLICABLE BLUE SKY LAWS.
Warrant No. 98RH-001a
COMMON STOCK PURCHASE WARRANT
JANUARY 1, 1998
THIS CERTIFIES THAT, for value received, Randy Haag ("Warrantholder") is
entitled to subscribe for and purchase from Legacy Brands, Inc., a California
corporation (the "Company"), that number of shares of the Company's Common
Stock, no par value, established in Section 4 (b) hereof at the Exercise Price
(as hereafter determined) at any time from the date hereof to and including the
Expiration Date (as defined below), subject to the terms and conditions stated
herein. For purposes of this Warrant, the term "Expiration Date" shall mean 5:00
p.m. Pacific time on December 31, 2002, except as set forth in Sections 1(a) and
1(b) hereof.
1. Exercise of Warrant.
<PAGE> 46
(a) The rights represented by this Warrant may be exercised, in
whole or in part (subject to the minimum exercise limitation set forth in this
Section 1), by the holder hereof at any time commencing 90 days following the
closing of the Company's initial underwritten public offering of its securities
(the "Initial Offering Period") and continuing to any time on or before the
Expiration date. The Expiration Date shall be extended by an amount of time
equal to the Initial Offering Period (including the 90 day waiting period).
Except as set forth in Section 1(b) hereof, the Warrant shall be exercisable
under any circumstances commencing on April 1, 1999, in which instance the
Expiration Date shall be extended to March 31, 2004. The Warrant shall be
exercised by the surrender of this Warrant and delivery of an executed
Subscription Agreement in the form attached hereto as Exhibit A to the Company
at its principal executive office, or such other place as the Company shall
designate in writing, accompanied by payment for the Warrant Stock (as defined
in Section 10) so subscribed for in cash or check, in good funds or, subject to
the good faith determination by the Company as to the creditworthiness of the
holder at the time, the issuance by the holder of its promissory note to the
Company (the "Note") for up to the full exercise price of all of the warrants,
with any differential payable by cash or check, which Note shall bear interest
at the rate of seven percent (7%) per annum, all due and payable one year from
the date of issuance. Any shares for which a Note shall have been given to the
Company as payment shall not be deemed issued until such time as that portion of
the Note pertaining to such shares shall have been paid in full and the holder
of such shares shall have no rights with respect thereto, including, but not by
way of limitation, the right to vote, nor may such shares be transferred. In the
event of a partial exercise of this Warrant, a substitute Warrant representing
the number of shares of Warrant Stock which were not acquired upon the exercise
of the Warrant shall be issued to the holder of this Warrant. No exercise of
this Warrant may be made for less than one fourth of the number of shares of
Warrant Stock initially subject to this Warrant or such lesser number as shall
then constitute the balance of shares purchasable hereunder.
(b) If at any time prior to the Expiration Date, the Company
shall be engaged in an offering of its securities, including any time
determined, in good faith by the Company or its Underwriter as hereinafter
defined, to be "quiet periods" during which its securities may not be offered
for sale or sold, or if at any other time or for any reason the Company or its
Underwriter (as hereinafter defined) shall, in good faith, determine that these
Warrants may not be exercised ( the period during which such inability to
exercise shall exist shall be referred to as the "Offering Period," which
Offering Period may not in each instance exceed a period of 90 days, it being
recognized that such an Offering Period may both precede and follow an offering
of the securities of the Company, with each such period being a separate
Offering Period for the purposes of this provision), the Expiration Date shall
be extended by the same number of days as the Offering Period.
<PAGE> 47
2. Investment Representation. The holder by accepting this Warrant
represents that the Warrant is acquired for the holder's own account for
investment purposes and not with a view to any offering or distribution and that
the holder has no present intention of selling or otherwise disposing of the
Warrant or the Warrant Stock in violation of applicable securities laws. Upon
exercise, the holder will confirm, in respect of securities obtained upon such
exercise, that the holder is acquiring such securities for the holder's own
account and not with a view to any offering or distribution in violation of
applicable securities laws. The holder acknowledges that the certificate(s)
representing the Warrant Stock issued upon exercise of this Warrant shall be
endorsed with the legend set forth on this Warrant and all other legends, if
any, required by applicable federal, state and foreign securities laws to be
placed on the certificate(s).
3. Validity of Warrant Stock. The Company warrants and agrees that all
shares of Warrant Stock which may be issued upon the exercise of this Warrant
will, upon issuance, be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof. The Company
further warrants and agrees that during the period within which this Warrant may
be exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of Warrant Stock to provide for the exercise of this
Warrant.
4. Exercise Price; Number of Warrant Shares.
(a) The Exercise Price shall be $7.50, subject to adjustment
pursuant to this Section 4 after giving effect to a 1:3 reverse stock split to
be effected by the Company.
(b) The number of shares of Warrant Stock to be issued upon
exercise of this Warrant shall be 100,000 after giving effect to a 1:3 reverse
stock split to be effected by the Company.
(c) Upon occurrence of any of the following, the Exercise Price
and the number of shares of Warrant Stock to be issued upon exercise of this
Warrant shall be adjusted as follows:
(i) If at any time after the date hereof the number of
shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of
shares of Common Stock, then, on the record date of such stock dividend,
subdivision, or split-up, the Exercise Price shall be appropriately
decreased and the number of shares of Warrant Stock issuable on exercise
of this Warrant shall be appropriately increased in proportion to such
increase of outstanding shares.
(ii) If at any time after the date that the 1:3 reverse
stock split of
<PAGE> 48
the Company shall be effective, the number of shares of Common Stock
outstanding is decreased by a combination of the outstanding shares of
Common Stock, then, on the effective date of such combination, the
Exercise Price shall be appropriately increased and the number of shares
of Warrant Stock issuable on exercise of this Warrant shall be
appropriately decreased in proportion to such decrease in outstanding
shares.
(d) All calculations under this Section 4 shall be made to the
nearest cent or to the nearest whole share, as the case may be. No fractional
shares of Warrant Stock shall be issued upon exercise of this Warrant. Any
fractional shares of Warrant Stock which might otherwise be issued upon exercise
of this Warrant shall be rounded to the nearest whole share (with one-half
rounded up).
(e) If the Exercise Price shall be adjusted, the Company shall
prepare and mail to the holder hereof a certificate setting forth the event
requiring the adjustment, the amount of the adjustment, the method by which the
adjustment was calculated, and (after giving effect to the adjustment) the
Exercise Price.
(f) A calculation of any adjustment under this Section 4
evidenced by a certificate of any firm of independent certified public
accountants of recognized standing selected by the Company and satisfactory to
the holder hereof (which may be the firm of independent certified public
accountants regularly employed by the Company) shall be presumed a correct
calculation of the adjustment for purposes of this Section 4. The foregoing
presumption shall constitute a rebuttable presumption, with the party disputing
the calculation bearing the burden of proving the incorrectness of the
calculation.
5. Notice of Certain Events. If at any time:
(a) The Company shall declare any dividend upon the Common Stock,
whether payable in cash, property or capital stock, or make any distribution to
the holders of Common Stock;
(b) There shall be any recapitalization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company with
another corporation;
(c) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(d) The Company shall propose to enter into a transaction not
covered by the preceding paragraphs (a) through (c), then, in each case, the
Company shall give to the holder of this Warrant, at the holder's address
registered on the books of the
<PAGE> 49
Company, not less than 20 days' prior written notice of the proposed event, by
first class certified mail, postage prepaid and return receipt requested, of (i)
the date on which the books of the Company shall close or a record shall be
taken for purposes of ascertaining which stockholders will be entitled to vote
on such reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be; (ii) the date on which the vote
shall be taken concerning such reclassification, reorganization, consolidation,
merger, dissolution, liquidation or winding up, as the case may be; and (iii)
the date on which such dividend or distribution is to be paid or such
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be, is to be effective. Such notice
shall also specify the date as of which the record holders of capital stock of
the Company shall participate in said dividend or distribution or shall be
entitled to exchange their shares of capital stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, dissolution, liquidation or winding up, as the case may be.
6. Transfer of Warrant.
(a) Each assignment of this Warrant shall be deemed a partitioned
right which is separately enforceable by the assignee, transferee or other
beneficiary. Each assignee, transferee or other beneficiary shall be entitled to
the full benefit of the Warrant assigned, subject to any conditions to which the
Warrant is subject and provided always that such assignee, transferee or other
beneficiary shall carry out all the obligations, liabilities and
responsibilities of the holder of the Warrant hereunder. No person, company or
other entity may enjoy the benefit of any Warrant unless it is an accredited
investor as that term is defined in Regulation D of the Securities Act of 1933,
as amended (the "Act"), and such party executes and delivers to the Company
certain subscription documents evidencing the investor's status and has a
pre-existing business or financial relationship with the Warrantholder.
(b) No transfer or assignment of this Warrant shall be made
without compliance with the provisions of Section 2 and the legend set forth on
the first page of this Warrant.
(c) This Warrant may not be assigned, held in trust, or otherwise
transferred to any person or entity in amounts of less than ten percent (10%) of
the number of shares subject to this Warrant.
7. No Stockholder Rights. This Warrant shall not entitle the holder
hereof to any voting rights or other rights as a stockholder of the Company, or
to any other rights whatsoever except the rights herein expressed, and no cash
dividend paid out of earnings or surplus or interest shall be payable or accrue
in respect of this Warrant or the interest represented hereby or the shares
which may be subscribed for and purchased hereunder until and unless and except
to the extent that the rights represented by this Warrant shall be exercised.
<PAGE> 50
8. Reporting Company; Registration Rights
(a) Registration Rights The Warrantholder shall, for a period of
two years from the date of exercise of the Warrant (the "Registration Period")
which Registration Period shall be extended by the amount of time equal to any
Offering Period, have the following registration rights on two occasions only.
(i) If the Warrantholder requests ("Demand Registration
Request") that the Company file a registration statement under the Act
("Registration Statement"), the Company agrees to use its best efforts to file a
Registration Statement covering the shares of Common Stock underlying this
Warrant (collectively the "Demand Registrable Securities") if so requested and
to obtain effectiveness thereof, to file post-effective amendments, and to make
appropriate qualifications under federal and state securities laws as may be
requested except in any jurisdiction where the Company would be required to
execute a general consent to service of process unless otherwise required to do
so by the Act or any applicable law. The Company shall keep such Registration
Statement effective for a period of twelve (12) months. Such rights are
hereinafter referred to as the "Demand Registration Rights." The Company shall
be obligated to file a Registration Statement and include the Demand Registrable
Securities, or any part thereof, only if the Underwriter, as herein defined,
determines, in its sole discretion, that the filing of a Registration Statement
and inclusion of such Demand Registrable Securities will not have a material
adverse affect on a current or proposed offering of any securities of the
Company (the "Offering"), provided that the Underwriter shall not unreasonably
withhold its consent to the inclusion of the Demand Registrable Securities in
the registration statement and that such Registration Statement includes
securities only on behalf of the Company and has been filed or will be filed
within sixty days of the Company's receipt of a Demand Registration Request. The
Demand Registration Rights may be delayed by the Company for a period of sixty
days on one occasion only every twelve months, except in the event of an initial
public offering ("IPO") of its securities. To the extent the Underwriter shall
determine not to include some or all of the Demand Registrable Securities, then
the Demand Registration Rights shall continue to be in force and effect as to
such Demand Registrable Securities which has not been registered. In the event
the Company has filed a Registration Statement under the Act pursuant to an IPO
or will do so within sixty days of its receipt of a Demand Registration request,
the Company shall have the right to delay the exercise of the Demand
Registration Rights until the completion of the Company's IPO; but in no event
shall such delay exceed an aggregate of one hundred twenty (120) days. The
Warrantholder shall not be entitled to more than one Demand Registration request
in any one fiscal year of the Company. For the purposes of this Section 8, the
term, the Underwriter, shall include the representatives of the Underwriters in
any proposed Offering and any other Underwriter or investment banker with which
the Company has or may have a contractual relationship from time to time.
<PAGE> 51
(ii) In the event of an IPO whereby only securities on behalf of
the Company are being registered and not those of any selling shareholder, the
Warrantholder agrees not to sell, transfer, or otherwise dispose of any Warrant
Stock or Registrable Securities for a period of one hundred eighty (180) days
and shall enter into a customary lock-up agreement required by the Underwriter.
The Warrantholder agrees that stop transfer instructions may be given to the
Company's transfer agent regarding the foregoing lock-up arrangement.
(b) Information and Documents In the event the Company shall be
required by the provisions of this Section 8 to effect the registration of any
securities, the Warrantholder shall furnish, in writing, such information as is
reasonably requested by the Company or the Underwriter or their representatives,
including their representative legal counsel and accountants, for inclusion in
the Registration Statement relating to such Offering and such other information
and documentation as the Company shall request. In addition, the Warrantholder
shall execute and deliver such agreements certifications and other documents,
including, without limitation, selling shareholder instructions,
powers-of-attorney, and custody agreements, as the Company or Underwriter may
reasonably request. The Company's obligation to register any securities
hereunder shall be subject to the fulfilment of the duty of the Warrantholder to
cooperate fully with the Company and the Underwriter and their representatives
in the preparation of the Registration Statement covering any securities
registrable pursuant to Section 8.
