<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996
REGISTRATION NO. 333-12299
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
COLEMAN NATURAL PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5147 84-0886892
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
--------------------------
5140 RACE COURT
DENVER, COLORADO 80216
(303) 297-9393
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
LEE N. ARST, PRESIDENT
COLEMAN NATURAL PRODUCTS, INC.
5140 RACE COURT
DENVER, COLORADO 80216
(303) 297-9393
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
SUSAN L. OAKES, ESQ. TIMOTHY M. HEANEY, ESQ.
IRELAND, STAPLETON, PRYOR & PASCOE, FREDRIKSON & BYRON, P.A.
P.C. 1100 INTERNATIONAL CENTRE
1675 BROADWAY, 26TH FLOOR 900 SECOND AVENUE SOUTH
DENVER, COLORADO 80202 MINNEAPOLIS, MINNESOTA 55402
(303) 623-2700 (612) 347-7000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
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 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. / /
--------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 25, 1996
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.
<PAGE>
1,700,000 SHARES COMMON STOCK
------------------
Of the 1,700,000 shares of Common Stock offered hereby, 1,475,000 shares are
being sold by Coleman Natural Products, Inc. ("Coleman" or the "Company"),
54,135 shares are being sold by certain selling stockholders and 170,865 shares
are being sold by the Underwriters upon the exercise of warrants to be purchased
from certain selling stockholders. The Company will not receive any of the
proceeds from the sale of shares by such selling stockholders ("Selling
Stockholders"). See "Principal and Selling Stockholders" and "Underwriting."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently anticipated that the initial public offering
price will be between $9.50 and $11.00 per share. See "Underwriting" for
information relating to the method of determining the initial public offering
price. Application has been made for designation of the Common Stock as a Nasdaq
National Market security, upon completion of this offering, under the symbol
"NTRL."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT 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.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(2)................... $ $ $ $
</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $600,000.
(2) The Selling Stockholders have granted the Underwriters a 30-day option to
purchase 206,293 shares and warrants to purchase 48,707 shares solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Stockholders will be $ 00,000,000,
$00,000,000, $00,000,000 and $00,000,000, respectively. See "Underwriting."
------------------------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of Principal Financial Securities, Inc., Dallas, Texas, on
or about , 1996.
PRINCIPAL FINANCIAL SECURITIES, INC. HANIFEN, IMHOFF INC.
The date of this Prospectus is , 1996
<PAGE>
[INSIDE FRONT COVER]
[PHOTO OF RETAIL PACKAGES OF COLEMAN BEEF]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTIN- UED AT ANY TIME.
2
<PAGE>
[TWO PAGE GATEFOLD UNDER FRONT AND INSIDE FRONT COVER]
[PHOTO OF MOUNTAINS AND CATTLE WITH COLEMAN LOGO AND
THE PHRASE "NOT JUST A FOOD, BUT A LIFESTYLE". ALSO
INCLUDES THREE INTERIOR PHOTOS WITH ACCOMPANYING TEXT
DESCRIBING THE SUPERIOR QUALITY OF COLEMAN'S PRODUCTS,
THE POSITIVE CONSUMER TRENDS IN THE COLEMAN
MARKETPLACE AND THE OPPORTUNITY WHICH COLEMAN BELIEVES
EXISTS IN THAT MARKET.]
3
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1996 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, 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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Summary.................................................................................................... 5
Risk Factors............................................................................................... 9
Use of Proceeds............................................................................................ 15
Dividend Policy............................................................................................ 15
Capitalization............................................................................................. 16
Dilution................................................................................................... 17
Selected Financial Data.................................................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 20
Business................................................................................................... 31
Management................................................................................................. 40
Certain Transactions....................................................................................... 49
Principal and Selling Stockholders......................................................................... 51
Description of Capital Stock............................................................................... 53
Shares Eligible for Future Sale............................................................................ 55
Underwriting............................................................................................... 57
Legal Matters.............................................................................................. 58
Experts.................................................................................................... 58
Additional Information..................................................................................... 59
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------------
The Company intends to distribute to its stockholders annual reports
containing financial statements examined by its independent public accounting
firm and make available