(c) Expenses. All expenses incurred in connection with any
registration under this Section 8, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and expenses of any special
audits incident to or required by any such registration are herein called
"Registration Expenses." All underwriting discounts and selling commissions
applicable to any sales of securities herein are called "Selling Expenses." The
Company will pay all Registration Expenses in connection with any registration
pursuant to this Section 8. To the extent allowed by law, the Company shall bear
the Selling Expenses. Otherwise, all Selling Expenses in connection with any
registration pursuant to Section 8 shall be borne by the Company, the
Warrantholder and any other shareholders whose shares are to be included in the
Registration Statement, pro rata in proportion to the shares registered thereby
being sold or registered by each of them. The Warrantholder shall bear the fees
and costs of its own counsel.
(d) Prospectus Delivery The Warrantholder shall comply with the
prospectus delivery requirements of federal or state securities laws in
connection with any registration. If any prospectus becomes outdated,
inaccurate, or misleading, any Warrantholder shall cease using all such
prospectuses upon notice thereof from the
<PAGE> 52
Company and shall return all copies of such prospectuses under control of such
person to the Company.
(e) "Market Stand-off" Agreement The Warrantholder shall not sell
or otherwise transfer or dispose of any Registrable Securities or any other
shares of Common Stock held by such persons, for a period of 180 days in
connection with any IPO of the Company covering only the Company's securities
and not those of any selling shareholder. The Warrantholder shall seek the
written consent of the Underwriter to transfer, convey or assign any securities
of the Company during the 180 day period specified above.
(f) No Registration Required The Company shall not be required to
effect a registration under this Section 8 if the Warrantholder would otherwise
be able to publicly sell the number of shares sought to be registered at the
time of the registration without registration pursuant to Rule 144 promulgated
by the SEC as then in effect or pursuant to any other exemption from the
registration provisions of the Act then available to the Warrantholder
(collectively referred to as "Rule 144") so long as the purchaser thereof shall
acquire shares that are not subject to any restriction on resale as may
otherwise be imposed pursuant to Rule 144.
(g) Termination of Rights The Company's obligations to register
the Registrable Securities pursuant to this Section 8 shall cease and terminate
as to the Registrable Securities upon the occurrence of either of the following:
(i) the registration of the Registrable Securities under the Act pursuant to the
provisions of this Warrant; or (ii) at any time the Registrable Securities
become freely transferable without registration under the Act. Upon becoming
subject to the reporting requirements of the 1934 Act, the Company agrees to use
its best efforts to make Rule 144 available to the Warrantholder and to continue
do so until the expiration of the registration rights specified in Section 8
herein.
(h) Duty to Cooperate The Company's obligations to register the
Registrable Securities shall be further contingent upon the Warrantholder
providing its full and complete cooperation to the Company in timely providing
such information, documents, certifications and representations as the Company
and its counsel or any Underwriter may determine to be necessary in order to
prepare, file and otherwise complete the registration process with respect to
the Registrable Securities.
9. No Impairment. The Company will not, by amendment of its articles of
incorporation or bylaws or through any reorganization, transfer of assets,
consolidation, merger, dissolution, or any voluntary action avoid or seek to
avoid the observance or performance of any of the terms of this Warrant.
10. Miscellaneous Matters.
<PAGE> 53
(a) As used herein, the term "Warrant Stock" shall mean the
Company's presently authorized Common Stock no par value, and stock of any other
series or class into which such presently authorized Common Stock may hereafter
have been converted or changed pursuant to any recapitalization or change in
such Common Stock.
(b) As used herein, the word "person" shall mean an individual or
entity.
(c) This Warrant and the name and address of the holder will be
registered in a Warrant Register that is kept at the principal office of the
Company, and the Company may treat the holder so registered as the owner of this
Warrant for all purposes.
(d) This Warrant shall be governed by and interpreted in
accordance with the internal laws, and not the law of conflicts, of the State of
California.
(e) Successors and assigns. Except as otherwise expressly
provided herein, all covenants and agreements contained in this Warrant by or on
behalf of any of the parties hereto shall bind and inure to the benefit of
respective successors and assigns of the parties to the extent permitted by law.
(f) Attorney Fees. In the event arbitration, suit or action is
brought by any party under this Warrant to enforce any of its terms, and in any
appeal therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorneys' fees to be fixed by the arbitrator, trial court, or
appellate court.
(g) Savings Clause. If any provision of this Warrant, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Warrant, or the application of such provision to
persons or circumstances other than those as to which it is held invalid, shall
not be affected thereby.
(h) Specific Performance. Each party's obligation under this
Warrant is unique. If any party should default in its obligations under this
Warrant, the parties each acknowledge that it may be extremely impracticable to
measure the resulting damages; accordingly, the non-defaulting party, in
addition to any other rights or remedies available, may sue in equity for
specific performance, and upon satisfactory proof thereof, it may be entitled to
obtain such specific performance.
IN WITNESS WHEREOF, the Company has executed this Warrant effective as
of the date first written above.
LEGACY BRANDS, INC.,
a California corporation
<PAGE> 54
By: /s/ THOMAS E. KEES
--------------------------------
THOMAS E. KEES, President
By: /s/ CRAIG CONNERTY
--------------------------------
CRAIG CONNERTY,
Chief Financial Officer
<PAGE> 55
EXHIBIT A
SUBSCRIPTION AGREEMENT
______________________, 19___
To: Legacy Brands, Inc.
The undersigned, pursuant to the provisions set forth in Warrant No.
9__-______ , hereby agrees to subscribe for and purchase _____________ shares of
the Warrant Stock covered by such Warrant, and makes payment herewith in full
for such Warrant Stock at the Exercise Price.
Signature:
--------------------------------
Printed Name
and Title:
--------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
ASSIGNMENT
FOR VALUE RECEIVED _______________ hereby sells, assigns and transfers
all of the rights of the undersigned under Warrant No. 9__-______, with respect
to the number of shares of Warrant Stock covered thereby set forth below unto:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated: _____________, 19_____
Signature:
--------------------------------
Printed Name
and Title:
--------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
<PAGE> 1
EXHIBIT 10.23
PROMISSORY NOTE
(AMENDED)
$200,000 June 23, 1998
Roseville, California
FOR VALUE RECEIVED, LEGACY BRANDS INCORPORATED ("Maker" herein) promises to
pay to the order of PAULSON INVESTMENT COMPANY, INC. ("Holder"), the principal
sum of Two Hundred Thousand and no/100ths Dollars ($200,000.00). Holder
expressly waives any and all right to receive any other form of compensation,
other than simple annual interest of ten (10%) percent in connection with this
transaction. Interest shall be computed from March 5, 1998 on the loaned amount
on the basis of a 365-day year or 366-day year, as applicable, and actual days
lapsed from the respective date of the loan. Maker shall from March 5, 1998 have
the privilege of prepaying the principal under this Promissory Note in whole or
in part, without penalty or premium, at any time. All payments hereunder shall
be applied first to interest, then to principal. Payment shall be made in lawful
money of the United States, at Portland, Oregon or such other place as the
Holder hereof may designate.
This Promissory Note shall be payable as follows:
1. In the event the proposed initial public offering of securities of
Maker pursuant to a Registration Statement on Form SB-2, to be underwritten by a
syndicate managed by the Holder (the "Offering"), is closed on or before October
31, 1998, this Promissory Note shall be payable in full at the closing of the
offering. At the option of the Holder, the Holder may deduct such payment from
the net proceeds otherwise payable by the Holder to the Maker at the closing.
2. In the event the Offering has not closed on or before the close of
business on October 31, 1998, this Promissory Note shall thereafter by payable
thirty (30) days after demand for payment by the Holder.
Maker waives diligence, presentment, demand, protest, and notice of any
kind whatsoever. The non-exercise by Holder of any of Holder's rights hereunder
in any instance shall not constitute a waiver thereof in that or any subsequent
instance.
Maker shall pay upon demand any and all expenses, including reasonable
attorney fees, incurred or paid by Holder without suit or action in attempting
to collect funds due under this Promissory Note. In the event an action is
instituted to enforce or interpret any of the terms of this Promissory Note
including but not limited to any action or participation by Maker in, or in
connection with, a case or proceeding under the U.S. Bankruptcy Code or any
successor statute, the prevailing party shall be entitled to recover all
expenses reasonably incurred at, before and after trial, on appeal, and on
review,
<PAGE> 2
Promissory Note
June 23, 1998
Page 2
whether or not taxable as costs, including, without limitation, attorneys'
fees, witness fees (except and otherwise), deposition costs, copying charges
and other expenses.
This Promissory Note is to be construed in all respects and enforced according
to the laws of the State of Oregon.
"MAKER"
LEGACY BRANDS INCORPORATED
By: /s/ THOMAS E. KEES
--------------------------------
Thomas E. Kees
Its: CEO
-------------------------------
Accepted:
"HOLDER"
PAULSON INVESTMENT COMPANY, INC.
By: /s/ LORRAINE MARSFIELD
--------------------------------
Lorraine Marsfield
Its: Senior VP, Research
-------------------------------
<PAGE> 1
EXHIBIT 10.24
[C & K CAPITAL CORPORATION LETTERHEAD]
May 15, 1998
Mr. Todd Fuller
LEGACY BRANDS
FAX: (916) 782-4641
RE: Bridge Loan
Dear Mr. Fuller:
Please hold this letter as an indication of the intent of C & K Capital
Corporation to provide to Legacy Brands a bridge loan under the following terms
and conditions:
- - Up to $500,000 will be invested in Legacy Brands under the following terms:
- - The Loan will have a maturity of August 31, 1998 or five days after the
effective date of an IPO and bear interest at a rate of 12% per annum.
- - The Loan will have a loan "enhancement fee" payout of 25% or $125,000 if the
full amount of the loan is taken down.
- - Up to 100,000 warrants will be allocated to the lenders at the rate of 20% of
the net amount of the bridge loan. The warrants will be exercisable at $6.00
per share, i.e. 20% above the offering price (to be adjusted should the
offering price be adjusted).
- - A due diligence fee of a maximum of $50,000 will be payable by Legacy. This
fee may be reinvested as part of the $500,000 under the same terms at the
option of C & K Capital Corporation.
If these general terms and conditions are acceptable, please contact me.
Sincerely,
/s/ ALEXANDER G. MONTANO
- ---------------------------
Alexander G. Montano
President
<PAGE> 2
[C&K CAPITAL CORPORATION LETTERHEAD]
June 2, 1998
Mr. Thomas E. Kees
Legacy Brands, Inc
2424 Professional Drive, Suite A
Roseville, CA 95661
RE: Bridge Loan
Dear Tom:
This letter is to confirm our conversation to move forward on the bridge
loan terms as stated in our May 15, 1998 term sheet. All of those terms will
remain the same. In regards to our discussion about default, if Legacy is
unable to repay the bridge loan upon maturity, we will require repayment within
one year in four quarterly payments. Each payment will include 25% of the
principal, 25% of the loan enhancement fee and all accrued interest to be
payable on a quarterly basis beginning on September 1, 1998. In addition, the
interest rate will adjust to 15% per annum beginning on September 1, 1998 and
the Warrants associated with this loan will become exercisable at $1.00 per
common share. Please let me know if you have any further questions about these
default provisions.
We are putting together the formal loan documents and expect initial
funding Friday, June 5, 1998. I will inform you if there will be any delays. We
will continue to phase funding as needed up to 500,000 over the next 45 days.
Please keep me posted on your cash requirements so we can accommodate your
needs.
Sincerely,
/s/ ALEXANDER G. MONTANO
- ---------------------------
Alexander G. Montano
President
<PAGE> 1
EXHIBIT 10.25
[VAN DEN BERGH FOODS COMPANY LETTERHEAD]
March 16,1995
Mr. Gregory B. Plunkett
Plunkett Inc.
600 California Street
Suite 1300
San Francisco, CA 94108
Dear Greg,
It was a pleasure to meet with you in Salt Lake City last Friday on the progress
of your Mrs. Fields retail cookie dough product introduction. As I stated then,
Van den Bergh Foods believes this product is a real winner that will enjoy much
success in the marketplace.
I would like to take this opportunity to provide a brief summary of the action
items we discussed:
- VdB will send a letter to yourself and Larry Hodges recommending a
change in shelf life from 6 to 9 months. Upon completion of product
testing and your joint authorization to change, VdB will guarantee
product performance within the new extended shelf life.
- VdB will investigate macadamia nut availability/pricing and advise
Plunkett Inc. of White Chunk Mac Nut product cost.
- VdB will minimize distribution costs by working with Haagen-Dazs
distributors to direct ship them their orders and eliminate third
party warehousing costs. VdB will also take aged inventory out of
Halls and US Cold Storage as fast as our plant storage facilities
can accommodate it.
- Plunkett Inc. and VdB agreed to the following repayment plan out of
Plunkett Inc.'s monthly revenue checks in order to reimburse VdB for
the $827,000 of non-salvageable value from aged inventory:
continued ...
<PAGE> 2
Mr. Gregory B. Plunkett
March 16, 1995
<TABLE>
<CAPTION>
MONTH'S SALES (CASES) DEDUCTIONS
--------------------- ----------
<S> <C>
less than 20,000 $2.00/case
20,000 - 40,000 $1.50/case
more than 40,000 $1.00/case
</TABLE>
- The repayment plan will begin with the March 1995 monthly check.
Based on discussions with our counsel, the terms of this agreement
will be incorporated in the pending Draft Supply Contract.
- February's net check of $36,885.81 was sent via Federal Express to
your attention yesterday.
- Copies of our supply contract, which I have signed, were given to
yourself and Larry Hodges for review and approval. Please advise if
you see any issues.
I look forward to meeting your supply needs for Mrs. Fields frozen cookie dough
and any other new products that you may consider. Please give me a call if I can
ever be of any assistance.
Sincerely,
/s/ GERALD W. HANNA
- --------------------------
Jerry Hanna
V. P. & General Manager - Bakery Products
cc: R.E. Cupples, Jr.
A.I. Friede
J. Wilhelm
J. Hau
J. McVay
M. Wilhelm
<PAGE> 3
________________________________________________________________________________
Author: Arnold Friede at 2859LIHD
Date: 1/15/96 8:51 PM
Priority: Normal
To: Laura Corridan at 2859LIHD
Subject: Haagen-Dazs/Pillsbury--Meeting with Counsel.
- ---------------------------------Forwarded w/Changes----------------------------
Author: Arnold Friede at 2859LIHD 1/15/96 8:50 PM
To: Jim Busby at 2859liha
To: Joe Wilhelm at 2859LIHC
CC: Jerry Hanna at 2859LIHD
CC: Winston F. Scotland at 2859LIHB
CC: Ronald Soiefer at LEVERUSLHEXEC
Subject: Haagen-Dazs/Pillsbury--Meeting with Counsel.
- ---------------------------------Message Contents-------------------------------
Please fax to Walter Merkle, Esq. for information. Thanks.
ARNIE FRIEDE
____________________________________Forward Header
_________________________Subject: Haagen-Dazs/Pillsbury--Meeting
with Counsel.
Author: Arnold Friede at 2859LIHD
Date: 1/15/96 8:50 PM
Jim/Joe:
I was pleasantly surprised today in Minneapolis at the cordial and
professional reception that I was accorded by counsel for Haagen-Dazs/Pillsbury
(Dave Schmitt (General Counsel, Pillsbury Specialty Brands) and Jerry Jenko
(Pillsbury General Counsel)).
In the meeting, I reviewed, among other things, the history of this
transaction and the bases for our conclusion that Haagen-Dazs has no legal
right to offset promotional monies promised by Plunkett against invoices due
and owning to Van den Bergh. In addition, I articulated why, on the basis of
Haagen-Dazs' demand that inventories of "dated" product be built to substantial
levels before distribution would commence, and Haagen-Dazs' ensuing failure
to meet its distribution commitments, it has liability to Van dan Bergh for
some or all of the $1.8 million in obsolete inventory. This was new news to
counsel, and presents a substantial "downside" risk to Haagen-Dazs/Pillsbury in
the event it does not settle the promotional offset claim with us. (I also
offered to help Haagen-Dazs/Pillsbury negotiate a suitable "workout"
arrangement with Plunkett that would provide a possible mechanism for recouping
the amounts that need to be paid to Van den Bergh.
I offered to put into writing for counsel the picture of the situation I
attempted to paint verbally today. This offer was welcomed; it will give counsel
something to go on as they investigate the matter further internally. Pursuing
this moderate course presents the best opportunity for settlement, which I
continue to believe is preferable in this case to litigation. Accordingly, in
the next
<PAGE> 4
several days, I will send my letter to counsel, and let the process run its
course. While I am not optimistic that we will ultimately be able to settle on
reasonable terms, I firmly believe we need to exhaust all possible roads to
settlement before filing a lawsuit in court.
ARNIE FRIEDE
<PAGE> 5
[VAN DEN BERG FOODS COMPANY LETTERHEAD]
January 22, 1996
BY FAX; U.S. MAIL
David E. Schmitt, Esq.
Vice-President and General Counsel
Pillsbury Specialty Brands
200 South Sixth Street
Minneapolis, MN 55402
Re: PLUNKETT, INC.
Dear Dave:
We appreciate the time that you and Jerry Jenko spent with us last Monday.
Our discussion was open and productive. As promised, I write to summarize my
case (and apologize, in advance, for any undue rhetoric below).
1. HAAGEN-DAZS' PROMOTIONAL OFFSET LIABILITY.
You understand my point that the relationship we each had with Plunkett was
independently bilateral. Therefore, Haagen-Dazs had no right to offset
promotional monies owed by Plunkett against amounts due and owing Van den Bergh.
Your argument that Van den Bergh's relationship with Haagen-Dazs was
necessarily a product of the Plunkett/Haagen-Dazs relationship, while arguably
true is so far as it goes, is really beside the point. It overlooks the
objective intent of both Haagen-Dazs and Van den Bergh, as manifested in their
later negotiations and ultimate "contract". In fact, we will be able to prove,
among other things, that the Plunkett/Haagen-Dazs agreement predated any
discussions between Van den Bergh and Haagen-Dazs; that these later discussions
culminated in an independent contract between Van den Bergh and Haagen-Dazs
(albeit a contract not memorialized in a single integrated instrument); that
THIS contract envisioned the relationship between Van den Bergh and Haagen-Dazs
as a direct, arm's length sale and purchase transaction (and that the parties
operated on that basis); and that it was not until Plunkett failed to make
promised promotional payments that Haagen-Dazs first contemplated its self-help
offset strategy.
So while it is true that the written agreement between Plunkett and
Haagen-Dazs placed responsibility for promotional payments squarely on
Plunkett's shoulders, this does not make Plunkett's failure to pay Van den
Bergh's problem (absent an express assumption of that liability,
<PAGE> 6
David E. Schmitt, Esq.
Page Two
January 22, 1996
which did not occur). It is important to remember that Van den Bergh did not
even have a copy of the Plunkett/Haagen-Dazs agreement until I got it from your
colleague, Eileen Gill, in the course of the early settlement discussions a few
weeks ago. I am hard-pressed to understand how Haagen-Dazs could have intended
for Van den Bergh to be liable for a contractual obligation of Plunkett that Van
den Bergh was not even on notice of. Moreover, under the objective theory of
contracts that remains the law under the Uniform Commercial Code, "it takes two
to tango". So even if Haagen-Dazs subjectively intended for Van den Bergh to be
liable for promotional payments that Plunkett failed to make, this would NOT
bind Van den Bergh.
At the end of the day, then, Van den Bergh has a strong case for recovery
of the approximately $915,000 that Haagen-Dazs improperly offset against
obligations for goods sold and delivered by Van den Bergh.(1)
2. HAAGEN-DAZS' OBSOLETE INVENTORY LIABILITY.
At the meeting, I discussed our contention that approximately $1.8 million
in "dated" MRS. FIELDS inventory became obsolete because of Haagen-Dazs' demand
that large inventories be "built-up" before distribution would commence, and
Haagen-Dazs' ensuing failure to meet its distribution commitments. Even though
the inventory that ultimately became "obsolete" was never formally "sold" as
such to Haagen-Dazs, and remained in third party warehouse, it is nevertheless
true that inventories were "built" in reliance on Haagen-Dazs' projections and
promises.
You will find in particular that "build-up" demands, and distribution
promises, which induced Van den Bergh to produce almost 5 million pounds of
cookies, were repeatedly made, and broken, by Jay Stewart at Haagen-Dazs. (See
e.g. Jay Stewart's "Mrs. Fields Volume Projections" (copy of poor quality "fax",
dated November 1, 1994, attached), promising distribution in specific markets by
designated dates that were not met). We have reason to believe this was due,
among other things, (a) to Stewart's failure to get the local Haagen-Dazs
- ------------
(1) As we discussed, there is also a serious question, in at least two respects,
about the underlying validity of a large part of the Haagen-Dazs offsets: (a)
proof is lacking in may cases that actual performance by retailers was rendered
to justify reimbursing Haagen-Dazs for promotional payments; and (b)
Haagen-Dazs' substantial distribution failures undercuts its entitlement to
reimbursement in many cases, even if the retailer performed -- what good is a
"roto" ad for MRS. FIELDS frozen cookies if the product is not available for
purchase. We do not have a firm handle yet on the total of these "invalid"
promotional claims but they are clearly on the order of several hundred thousand
dollars. We expect a firm number from Plunkett's outside auditors in the next
few weeks.
<PAGE> 7
David E. Schmidt, Esq.
Page Three
January 26, 1996
distribution networks throughout the country "on board" before promising what
he could not deliver, and (b) his failure to get clearance in advance from
Pillsbury "corporate" (which delayed the matter while a decision was made
whether to distribute a competing line of frozen cookies).
We appreciate your commitment to look into this aspect of the matter. We
believe that, under a number of legal theories ("detrimental reliance",
"estoppel", "third party beneficiary", etc.), Van den Bergh has a good claim
against Haagen-Dazs for all or part of the $1.8 million obsolete inventory
liability.(2)
3. The "Workout" Arrangement Between Plunkett and Van den Bergh.
In our meeting, I described the "workout" arrangement that Plunkett and
Van den Bergh are about to conclude--Van den Bergh will continue manufacturing
the Mrs. Fields retail frozen cookies; in consideration, among other things,
Van den Bergh will receive an incremental amount per case to amortize the
obsolete inventory liability, and Van den Bergh will take a security interest
in the License Agreement between Plunkett and Mrs. Fields.
Based on my discussions with Walter Merkle, Esq., counsel for Plunkett,
and with Steve Kirchner, President of Capital Bay Securities, the investment
banking firm that raised new capital for Plunkett and now controls its
day-to-day operations, Plunkett is prepared to entertain a similar "workout"
arrangement with Haagen-Dazs (once an agreement is reached on the amount of the
valid underlying promotional claims). Under such an arrangement, upon
repayment to Van den Bergh, Haagen-Dazs would similarly be entitled to an
agreed per case payment in respect of its promotional payment claims against
Plunkett.
I am prepared to do what it takes to facilitate Haagen-Dazs' participation
in an appropriate "workout" arrangement with Plunkett, and I encourage you to
give that option serious consideration. That will address, as best possible at
this time, your stated concern that Haggen-Dazs will be left "holding the bag"
in any settlement.
* * *
In our meeting, I mentioned the numerous relationships that Pillsbury and
Van den Bergh, and Unilevel and Grand Met, have with one another, as a reason
why settlement of this matter
- --------------
(2) Van den Bergh has a separate claim against Plunkett for this same amount
based on Plunkett's "misforecasts" (which in turn were based largely on
Haagen-Dazs' projections). This is being addressed in our "workout"
arrangement with Plunkett. Van den Bergh understands that it cannot recover
twice for the same thing.
<PAGE> 8
David E. Schmitt, Esq.
Page Three
January 22, 1996
makes sense for each of us. I firmly believe that litigation should be the
avenue of last resort. But it is something we will pursue if we cannot reach a
fair and equitable negotiated settlement.
I look forward to hearing from you, Best personal regards.
Sincerely,
/s/ ARNOLD I. FRIEDE
----------------------------
Arnold I. Friede
cc Jerome J. Jenko, Esq.
Senior Vice President & General Counsel
The Pillsbury Company
Walter Merkle, Esq.
Kay & Merkle
Counsel for Plunkett, Inc.
<PAGE> 9
MRS. FIELDS VOLUME PROJECTIONS
[COPY ILLEGIBLE]
<PAGE> 10
[VAN DEN BERGH FOODS COMPANY LETTERHEAD]
June 14, 1996
Mr. Tom Kees
President and CEO
Legacy Brands, Inc.
2200-B Douglas Blvd.
Suite 100
Roseville, CA 95661
Dear Tom,
We have reviewed the long term debt owed to Van den Bergh Foods by Legacy Brands
which now stands at $1.7M after recent adjustments. We are prepared to detail
the amount to your satisfaction.
At the conclusion of our review and in response to your request for a
settlement, we are prepared to accept 2/3 of that amount to settle the debt owed
to us. That would total $1,133,026.00. Rather than go through some lengthy
process, I will simply say this is bottom line from our perspective.
If the above is unworkable, I must advise you that a signed Supply Agreement
that we have negotiated is a requirement to continue to do business per my
Board.
I look forward to your response.
/s/ JERRY HANNA
- --------------------------
Jerry Hanna
V. P. & General Manager
<PAGE> 11
[LEGACY LETTERHEAD]
October 9, 1996
Gerald W. Hanna
Vice President & General Manager
Bakery Products Group
Van den Bergh Foods
2200 Cabot Drive
Lisle, Illinois 60532
Dear Jerry:
This is to conform our agreement with respect to the liability of Legacy
Brands, Inc., ("Legacy") to Van den Bergh Foods ("Van den Bergh") for certain
out of code inventory in the approximate amount of $1.6 million.
Upon the successful completion of Legacy's initial public offering ("IPO"),
Legacy will agree to pay the lesser of $1,100,000 or .667 of the amount
outstanding as of the date of the IPO in full satisfaction of its obligation
for such out of code inventory.
Any additional amounts that are outstanding as a result of the aforementioned
transaction must be agreed upon by Legacy and Van den Bergh and will be
amortized at a maximum rate of $2 per case of product.
Sincerely,
/s/ THOMAS E. KEES
- --------------------
Thomas E. Kees
President and CEO
<PAGE> 12
[VAN DEN BERGH FOODS COMPANY LETTERHEAD]
November 01, 1996
Legacy Brands, Inc
2200-B Douglas Blvd., Suite 100
Roseville, CA 95661
Attention: Thomas E. Kees
RE: Guarantee and Indemnity
Dear Sir:
We guarantee that no article we sell or otherwise deliver to you is
adulterated or misbranded within the meaning of the Federal Food, Drug, and
Cosmetic Act ("the Federal Act"), or within the meaning of any state statutes
the provisions of which are identical with or substantially the same as those
found in the Federal Act ("the State Acts"), nor is it an article which may not
under the Federal Act or the State Acts be introduced into interstate or
intrastate commerce; provided however that our guaranty does not extend to
violations of the Federal Act or the State Acts because of causes beyond our
reasonable control.
We agree to indemnify, defend, and same and hold you harmless from and
against any and all losses, claims, damages (except consequential and punitive
damages), and expenses, including reasonable attorneys' fees, arising from
claims of bodily injury or property damage resulting or alleged to result from
the use of an article sold by us to you, unless the claim is based on a
warranty not authorized by us or results from the negligence or other wrongful
act or omission other than our own.
If articles we sell or otherwise deliver to you are distributed in the
State of California, we guarantee that the same do not contain a listed chemical
for which a warning is required under the California Safe Drinking Water and
Toxic Enforcement Act of 1986 and implementing regulations ("Proposition 65")
or, if any such warning is required, that it is being provided; however, we do
not guarantee against such articles becoming altered in a manner that would
create a violation of Proposition 65 after shipment by us because of causes
beyond our reasonable control.
<PAGE> 13
Page Two
This guarantee is contingent, of course, on our being promptly notified of
any alleged breach hereof and being permitted to deal therewith in our own
discretion and through our own representative or attorney. This is a continuing
guarantee and may be revoked on written notice thereof; it supersedes any
previous arrangement between us relating to the subject matter.
Sincerely,
VAN DEN BERGH FOODS CO., A DIVISION
OF CONOPCO, INC.
By: /s/ ARNOLD I. FRIEDE
-----------------------------------------
Arnold I. Friede
Assistant Secretary
AIF:jk
<PAGE> 14
<TABLE>
<S><C>
- ------------------------------------------------------------------------------------------------------------------------------------
DATE (MM/DD/YY)
ACORD CERTIFICATE OF LIABILITY INSURANCE PAGE 1 OF 1 11-01-96
- ------------------------------------------------------------------------------------------------------------------------------------
PRODUCER THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION
Millis Corroon Corporation of New York 8040 ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE
7 Hanover Square HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND OR
New York NY 10004-2594 ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW.
(212) 344-8888 -------------------------------------------------------------------
COMPANY National Union Fire Insurance Co. of Pittsburgh PA
Guy Johnson A
- ------------------------------------------------------------------------------------------------------------------------------------
INSURED COMPANY Insurance Co. of the State of Pennsylvania
B
Unilever United States, Inc. & Its Subsidiary ------------------------------------------------------------------
CONOPCO Inc. & its div Van Den Bergh Foods Co. COMPANY Illinois National Insurance Company
2200 Cabot Drive C
Lisle IL 60532 -------------------------------------------------------------------
COMPANY
D
- ------------------------------------------------------------------------------------------------------------------------------------
COVERAGES
THIS IS TO CERTIFY THAT THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY
PERIOD INDICATED, NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH
THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE
TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. LIMITS SHOWN MAY HAVE BEEN REDUCED BY PAID CLAIMS.
- ------------------------------------------------------------------------------------------------------------------------------------
CO
LTR TYPE OF INSURANCE POLICY NUMBER POLICY EFFECTIVE POLICY EXPIRATION LIMITS
DATE (MM/DD/YY) DATE (MM/DD/YY)
- ------------------------------------------------------------------------------------------------------------------------------------
A GENERAL LIABILITY RMGL 0179103 01-JUL-1996 01-JUL-1997 GENERAL AGGREGATE $2,000,000
---------------------------------
[X] COMMERCIAL GENERAL LIABILITY PRODUCTS-COMP/CP AGG $2,000,000
---------------------------------
[ ] CLAIMS MADE [X] OCCUR PERSONAL & ADV INJURY $2,000,000
---------------------------------
[ ] OWNER'S & CONTRACTOR'S PROT EACH OCCURRENCE $2,000,000
---------------------------------
[ ] ____________________________ FIRE DAMAGE
(Any one fire) $ 25,000
[ ] ---------------------------------
MED EXP
(Any one person) $ 5,000
- ------------------------------------------------------------------------------------------------------------------------------------
A AUTOMOBILE LIABILITY RMCA1353468 (A/S) 01-JUL-1996 01-JUL-1997
COMBINED SINGLE LIMIT $2,000,000
[X] ANY AUTO RWCA1353469 (TX) ---------------------------------
[X] ALL OWNED AUTOS BODILY INJURY $
[X] SCHEDULED AUTOS (Per person)
[X] HIRED AUTOS ---------------------------------
[X] NON-OWNED AUTOS BODILY INJURY $
[ ] ___________________________ (Per accident)
[ ] ---------------------------------
PROPERTY DAMAGE $
- ------------------------------------------------------------------------------------------------------------------------------------
GARAGE LIABILITY AUTO ONLY - EA $
ACCIDENT
[ ] ANY AUTO ---------------------------------
[ ] ___________________________ OTHER THAN AUTO ONLY
[ ] ---------------------------------
EACH ACCIDENT $
--------------------------------
AGGREGATE $
- ------------------------------------------------------------------------------------------------------------------------------------
EXCESS LIABILITY EACH OCCURRENCE $
---------------------------------
[ ] UMBRELLA FORM AGGREGATE $
[ ] OTHER THAN UMBRELLA FORM ---------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
A WORKERS COMPENSATION AND RMWC2119659 (A/S) 01-JUL-1996 01-JUL-1997 [X] WC STATU- [ ] OTH-
EMPLOYERS' LIABILITY TORY LIMITS ER
A RMWC2119660 (AZ, ID, OR) ---------------------------------
THE PROPRIETOR/ EL EACH ACCIDENT $2,000,000
B PARTNERS/EXECUTIVE [ ] INCL RMWC1362530 DED MC, VA ---------------------------------
B OFFICERS ARE: [ ] EXCL RMWC1362529 DED (A/S) EL DISEASE-POLICY $2,000,000
LIMIT
---------------------------------
EL DISEASE-EA $2,000,000
EMPLOYEE
- ------------------------------------------------------------------------------------------------------------------------------------
B OTHER RMWC1362531 DED (TX)
C RMWC1362532 DED (IL)
EXCESS WORKERS COMP & COV A - STAT X/S $350,000
A EMPLOYERS LIABILITY RMQS10174560 01-JUL-1996 01-JUL-1997 COV B - $1,650,000 X/S $350,000
- ------------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OPERATIONS/LOCATIONS/VEHICLES/SPECIAL ITEMS
- ------------------------------------------------------------------------------------------------------------------------------------
CERTIFICATE HOLDER CANCELLATION
- ------------------------------------------------------------------------------------------------------------------------------------
Legacy Brands, Inc. SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED BEFORE THE
2200-B Douglas Blvd. Suite 100 EXPIRATION DATE THEREOF, THE ISSUING COMPANY WILL ENDEAVOR TO MAIL
30 DAYS WRITTEN NOTICE TO THE CERTIFICATE HOLDER NAMED TO THE LEFT,
Roseville, CA 95661 BUT FAILURE TO MAIL SUCH NOTICE SHALL IMPOSE NO OBLIGATION OR LIABILITY
OF ANY KIND UPON THE COMPANY, ITS AGENTS OR REPRESENTATIVES.
Attention: Thomas E. Kees AUTHORIZED REPRESENTATIVE
[SIG]
- ------------------------------------------------------------------------------------------------------------------------------------
ACORD 25-5 (1/95) (c)ACORD CORPORATION 1988
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 15
[LEGACY BRANDS, INC. LETTERHEAD]
December 11, 1996
Mr. Gerald W. Hanna
Vice President and General Manager
Bakery Products Group
Van den Bergh Foods Company
2200 Cabot Drive
Lisle, IL 60532
Re: Obsolete Inventory Obligation
Dear Jerry:
I felt it appropriate to forward this letter to you to put in writing some of
our recent discussions and my hope that we will be able to satisfy the Legacy
obligation to Van den Bergh in a professional manner that is satisfactory to
both parties. Although neither of us created this problem, I know that we both
realize that it is one that needs to be resolved promptly.
As I know you are aware, both myself and Legacy are very pleased to have
developed the relationship with you and Van den Bergh over the past year. Legacy
has generated approximately $3.5 million in sales and Van den Bergh has been
instrumental in helping Legacy to date, with only some correctable "hiccups."
Through this year, in addition to the profit that Van den Bergh has made on
sales, Legacy has also been able to pay down approximately $400,000 on the
obsolete inventory obligation.
As we discussed, Jerry, the initial public offering for Legacy Brands which was
scheduled to proceed as early as last September, is now slated on the National
Securities calendar for early February 1997. The reason for the delay has
nothing to do with National Securities, or investor enthusiasm, or the stock
market, but rests primarily in the hands of the independent accountants, Coopers
& Lybrand. C & L had to get their hands around an abundance of missing
documentation, litigation and capital formation issues remaining from prior
management. These issues have all now been addressed and the registration
statement for Legacy will be filed with the Securities and Exchange Commission
within the next twenty days.
<PAGE> 16
You have offered Legacy a reduced pay-off of the inventory obligation by
December 31, 1996 to help clean up the Van den Bergh financial statements with
regard to the merger of Van den Bergh and the Thomas J. Lipton Company.
Initially we thought we could take advantage of that offer by December 31, 1996;
however, the only source of capital available to accomplish that pay off now is
through the initial public offering. To restructure or re-characterize the
obligation at this time would force us to completely redo the Legacy financial
and registration statements and could seriously impair our initial public
offering. With the initial public offering less than ninety days away, this
certainly is not a prudent move on Legacy's part.
I would, however, suggest that in the spirit of attempting to accommodate Van
den Bergh and ensure the success of the offering and enable us to pay Van den
Bergh off in full, that we could allow Van den Bergh to deduct an additional 20%
of each gross check after the $2.00 per case allowance has been deducted until
the total obligation is satisfied. While I understand that the $2.00 per case
payment applies dollar for dollar to the obligation, I would expect that the
extra 20% payment would apply to the previously agreed upon discounted amount
upon payment in full. We would need to discuss the mechanics.
Again, Jerry, we cannot express enough our appreciation of both you and Van den
Bergh, and the cooperation you have demonstrated over the past year. Both of us
have worked diligently to recover the inventory loss for the benefit of Van den
Bergh when we all know that the likelihood of recovery a year ago was slim at
best. It would be greatly appreciated if you could bear with us for just this
last final push so that we can resolve the whole matter in its entirety.
Please give me a call with any thoughts you might have.
Sincerely,
/s/ THOMAS E. KEES
- --------------------------
Thomas E. Kees
President and CEO
Legacy Brands, Inc.
<PAGE> 17
Post-It # Fax Note 7671
--------------------------------------------
DATE # of pages
--------------------------------------------
TO Rob Kresimir FROM
--------------------------------------------
Co./Dept. Co.
VAN DEN BERGH --------------------------------------------
FOODS COMPANY Phone # Phone #
--------------------------------------------
Fax # Fax #
2200 Cabot Drive --------------------------------------------
Lisle, Illinois 60532
(708) 805-5300 --------------------------------------------
Vice President & General Manager
Bakery Products Group
December 27, 1996
Mr. Thomas E. Kees
President and CEO
Legacy Brands, Inc.
2200-B Douglas Blvd. Suite 100
Roseville, CA 95661
RE: Obsolete Inventory Obligation
Dear Tom:
I am in receipt of your letter of December 11, 1996 which discusses your IPO
and your proposal to pay down the existing Obsolete Inventory Obligation that
now stands at approximately $1,450,000 through December, 1996.
First let me say how pleased I am with progress made by the new management
group and I am further encouraged by the IPO and the strength of the support of
your pending investment community. The reversal of fortunes is a tribute to
your group, and certainly makes the future look bright. In that context, we are
pleased to be your vendor of choice and hope to play an even more valuable role
as you continue to grow.
As you are aware we offered to reduce the principle of the obligation to 2/3's
of amount if paid in 1996, however, delaying the IPO plus the extraordinary
cost of a bridge loan has made that repayment in 1996 not possible. In your
letter of December 11, 1996 you have offered to continue to pay off the
principle amount at $2.00 per case plus an additional 20% of the gross check
(less the $2.00 per case amount) with the 20% applied to the 2/3's of the
principle. On a prolonged basis this method would take around 1-1/2 years to
eliminate the debt.
In our conversations you made it clear to me that your intentions always were
to repay Van den Bergh once the IPO funds were received which would be in the
March-April, 1997 timeframe as of today's present knowledge. Let me propose two
options:
<PAGE> 18
1. Legacy continues to pay $2.00/case until the debt is eliminated, however
the debt will stay constant at $1,000,000.00 regardless of the per case
repayment amount. In other words, it is in your best financial interests
to pay the $1,000,000.00 as early as possible.
2. Legacy repays at the rate of $4.00/case until the entire debt is repaid.
The debt as of January 1, 1997 becomes an interest bearing note at 1-1/2
over prime -- compounded monthly. A monthly premium amount of $60,000.00
is established in case the volume falls below 15,000 cases. The debt can
be paid in full at any time by paying the principle amount.
Either method is acceptable but no mixing of the two. As always we will provide
the legal paperwork which will be beneficial to the IPO. I will be back in the
office after January 8, 1997 to finalize this agreement. I hope you are having
a happy holiday and will talk to you next year.
Sincerely,
/s/ Jerry Hanna
- -------------------
Gerald W. Hanna
V.P./G.M. - Bakery Division
Van den Bergh Foods Company
<PAGE> 19
[VAN DEN BERGH FOODS COMPANY LETTERHEAD]
March 4, 1997
Mr. Thomas E. Kees
President & CEO
Legacy Brands, Inc.
2200-B Douglas Blvd.
Suite 100
Roseville, CA 95661
Dear Tom:
The purpose of this letter is to confirm to you that Van den Bergh Foods Company
and Haagen Dazs (a division of the Pillsbury Company, Grand Metropolitan PLC)
settled their dispute involving promotional offsets taken by Haagen Dazs on
invoicing of products supplied by Van den Bergh Foods Company. Additionally, Van
den Bergh Foods Company will take no further action against Haagen Dazs
regarding the obsolete inventory issue reference earlier in the dispute. We
consider these matters closed. Terms of the settlement are confidential and will
not be disclosed.
Sincerely,
/s/ GERALD W. HANNA
- ----------------------------------
Gerald W. Hanna
Vice President and General Manager
<PAGE> 1
EXHIBIT 10.26
THIS AGREEMENT made this 1st day of March, 1997.
BETWEEN:
329985 ONTARIO LIMITED, c.o.b. under the firm name and style of KISKO
PRODUCTS, a corporation duly incorporated under the laws of the Province of
Ontario and having the registered office in the City of Scarborough, in the
Municipality of Metropolitan Toronto,
(hereinafter called the "Seller")
OF THE FIRST-PART
- - and -
LEGACY BRANDS, INC.,
a corporation duly incorporated under the laws of the State of ______________
and having its registered office in Roseville, in the State of California,
United States of America,
(hereinafter called the "Buyer")
OF THE SECOND PART
WHEREAS the Seller manufactures a frozen water ice confection known as a
freeze pop ("product"), which goods shall be finished goods packaged for retail
sale:
AND WHEREAS the Buyer wishes the Seller to sell the product to the Buyer,
such product to be packaged, named and labelled in accordance with the Buyer's
specifications, under the name "GUMBY POPS";
NOW THEREFORE in consideration of the mutual covenants hereinafter
contained, the parties hereto hereby agree as follows:
1. MANUFACTURE AND SALE OF PRODUCT
1.1 The Seller shall manufacture and sell to the Buyer and the Buyer shall
buy from the Seller, the product, under the terms and conditions hereinafter
set forth, and, to the best of the Seller's abilities, in such quantities as
the Buyer may from time to
<PAGE> 2
2
time order.
1.2 The product shall be manufactured in accordance with the
specifications set out in Schedule "A" attached hereto.
2. PACKAGING
2.1 The Seller shall package the product for the Buyer, in accordance
with the specifications outlined in Schedule "A" attached hereto.
2.2 The packaging shall consist of folding cartons, laminated film master
cases which the Seller will provide as specified (the "packaging"). The Seller
will order the packaging from a packaging manufacturer, and shall be
responsible to that packaging manufacturer for payment, but between the parties
hereto, it is agreed that payment for the printing plates, art work and steel
rule dies will be made as follows;
(i) The Buyer shall supply finished art work to the packaging
manufacturer;
(ii) The Buyer shall be limited to reimbursing the Seller for the cost of
certain packaging components represented by cost of art work, film
separation, printing plates and steel rule dies. The costs for these
components is estimated in Schedule "B". If the costs exceed the
estimates, the excess must be approved by the Buyer;
(iii) Such payment shall be in addition to the price of the product and
shall be invoiced by the Seller and paid by the Buyer at the rate of
twenty five ($.25) cents for each case of product sold to the Buyer
until the total cost of the art work, film separation, printing plates
and steel rule dies paid by the Seller to the packaging manufacturer
has been reimbursed to the Seller by the Buyer;
(iv) If on the 30th day of September, 1997, the Seller has not been fully
reimbursed for the cost of the art work and princing plates by the
payment method set out in 2.2(ii), the Buyer shall forthwith pay the
balance of such cost to the Seller.
<PAGE> 3
3
3. DELIVERY
3.1 The Buyer shall submit purchase orders for the product at least three
(3) weeks prior to delivery.
3.2 Delivery of the packaged Product shall be made by the Seller and risk of
loss and damage to the packaged product shall pass to the Buyer upon delivery
of the Product to the Buyer's appointed customer.
3.3 The Seller will be responsible to pay customs duty going into the United
States of America and the relevant customs clearance charges on the Product.
The Buyer appoints the Seller as its agent to arrange and manage the shipping
of the Product according to the Buyer's instructions as to destination. The
Buyer is responsible to pay for all freight charges as set out in Schedule "C".
If the shipping costs exceed the amounts set out in Schedule "C", the increase
shall be approved by the Buyer before shipping the Product.
4. PRICES AND TERMS OF PAYMENT
4.1 The prices to be paid by the Buyer for the product shall be in
accordance with Schedule "D" attached hereto.
4.2 All prices are stated as f.o.b. the Seller's facility in Markham,
Ontario, Canada.
4.3 The Seller shall invoice the Buyer for the product sold, and the Buyer
will, on or before the 30th day following the date on which the product is
invoiced, pay the Seller in full for the product so invoiced. A cash discount
of two (2%) per cent of the invoiced price will be allowed for payment received
by the Seller on or before the 20th day following the date on which the product
is invoiced.
4.4 On the 30th day of September in any year, the Seller shall invoice the
Buyer for all product and packaging which the Seller has on hand and not
delivered, and which has been ordered by the Buyer in its purchase orders.
Payment of such invoice shall be in accordance with paragraph 4.3 hereof. The
Buyer will not be responsible to pay for any Product or Packaging which is not
ordered by the Buyer, PROVIDED it is understood that the Buyer will still pay
for any Packaging which is not
<PAGE> 4
4
ordered by it where the packaging manufacturer has required a standard order
(not a custom order) up to ten (10%) larger.
4.5 All monetary amounts expressed herein shall be in United States dollars.
4.6 The Buyer will not be responsible for any cost not expressly denoted in
the Agreement.
5. FORCE MAJEURE
The Seller shall not be responsible for failing to meet obligations due
to causes beyond its reasonable control.
6. INSURANCE
The Seller shall maintain sufficient product liability insurance to
satisfy any obligation arising as a result of this Agreement and, in any event,
no less than Five million ($5,000,000.00) dollars of insurance coverage and
such insurance policy shall include the Buyer as a co-insured party to the
policy. Upon request, the Seller shall provide the Buyer with certificates of
insurance properly executed showing such insurance to be in full force and
effect.
7. LIMITED WARRANTY
7.1 In providing manufacturing services under the agreement, the Seller
makes no warranties whatsoever, either express or implied, oral or written, in
fact or by operation of law or otherwise, except as expressly stated in this
agreement.
7.2 Subject to paragraph 8.1, the Seller warrants and represents to the
Buyer that the product sold to the Buyer shall, at the time of delivery to the
Buyer's customer, be guaranteed to meet the specifications for manufacture and
packaging of the product, set out in Schedules "A" attached hereto, and shall
be in good, usable and merchantable condition and fit for its intended purpose.
7.3 The remedy of the Buyer for breach of the above warranty shall be limited
<PAGE> 5
5
to the replacement of the defective product or credit against the invoice price
of the defective product, at the option of the Seller. There shall be no
liability for any other claim or loss, whether direct or indirect, incidental
or consequential, or for loss of profit.
8. RELATIONSHIP
Each party in performing its obligations and duties hereunder shall be
conclusively deemed to be an independent contractor and not under the control
and supervision of the other and nothing in this agreement shall be read to
create any partnership, joint venture, trust or other fiduciary relationship
between them.
9. TERMINATION
Either party may terminate this agreement, with or without cause, by
written notice. Termination shall be effective One hundred and eighty (180)
days after receipt of notice. Termination shall not discharge the Buyer for any
amounts due the Seller. Additionally, in the event of termination of this
agreement, provisions which by their terms are intended to continue shall so
survive and shall continue to apply to Products delivered to the Buyer.
10. HEADINGS
The headings of the sections of this Agreement are inserted for
convenience only and do not constitute part of this Agreement.
11. FINAL AGREEMENT
This Agreement expresses the entire and final agreement between the
parties thereto with respect to all of the matters herein set forth; and its
execution has not been induced by, neither do any of the parties hereby rely
upon, not regard as material, any representations or promise whatsoever not
incorporated herein and not made a part hereof; and, it shall not be altered,
amended or qualified except by memorandum in writing signed by the parties
hereto; and any alteration, amendment
<PAGE> 6
6
or qualification thereof shall be null and void and shall not be binding upon
the parties hereto unless made and recorded as aforesaid.
12. GOVERNING LAW
This Agreement shall, in all respects, be governed by and construed in
accordance with the laws of the province of Ontario.
13. NO ASSIGNMENT
This agreement shall not be assigned by either party without the prior
written consent of the other party.
IN WITNESS WHEREOF the parties hereto have respectively executed this
agreement the day and year first above written.
329985 ONTARIO LIMITED LEGACY BRANDS; INC.
Per: Per: /s/ THOMAS E. KEES
------------------------- ------------------------
Name: LESLIE JOSEPHS Name: Thomas E. Kees
-----------------------
Title: President Title: President & CEO
----------------------
Date: Date: 5/28/97
------------------------ -----------------------
<PAGE> 7
SCHEDULE A
Product manufacturing and packaging specifications.
Manufacturing: Product to be manufactured is frozen water ice confections in six
flavors and colors:
<TABLE>
<CAPTION>
Color Flavor
----- ------
<S> <C>
Red Cherry
Blue Raspberry
Orange Orange
Yellow Tropical
Purple Grape
Green Lime
</TABLE>
Formulations are based on existing Klsko flavor and color profiles. All flavors
and colors have been reviewed and approved by Legacy.
Packaging: Product is to be packaged in 1.25 oz. sealed film packets, Eighteen
packets (three each flavor) per carton, 12 carton per shipping case. Cases will
be packed 100 per pallet for shipment.
Approximate dimensions of cartons and cases are as follow:
Carton - 6.75 x 1.5 x 8.75
Case - 18 x 9.25 x 7.75
Pallet - 10 layers x 10 layers
Product is considered to be acceptable if all of the above conditions are met
and product is delivered to customer in good salable condition with leaker rate
of less than 1%.
<PAGE> 8
SCHEDULE B
Estimated cost of packaging components:
Artwork Film Separations & Printing Plates:
Folding carton - $700
Film packets - $720
Art Costs, Printing Plates & Steel Rule Dies:
Shipping container - $1,222
<PAGE> 9
SCHEULE D
Cost of product:
Product - Eighteen 1.25oz packets per carton packed twelve per case
Case cost - $5.46 U.S. Dollars
F.O.B. - Markham, Ontario
<PAGE> 10
SCHEDULE C
Estimated truckload freight rates - shipment of 12/18/1.25oz. Freeze Pops (U.S.
Dollars)
<TABLE>
<CAPTION>
Freight Per Total
Cities Rates($) Case Cases($)
- ------ -------- ---- --------
<S> <C> <C> <C>
Indianapolis 752.00 0.34 5.80
Grand Rapids 575.00 0.26 5.72
Boston 972.00 0.44 5.90
Baltimore 1092.00 0.50 5.96
Cleveland 531.00 0.24 5.70
Cincinnati 663.00 0.30 5.76
Columbus 620.00 0.28 5.74
Milwaukee 796.00 0.36 5.82
Pittsburgh 575.00 0.26 5.72
Philadelphia 840.00 0.38 5.84
Reading 840.00 0.38 5.84
Buffalo 398.00 0.18 5.64
Rochester 575.00 0.26 5.72
Syracuse 663.00 0.30 5.76
New York City 972.00 0.44 5.90
California 1729 0.87 6.33
</TABLE>
<PAGE> 1
EXHIBIT 10.28
AMENDMENT NUMBER 2 TO PLACEMENT AGENT AGREEMENT
This Amendment Number 2 to Placement Agent Agreement, is entered into
between Legacy Brands, Inc., a California corporation, (the "Company") and
Capitol Bay Securities (the "Placement Agent") as of November 27, 1997, with
respect to the following facts.
The Company retained the Placement Agent to assist the Company in
raising financing through a private placement of Common Stock in June
1997. The terms and conditions under which the Placement Agent conducted
the offering were set forth in a Placement Agent Agreement, dated June
25, 1997. which was amended on August 27, 1997 (the "Placement Agent
Agreement"). The private placement was terminated on November 27. 1997.
The parties wish to make certain amendments to the Placement Agent
Agreement, which are described below.
IN VIEW OF THE FOREGOING FACTS, and for good and valuable consideration, receipt
of which is duly acknowledged, the parties agree as follows:
1. Acknowledgment of Agreement. The parties hereby acknowledge that the
Placement Agent Agreement and the amendment to the Placement Agent Agreement,
were valid and binding obligations of the parties, and were effective as of the
date set forth on such agreements.
2. Nominee on Board of Directors. The Parties agree to eliminate the
requirement in the Placement Agent Agreement that the Company shall cause one
nominee of the Placement Agent to be elected to the Company's Board of
Directors, but wish to continue to allow the Placement Agent the right to have
one representative (the "Observer") attend Board of Directors' meetings as a
non-voting observer only. To carry out the intent of the parties, the parties
agree to amend paragraph 4a of the Placement Agent Agreement as follows:
a. The first two sentences and the penultimate sentence of
paragraph 4a of the Placement Agent Agreement are eliminated.
b. The Parties hereby agree that the Placement Agent's right to
have the Observer attend Board of Directors' meetings shall extend for a period
of three years after the date of this Amendment Number 2 to the Placement Agent
Agreement.
c. The Company shall pay the Observer the same amount of
compensation, under the same terms, as the Company pays each nonemployee
director from time to time for serving as a member of the Board of Directors of
the Company.
-1-
<PAGE> 2
d. The period during which the Placement Agent may be allowed to
have an Observer attend meetings of the Board of Directors of the Company may be
extended by the mutual written consent of the Company and the Placement Agent.
Nothing in this Amendment Number 2 to the Placement Agent Agreement shall create
any obligation of either party to agree to any extension of those periods.
3. Warrants/Shares. Paragraph 12 of the Placement Agent Agreement is hereby
eliminated. In lieu of granting warrants to the Placement Agent pursuant to that
provision, the Company hereby agrees to grant the Placement Agent: (i) a warrant
to purchase up to 148,000 shares of Common Stock of the Company; and (ii) 46,000
shares of the Common Stock of the Company pursuant to the terms of a warrant and
share purchase agreement in the form attached hereto as Exhibit A (the "Warrant
Purchase Agreement") and;
4. Registration Rights. Paragraph 15 of the Placement Agent Agreement is
hereby eliminated. The registration rights with respect to the warrants to be
issued to the Placement Agent shall be as set forth in the Warrant Purchase
Agreement.
5. Elimination of Right of First Refusal. Section 16 of the Placement Agent
Agreement is hereby eliminated.
6. Elimination of Investment Banker Services. Paragraph 17 of the Placement
Agent Agreement is hereby eliminated.
7. Indemnification. Paragraph 8 of the Placement Agent Agreement is hereby
amended by inserting the following as a new subparagraph "d" to Paragraph 8.
"d. The parties understand that Gregory Plunkett. the former
President and Chief Executive Officer of the Company ("Plunkett"), has
filed suit against the Company in the State of California, County of San
Francisco. Each party to this Agreement agrees to indemnify, defend and
hold the, other party harmless from and against all claims, costs,
liabilities and damages which the other party may incur in connection
with the suit brought by Plunkett, or any related claim or suit which
Plunkett may bring, if such claims, costs, liabilities or damages
resulted from any willful grossly negligent or negligent action of that
party or any omission by that party which constitutes willful
misconduct, gross negligence or negligence by that party."
8. Rights to Receipt of Compensation. Except for the payments to be made to
the Observer pursuant to Paragraph 2(c) of this Amendment, or for payments
required to indemnify the Placement Agent as provided in the Placement Agent
Agreement, as amended, Capitol Bay (on behalf of itself and its directors,
officers, shareholders and principals) waive all rights which it has or may have
for payment of any form of compensation or reimbursement of expenses by the
Company under the Placement Agent Agreement or pursuant to any other agreement
or arrangement between the parties.
-2-
<PAGE> 3
9. Effect of Amendment. This Amendment amends but does not supersede the
terms of the placement Agent Agreement, except as expressly set forth herein.
All other terms and conditions of the placement Agent Agreement shall remain in
full force and effect, other than those terms which expired on the termination
of the private placement.
10. Counterparts. This Amendment may be executed in counterparts (including
facsimile copies), each counterpart of which will be deemed an original, but all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 2 to Placement
Agent Agreement as of the date first above written.
LEGACY BRANDS, INC. CAPITOL BAY SECURITIES
/s/ Thomas E. Kees, President /s/ Stephen C. Kircher, President
- -------------------------------- --------------------------------
Thomas E. Kees, President Stephen C. Kircher, President
/s/ Craig C. Connerty, /s/ [SIG]
- -------------------------------- --------------------------------
Craig C. Connerty, Secretary [not legible], Secretary
-3-
<PAGE> 4
EXHIBIT A
WARRANT PURCHASE AGREEMENT
<PAGE> 1
EXHIBIT 10.29
WARRANT AND SHARE PURCHASE AGREEMENT
THIS AGREEMENT, dated as of November 27, 1997, is entered into between
Legacy Brands, Inc., a California corporation (the "Company") and Capitol Bay
Securities ("Capitol Bay") with respect to the following facts:
Capitol Bay has provided assistance to the Company in connection
with a private placement of the securities of the Company from
June through November, 1997. Effective November 27, 1997, Capitol
Bay and the Company agreed to amend the Placement Agent Agreement
dated June 25, 1997 as previously amended August 27, 1997. As part
of the consideration for agreeing to this amendment, Capitol Bay
has requested that it be given and the Company has agreed to provide,
a warrant to purchase shares of Common Stock of the Company and
shares of the Common Stock of the Company.
IN VIEW OF THE FOREGOING FACTS, the parties hereby agree as follows:
1 Purchase and Sale. For the consideration set forth herein, the Company
agrees to sell to Capitol Bay, and Capitol Bay hereby agrees to purchase from
the Company, a warrant to purchase a maximum of 148,000 shares of Common Stock
of the Company. The warrant shall be governed by the terms and conditions set
forth in Exhibit A to this Agreement (the "Warrant") which Warrant contains a
provision exempting such Warrant and the shares issuable thereunder from
adjustment in case of a reverse stock split at any time prior to the completion
of the Company's initial public offering of its Common Stock. In addition, the
Company hereby sells to Capitol Bay, and Capitol Bay hereby agrees to purchase,
46,000 shares of the Common Stock of the Company (the "Shares").
2 Consideration. The Warrant and the Shares are being sold to Capitol Bay in
exchange for its agreement to amend the Placement Agent Agreement in the manner
specified in the Second Amendment to Placement Agent Agreement.
3 Closing. The purchase and sale of the Warrant and the Shares shall take
place effective as of the effective date of this Agreement at the offices of the
Company or at such other time, date and location as the parties mutually agree
(the "Closing"). At the Closing, the Company shall deliver to Capitol Bay a duly
executed Warrant dated as of the Closing and share certificates representing the
Shares.
4 Representation and Warranties of the Company. The Company represents and
warrants to Capitol Bay, which representations shall be true and correct as of
this date and as of the Closing.
4.1 Due Incorporation, Good Standing. The Company is duly
incorporated, validly existing and in good standing under the laws of the State
of California. The Company has full corporate power and authority to operate its
business in the manner in which that business is presently
-1-
<PAGE> 2
conducted. The Company is qualified to do business in all jurisdictions in
which its activities require such qualifications.
4.2 Authorized Shares. The Company is authorized to issue a maximum of
5,000,000 shares of Common Stock, of which 3,333,545 shares are presently
issued and outstanding. The shares of Common Stock issued upon proper exercise
of the Warrant (the "Warrant Shares") shall be validly issued, fully paid and
nonassessable. The Company has taken all corporate action, including but not
limited to approval by its Board of Directors, required to authorize the
execution and performance of this Agreement by the Company, the grant of the
Warrant and the issuance of the Warrant Shares to Capitol Bay.
4.3 No Conflict. Neither the execution, delivery or performance of
this Agreement by the Company, nor the offer, issuance, sale and delivery of
the Shares, the Warrant and the Warrant Shares, does or will: (i) conflict with
or violate the Articles of Incorporation or Bylaws of the Company; (ii)
conflict with or result in a breach of any of the conditions or provisions of,
or constitute a default under, any agreement, mortgage, instrument or evidence
of indebtedness; or (iii) require the consent of any shareholder, trustee or
creditor of the Company.
5 Representations and Warrants or Capitol Bay
5.1 Authorization. Capitol Bay has obtained all required approvals and
taken all corporate action necessary to allow it to enter into this Agreement,
purchase the Warrant and carry out all of the other obligations which it is
required to perform under the terms of this Agreement.
5.2 Purchase for Investment. Capitol Bay is purchasing the Shares,
the Warrant and the Warrant Shares issuable thereunder for investment purposes
only and not with a view toward the resale of the Shares, Warrant or Warrant
Shares. Capitol Bay understands that Shares, the Warrant and the Warrant Shares
have not been registered under the Securities Act of 1933, as amended (the
"Act") pursuant to an exemption from the registration requirements set forth in
Section 4(2) of the Act. Capitol Bay further understand that, because these
securities have been issued pursuant to that Section of the Act, the Shares,
the Warrant and the Warrant Shares constitute "Restricted Securities" as
defined in Rule 144 of the Securities and Exchange Commission. Capitol Bay
understands that it will not be able to sell, assign or otherwise transfer the
Shares, the Warrant or the Warrant Shares unless those securities are
subsequently registered under the Act or an exemption from registration is
available for such transfer. As a result of this fact, Capitol Bay further
understands that the Shares, the Warrant and the Warrant Shares will be subject
to substantial restrictions on resale under federal securities laws and that
these restrictions may prevent Capitol Bay from liquidating its investment in
Company for the foreseeable future.
5.3 Sophistication -- Investment Experience. Capitol Bay is a
securities broker/dealer and has substantial expertise and experience in
evaluating and investing in businesses such as the Company. Furthermore, Capitol
Bay is very familiar with the business, financial condition, management and
prospects of the Company and, based upon its pre-existing business relationship
with the Company, is able to evaluate properly the risks inherent in an
investment in the Company.
-2-
<PAGE> 3
5.4 Access to Information. Capitol Bay has had access to detailed
information regarding the Company's business, financial condition, management
and prospects, has made inquiries of management and of such other persons as it
has deemed necessary and appropriate to evaluate an investment in the Company,
and has conducted its own independent investigation of the Company to the
extent it has deemed necessary and appropriate. Capitol Bay has received
answers to its inquiries regarding the Company which it deems to be adequate
for the purpose of properly evaluating an investment in the Company.
5.5 Lack of Public Market. Capitol Bay acknowledges and understands
that there is currently no market for the Warrant or the Common Stock of the
Company and it is uncertain whether any such market will develop in the
foreseeable future. In addition, even if a public market for the Common Stock
may develop in the near future, it is uncertain how liquid a market in the
Company's Common Stock may be. As a result, Capitol Bay may find it difficult
and, possibly impossible, to sell or otherwise liquidate the Shares, the
Warrant or the Warrant Shares and therefore must bear the risk that it may
not be able to liquidate that investment for the foreseeable future.
5.6 High Risk-Investment. Capitol Bay understands that the Company is
engaged in a highly competitive business. Many of the Company's competitors
have substantially greater financial resources than does the Company. Capitol
Bay understands that the Company has incurred substantial indebtedness, during
the course of its existence, has never operated at a profit for any quarter or
year during its existence, and will need a substantial infusion of equity
capital (in addition to any funds received upon exercise of the Warrant) in
order to achieve the goals in its business plans. In view of the financial
condition of the Company and other risk factors, Capitol Bay understands that
this is a high risk investment and that it is possible it could lose the entire
amount of its investment.
5.7 Limited Resale. Capitol Bay is purchasing the Warrant and the
Warrant Shares purchasable thereunder for investment purposes only and not with
a view toward the resale of that Warrant and those shares. The Company has not
registered the Shares, the Warrant or the Warrant Shares under the Act and,
therefore, Capitol Bay understands that these securities constitute "Restricted
Securities" as defined in Rule 144 of the Securities and Exchange Commission.
Capitol Bay understands that it will not be able to sell, assign or otherwise
transfer the Shares, the Warrant or the Warrant Shares unless they are
subsequently registered under the Act or an exemption from registration is
available for such transfer. The Shares, Warrants and Warrant Shares shall
contain legends which provide substantially as follows:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE
SHARES MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT PERTAINING TO THE
SHARES UNDER THE ACT OR UNLESS THE HOLDER CAN DEMONSTRATE, TO THE
SATISFACTION OF THE CORPORATION, THAT THE SHARES ARE BEING TRANSFERRED
PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE ACT.
-3-
<PAGE> 4
6 Conditions to Closing. The obligations of the parties to complete the
purchase and sale of the Warrant pursuant to this Agreement are subject to and
conditioned upon: (i) the performance by the other party (or demonstration by
that party that it is unconditionally willing and able to perform) all of its
obligations under this Agreement; and (ii) the truth and accuracy of all
representations and warranties made by the other party pursuant to this
Agreement.
7 Covenants. For such period as the Warrant remains exercisable, the Company
agrees that it will reserve sufficient shares out of its authorized capital
stock to allow Capitol Bay to exercise the Warrant in full.
8 Registration Rights. If at any time after its initial underwritten public
offering, but not later than January 31, 2003, the Company shall decide to
register any of its securities for sale under the Securities Act of 1933, as
amended (the "Act"), Capitol Bay shall have the right to request that some or
all of the Warrant Shares and the Shares herein be included in such
registration, subject to the terms, conditions, limitations and procedures set
forth below:
8.1 Definitions. For the purposes of this Agreement, the following terms
shall have the meanings set forth below:
8.1.1 "Act" shall mean the Securities Act of 1933, as amended.
8.1.2 "Registration" The term "register" or "registration" shall
mean or apply to the registration of the securities of the Company for sale
pursuant to the Act on any form prescribed by the Securities and Exchange
Commission, other than: (i) any registration on Form S-8; (ii) any registration
on any other form pertaining to the registration of the Common Stock of the
Company for issuance solely to employees, directors, consultants or advisors in
connection with compensatory stock or stock option plans or agreements (other
than those for compensation for assistance in obtaining financing for the
Company); or (iii) a registration statement relating solely to a transaction to
which Securities and Exchange Commission Rule 145 (or any successor rule or
regulation) applies.
8.2 Notification. If the Company wishes to register any of its
securities, whether for its own account or the account of a security holder or
holders, the Company shall promptly give notice of the proposed registration to
Capitol Bay (the "Registration Notice"). If Capitol Bay wishes to include some
or all of the Warrant Shares or Shares herein in any such registration, Capitol
Bay shall give notice of its desire to so include those shares in the
registration no later than 10 days after receipt of the Registration Notice
from the Company.
8.3 Underwritten Offering. The Company shall not be obligated to include
any of the Warrant Shares or Shares herein in the registration statement if such
registration statement if the underwriter in connection therewith, in its sole
discretion, determines that the sale or inclusion of such Warrant Shares or
Shares or both will materially adversely affect the success of such offering.
Capitol Bay will be deemed to have waived its rights to such Registration Rights
if it does not provide timely
-4-
<PAGE> 5
notice to the Company of its intension to include the shares in the registration
statement and the registration statement is declared effective by the SEC.
8.4 Right to Terminate/Withdraw Registration. The Company shall have
the right to terminate or withdraw in its sole discretion any registration
initiated by it prior to the effectiveness of that registration, regardless of
whether Capitol Bay has elected to include its Warrant Shares or Shares in that
registration. Capitol Bay shall also have the right to withdraw any or all of
Capitol Bay's shares from any registration upon notice to the Company at any
time before the registration statement becomes effective.
8.5 One-Time Exercise. Capitol Bay shall have the right to request
the Company to include its Warrant Shares or Shares in a registration under the
Act only one time. The foregoing notwithstanding, if the Company withdraws a
registration statement prior to it becoming effective, Capitol Bay withdraws all
of its shares from a registration statement before it becomes effective, if the
underwriter shall have determined not to include some or all of the Warrant
Shares or Shares, or if an underwritten public offering as described in Section
is terminated before any of the securities registered thereunder are sold,
Capitol Bay may exercise its registration rights in connection with a subsequent
registration of securities by the Company to the extent that shares for which a
request to be included was made which was not satisfied for the reasons stated
herein.
8.6 Registration Requirements and Procedures. In connection with
any registration described in this Section:
8.6.1 Copies of Documents. The Company shall furnish to
Capitol Bay such reasonable number of copies of the registration statement,
preliminary prospectuses, final prospectuses and such other documents as
Capitol Bay may reasonably request
8.6.2 State Qualification. The Company shall advise Capitol
Bay of all states in which the Warrant Shares are qualified or registered under
the various state "blue sky" securities laws.
8.6.3 Notification. The Company shall notify Capitol Bay,
promptly after it shall receive notice thereof, of the time when the
registration statement, or amendment to a registration statement, has become
effective or a supplement to any prospectus has been filed with the Securities
and Exchange Commission. The Company shall also notify Capitol Bay whether any
stop order has been entered by the Securities and Exchange Commission or any
other governmental agency in connection with the securities to be sold pursuant
to the registration statement.
8.6.4 Information by Capitol Bay. Capitol Bay shall furnish to
the Company such information regarding Capitol Bay and the Warrant Shares or
Shares as the Company may request which the Company reasonably believes is
required in connection with any registration, qualification or compliance
referred to in this Section. Capitol Bay shall promptly furnish such information
and shall otherwise cooperate with the Company in connection with the foregoing.
-5-
<PAGE> 6
8.7 Costs and Expenses. The Company shall pay all expenses incurred in
connection with the registration and public offering of the Warrant Shares or
Shares, including but not limited to its legal and accounting expenses, filing
fees and printing costs and underwriter's charges, except that, to the extent
that the underwriter or underwriters charge a commission, discount or fee based
on the proceeds from the sale of the Warrant Shares or Shares, such charges
shall be borne by Capitol Bay. Capitol Bay shall pay all legal, accounting and
other expenses it incurs in connection with the registration of the Warrant
Shares or Shares.
8.8 Indemnification.
8.8.1 By Company. The Company shall indemnify and hold Capitol Bay
and its officers, directors, employees and owners harmless against all expenses,
claims, losses, damages or liabilities, including but not limited to any of the
foregoing incurred in settlement of any litigation, arising out of or based on
any untrue statement or alleged untrue statement of a material fact contained
in any registration statement, prospectus or other document or any amendment or
supplement thereto, incident to any such registration or qualification or based
on any omission or alleged omission to state 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, or any violation by the
Company of the Act or any rule or regulation of the Securities and Exchange
Commission applicable to the Company in connection with any such registration
or qualification.
8.8.2 By Capitol Bay. Capitol Bay will, if any of its Warrant
Shares or Shares are registered pursuant to this Section, indemnify and hold
harmless the Company, each of its directors and officers, each underwriter and
each person who controls the Company or any underwriter within the meaning of
Section 15 of the Act and all other shareholders whose shares are being
registered in accordance with that registration statement, against all claims,
losses, damages and liabilities based on or arising out of any untrue statement
or alleged untrue statement of a material fact contained in any such
registration statement, prospectus or other document, or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
such persons for any legal or other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action. This Section shall only apply to the extent that the untrue statement
or alleged untrue statement or omission or alleged omission is made in the
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information Capitol Bay furnished
to the Company and stated to be specifically used for inclusion in that
document.
8.8.3 Notification. Each party entitled to indemnification under
this Section (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after the
Indemnified Party has actual knowledge of any claim as to which indemnify may
be sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party and the Indemnified
-6-
<PAGE> 7
party may participate in the defense at that party's expense, provided further
that the failure of any Indemnified Party to give notice as provided under this
subsection shall not relieve the Indemnifying party of its obligations under
this Section unless the failure to give notice is materially prejudicial to the
Indemnifying Party's ability to defend that action and provided further that the
Indemnifying Party shall not assume the defense for matters as to which there is
a conflict of interest or separate and different defenses. No Indemnifying
Party, in the defense of any claim or litigation, shall, except with the consent
of the Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party a release from all liability
in respect.
9 Market Stand-Off Agreement
9.1 General Restrictions on Sale. Capitol Bay agrees that, in connection
with any public offering of the Company's securities, upon the request of the
Company or the underwriters managing that public offering, Capitol Bay will not
sell or otherwise dispose of any Shares, this Warrant or Warrant Shares without
the prior written consent of the Company or the underwriters for such period as
the Company or the underwriters may specify. Capitol Bay agrees to execute a
separate written agreement not to sell the Warrant or such shares if so
requested by the Company or the underwriter. The foregoing limitation shall not
apply to the sale of any Warrant Shares or Shares which are registered under the
Act upon the exercise of Capitol Bay's registration rights as provided in
Section 8.
9.2 De-Minimus Exception to Sale. Notwithstanding Section 9.1, Capitol Bay
may sell during the period described in Section 9.1 a maximum of 5,000 of the
Warrant Shares or Shares after the completion of an underwritten public offering
other than the initial underwritten public offering of the Company, provided
that all sales of Warrant Shares or Shares shall be conducted in full compliance
with applicable securities laws.
10 Applicability to Subsequent Purchasers of Warrant, Warrant Shares or Shares.
The rights of Capitol Bay to have the Company register the Warrant Shares or
Shares pursuant to Section 8, and the obligations of Capitol Bay not to sell or
otherwise transfer their Warrant Shares or Shares during the period described in
Section 9, will be assigned and be binding upon any purchaser of the Warrant or
any Warrant Shares or Shares if: (i) the total number of Warrant Shares or
Shares purchaseable upon exercise of the portion of the Warrant being
transferred equals or exceeds 5,000 shares; or (ii) the number of Warrant Shares
or Shares purchased by such assignee exceeds 5,000 shares. The foregoing
notwithstanding, the limitations described in Section 9 pertaining to the sale
of Warrant Shares or Shares shall not apply to Warrant Shares or Shares that
have been sold pursuant to an effective registration statement under the Act.
-7-
<PAGE> 8
11 Miscellaneous.
11.1 Governing Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of California, excluding any
principles of conflicts of law which may require the application of the laws of
another state.
11.2 Entire Agreement -- Amendment. This Agreement, and all
attachments hereto, represents the entire agreement and understanding with
respect to the subject matter set forth herein and supersedes, in its entirety,
all previous and contemporaneous agreements or understanding, whether oral or
written, between the parties. This Agreement may not be amended, modified or
terminated except by means of a writing which is signed by both parties.
11.3 Notices. All notices which are required to be delivered
pursuant to this Agreement shall be in writing and shall be sent to the
addresses set froth below each party's signature or to such other address as
the party to whom the notice is being sent shall advise the other party in
writing. Notices shall be delivered either personally, by recognized overnight
courier (such as Federal Express, DHL, Airborne Express, UPS Overnight or
Express Mail), or by first class mail, postage prepaid.
11.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original of this Agreement.
IN WITNESS WHEREOF, the parties have entered into this Agreement on the date
first above written.
LEGACY BRANDS, INC. CAPITOL BAY SECURITIES
/s/ THOMAS E. KEES /s/ STEPHEN C. KIRCHER
- ------------------------------ --------------------------------
Thomas E. Kees, President Stephen C. Kircher, President
/s/ CRAIG CONNERTY /s/ LISA McCORGAR
- ------------------------------ --------------------------------
Craig Connerty, Secretary [Lisa McCorgar], Secretary
Address:
2424 Professional Drive, Suite A Address:
Roseville, CA 95661 2424 Professional Drive
Roseville, CA 95661
-8-
<PAGE> 9
EXHIBIT A
FORM OF WARRANT
-9-
<PAGE> 1
EXHIBIT 10.30
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE
SECURITIES MAY NOT BE SOLD, ASSIGNED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THE WARRANT
OR SUCH SHARES UNLESS THE HOLDER HEREOF CAN DEMONSTRATE THAT SUCH TRANSFER MAY
BE MADE IN THE ABSENCE OF SUCH REGISTRATION.
Name and Address of Holder: Number of Shares Purchasable: 148,000
Capitol Bay Securities Date: January 30, 1998
2424 Professional Drive
Roseville, CA 95661 Expires January 30, 2003
COMMON STOCK PURCHASE WARRANT
LEGACY BRANDS, INC.
For good and valuable consideration, the receipt and adequacy of which are
duly acknowledged, Legacy Brands, Inc., a California corporation (the "Issuer")
hereby grants to the person or persons designated above as the "Holder" a
warrant (the "Warrant") to purchase from the Issuer that number of shares of
fully paid and non-assessable of Common Stock of the Issuer (the "Warrant
Shares") as is set forth above at a price of $7.50 per share (the "Purchase
Price"), subject to certain adjustments as provided herein.
1. METHOD OF EXERCISE.
1.1 GENERAL. The Holder may exercise this Warrant in full or in part,
beginning on the first anniversary date of this Warrant and at any time
thereafter before the time and date set forth above by surrendering this
Warrant, together with a duly executed notice of exercise in the form attached
to this Warrant, to the Issuer at the Issuer's principal address accompanied by
payment, in cash or by bank check payable to the order of the Issuer, in the
amount of the Purchase Price. The Holder shall be treated for all purposes as
the holder of such shares of record as of the close of business on the date
that the Holder completes all steps necessary to exercise this Warrant and the
Issuer receives the documents described above. If this Warrant is exercised in
part, the Holder shall surrender this Warrant in the manner and at the place
above. Upon any such partial exercise, the Issuer, at its expense, will issue
and deliver to the Holder a new warrant containing the same expiration date and
provisions as this Warrant, for the number of shares not yet purchased. If
there is more than one Holder, the shares of Common Stock shall be issued in
the name of all Holders unless the Issuer receives a notification, signed by
all Holders, that the shares are to be issued in a different name or in the
name of one Holder alone.
1.2 If at any time prior to the Expiration Date, the Issuer shall be
engaged in an offering of its securities, including any time determined, in
good faith by the Issuer or its underwriter, to be "quiet periods"
-1-
<PAGE> 2
during which its securities may not be offered for sale or sold, or if at any
other time or for any reason the Issuer or its underwriter shall, in good
faith, determine that this Warrant may not be exercised (the period during
which such inability to exercise shall exist shall be referred to as the
"Offering Period," which Offering Period may not in each instance exceed a
period of 90 days, it being recognized that such an Offering Period may both
precede and follow an offering of the securities of the Issuer, with each such
period being a separate Offering Period for the purpose of this provision), the
Expiration Date shall be extended by the same number of days as the Offering
Period.
1.3 ALTERNATIVE FORMS OF PAYMENT. The Issuer, at its sole discretion,
may allow the Holder to exercise this Warrant by the surrender of shares of the
Issuer's stock owned by the Holder with a value, as determined by the Issuer,
equal to the Purchase Price, provided that if the Holder is subject to
short-swing profit liability under Section 16 of the Securities Exchange Act,
the timing of the exercise must satisfy the requirements of Rule 16b-3 of the
Securities and Exchange Commission.
1.4 DELIVERY OF STOCK CERTIFICATES UPON EXERCISE. As soon as practicable
after the exercise of this Warrant, and in any event within 30 days thereafter,
the Issuer, at its expense, will cause to be issued in the name of the Holder a
certificate or certificates for the number of fully paid and non-assessable
shares of Common Stock which the Holder has purchased. In lieu of any
fractional share to which the Holder would otherwise be entitled, the Issuer
may pay the Holder cash equal to such fraction multiplied by the then current
fair market value of one full share of Common Stock, together with any other
stock or other securities or property (including cash, where applicable) to
which the Holder is entitled upon such exercise.
1.5 WHEN EXERCISABLE. The Holder may exercise this Warrant at any time
beginning as of the first anniversary date of this Warrant until January 30,
2003 at 5:00 p.m. Pacific Time (the "Expiration Date").
2. STOCK DIVIDENDS, STOCK SPLITS, COMBINATIONS.
2.1 GENERAL. If the Issuer pays a dividend in the form of Common Stock
or effects a split or subdivision of the outstanding shares of Common Stock
without payment of any consideration by such holders of the Common Stock, then,
as of the date of such dividend distribution, split or subdivision, the
Purchase Price shall be proportionately decreased and the number of shares of
Common Stock issuable on exercise of this Warrant shall be increased in
proportion to the increase in the shares of Common Stock outstanding. If the
number of shares of Common Stock outstanding is decreased by a reverse stock
split or other combination of the outstanding shares of Common Stock without
the payment of consideration to the holders of those shares, then, following
the effective date of the reverse stock split or combination, the Purchase
Price shall be proportionately increased and the number of shares of Common
Stock issuable on exercise of this Warrant decreased in proportion to the
decrease in the number of shares of Common Stock outstanding. The Issuer shall
promptly deliver to the Holder a notice stating any adjustment under this
Warrant in the Purchase Price and the number of shares of Common Stock which
may be purchased upon exercise of this Warrant, accompanied by a brief
statement of the facts requiring that adjustment.
2.2 EXEMPTED REVERSE STOCK SPLIT. Notwithstanding anything to the
contrary in Section 2.1, if there is a reverse stock split of the Common Stock
prior to the completion of the Issuer's initial public offering of Common
Stock, the number of shares purchasable upon exercise of this Warrant and the
exercise price shall not be adjusted as a result of that reverse stock split.
-2-
<PAGE> 3
3. SUBJECT TO WARRANT PURCHASE AGREEMENT. Additional rights, obligations and
restrictions of the Holder with respect to the Warrant and the Warrant Shares
are set forth in a Warrant Purchase Agreement, dated as of November 27, 1997,
between the Issuer and the initial Holder of this Warrant (the "Warrant
Purchase Agreement"). Upon acceptance of this Warrant, the Holder hereby agrees
to be bound by the terms and conditions of the Warrant Purchase Agreement.
4. RESTRICTED SECURITIES. Except to the extent that the Warrant Shares may be
registered under the Act pursuant to the terms of the Warrant Purchase
Agreement, each certificate evidencing the Warrant Shares shall bear the
following legend:
THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"). THESE SHARES MAY NOT BE SOLD, TRANSFERRED
HYPOTHECATED OR OTHERWISE TRANSFERRED IN ANY WAY IN THE ABSENCE OF
A REGISTRATION STATEMENT UNLESS THE HOLDER CAN DEMONSTRATE THAT SUCH
TRANSFER MAY BE MADE WITHOUT REGISTRATION UNDER THE ACT.
THESE SHARES WERE INITIALLY PURCHASED PURSUANT TO THE TERMS OF A
WARRANT PURCHASE AGREEMENT, DATED AS OF NOVEMBER 27, 1997, AND ARE
SUBJECT TO CERTAIN LIMITATIONS ON RESALE PURSUANT TO THE TERMS OF
THAT AGREEMENT. A COPY OF THAT AGREEMENT MAY BE OBTAINED, WITHOUT
CHARGE, FROM THE SECRETARY OF THE CORPORATION AT THE CORPORATION'S
PRINCIPAL EXECUTIVE OFFICES. ALL TRANSFERS IN VIOLATION OF THESE
SALE RESTRICTIONS SHALL BE VOID.
5. SHAREHOLDER RIGHTS. The Issuer shall deliver to the Holder all information
which the Issuer delivers to its shareholder generally, including but not
limited to annual and quarterly reports, proxy and information statements and
notices of shareholders meetings. Except with regard to the right to receive
information as provided herein, the Holder shall not be entitled to any other
rights as a shareholder of the Issuer until such time, and to the extent, that
the Holder exercises this Warrant and purchases the Warrant Shares.
6. ASSIGNMENT. Subject to any restrictions which may be imposed on the
assignment of this Warrant under applicable securities laws, the Holder may
assign this Warrant or any portion thereof upon the execution and delivery to
the Issuer of a Warrant Assignment Form, substantially in the form attached to
this Warrant, together with this Warrant. Upon receipt of this Warrant and the
form of assignment, the Issuer shall issue to the assignee or assignees a
Warrant or Warrants.
-3-
<PAGE> 4
7. MISCELLANEOUS. This Warrant may not be amended, or any right hereunder
waived, except by an instrument in writing signed by both the Issuer and the
Holder. This Warrant is being delivered in California and shall be construed
and enforced in accordance with and governed by the laws of that State. The
headings in this Warrant are for purposes of reference only, and shall not
limit or otherwise affect any of the terms hereof.
LEGACY BRANDS, INC.
/s/ THOMAS E. KEES
----------------------------------
Thomas E. Kees, President
/s/ CRAIG C. CONNERTY
----------------------------------
Craig C. Connerty, Secretary
-4-
<PAGE> 5
FORM OF WARRANT EXERCISE
Date: _____________, ____.
Legacy Brand, Inc.
2424 Professional Drive, Suite A
Roseville, CA 95661
Attn: Secretary
Dear Sir or Madam:
I, ______________________, on this _______ day of ________________, 19__
hereby irrevocably exercise this Warrant for and purchase _________ of the
number of shares of Common Stock of Legacy Brands, Inc. purchasable with this
Warrant at a price of $_________ per share, per the rights afforded me under my
Common Stock Purchase Warrant dated January 30, 1998. Enclosed is my payment of
$_________ representing payment in full for the shares referred to above. Please
deliver certificates representing the shares purchased hereby to the address
set forth below:
______________________________________
(Signature of Holder)
______________________________________
(Street Address)
______________________________________
(City, State, Zip Code)
<PAGE> 6
ASSIGNMENT
Date: _____________, _____.
Legacy Brands, Inc.
2424 Professional Drive, Suite A
Roseville, CA 95661
Attn: Secretary
Dear Sir or Madam:
For consideration received, I hereby assign and transfer to the person
whose name and address appears below my right to purchase __________ shares
of the Common Stock of Legacy Brands, Inc. (the "corporation") pursuant to
the enclosed warrant and hereby appoint __________________________________
as my attorney, with full power of substitution, to effect the transfer of
the aforementioned warrant of the books of the corporation.
Name and Address of Transferee:
___________________________________ __________________________________
(Signature of Holder)
___________________________________
___________________________________ __________________________________
(Printed Name of Holder)
___________________________________
<PAGE> 1
Exhibit 10.32
[LEGACY BRANDS LETTERHEAD]
January 30, 1998
Stephen C. Kircher, Manager Stephen C. Kircher, President
C. Brands Management LLC Capitol Bay Group
2424 Professional Drive Capitol Bay Securities
Roseville, CA 95661 2424 Professional Drive
Roseville, CA 95661
Re: CONVERSION OF PROMISSORY NOTES-INDEMNIFICATION AGREEMENT.
Dear Steve:
I would like to memorialize the understanding which we reached on this
date between Legacy Brands, Inc. ("Legacy") and C. Brands Management LLC ("C.
Brands") concerning the conversion to Legacy Common Stock ("Legacy Stock") of
principal and accrued interest owing under two promissory notes payable by
Legacy to C. Brands (the "Notes") as well as certain other related matters
involving Capitol Bay Group ("CapBay") and Capitol Bay Securities ("CBS").
Under a Memorandum of Agreement, dated August 8, 1995, between Legacy,
Gregory Plunkett ("Plunkett"), CapBay and various other persons (the "August 8,
1995 Agreement"), CapBay committed and undertook, through and on behalf of its
affiliated entity, CBS, although not a party to the August 8, 1995 Agreement or
a signatory to the August 1, 1995 Letter Agreement referenced in the August 8,
1995 Agreement, to certain actions therein, including raising financing for
Legacy.
Thereafter, CBS sold the Notes described above to C Brands, the
"investor" contemplated under the August 8, 1995 Agreement, Plunkett was
required to transfer, from his own holdings, shares of Legacy common stock for
issuance to C. Brands in addition to the number of shares Legacy was to issue
to C. Brands. Plunkett has filed suit against Legacy in the Superior Court of
the State of California, County of San Francisco seeking, among other things, a
judicial determination that the conditions set forth in the August 8, 1995
Agreement have not been satisfied and, therefore, that he is not obligated to
perform his obligations under the August 8, 1995 Agreement. If Plunkett is
successful in this suit and is entitled to recover from C. Brands the stock
which Legacy has recorded on its books as having been transferred from Plunkett
to C. brands, Legacy agrees that it will reissue
-1-
<PAGE> 2
and deliver to C. Brands that number of shares of Legacy stock which the court
shall determine should not have been transferred from Plunkett under the
August 8, 1995 Agreement.
The Notes were issued in exchange for $622,500 in financing provided by C.
Brands to Legacy. As of November 27, 1997, the accrued interest owing under the
Notes was $113,500. Effective November 27, 1997, the entire principle and
interest amount owing under the Notes was converted into 147,200 shares of
Legacy Stock. All obligations of Legacy to pay penalties and other charges
under the Notes were waived and terminated on the date conversion occurred.
If you believe that this letter properly states the full and complete
understanding between Legacy, C. Brands, CapBay and CBS relating to the number
of shares to which C. Brands is entitled as a result of the conversion and to
provide indemnification to assure that shares that were required to be issued
as a result of the August 8, 1995 Agreement will be issued without regard to
the outcome of the pending litigation between Legacy and Plunkett, please sign
in the spaces provided.
Sincerely,
LEGACY BRANDS, INC.
/s/ THOMAS E. KEES
- ------------------------------
Thomas E. Kees,
President
Read and agreed:
C. BRANDS MANAGEMENT LLC CAPITOL BAY GROUP
CAPITOL BAY SECURITIES, INC.
/s/ STEPHEN C. KIRCHER /s/ STEPHEN C. KIRCHER
- ------------------------------ ----------------------------------------
Stephen C. Kircher, Manager Stephen C. Kircher, President
-2-
<PAGE> 1
EXHIBIT 12.2
To the Board of Directors
Legacy Brands, Inc.
Roseville, California
We consent to the inclusion in this registration statement on Form SB-2
(to be filed on or about July 8, 1998) of our report dated June 30, 1998,
on our audits of the financial statements of Legacy Brands, Inc. We also
consent to the reference to our firm under the caption "Experts."
Very truly yours,
/s/ PricewaterhouseCoopers LLP
Sacramento, CA
July 8, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF THE COMPANY FOR THE THREE MONTH PERIOD ENDED
APRIL 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM SB-2.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 14,762
<SECURITIES> 0
<RECEIVABLES> 251,672
<ALLOWANCES> 0
<INVENTORY> 256,146
<CURRENT-ASSETS> 563,989
<PP&E> 83,654
<DEPRECIATION> 15,009
<TOTAL-ASSETS> 3,119,948
<CURRENT-LIABILITIES> 3,370,767
<BONDS> 0
0
0
<COMMON> 6,253,057
<OTHER-SE> (7,211,591)
<TOTAL-LIABILITY-AND-EQUITY> 3,119,948
<SALES> 1,640,728
<TOTAL-REVENUES> 1,640,728
<CGS> 1,026,444
<TOTAL-COSTS> 1,716,731
<OTHER-EXPENSES> 66,033
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,033
<INCOME-PRETAX> (142,036)
<INCOME-TAX> 800
<INCOME-CONTINUING> (142,836)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (142,836)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
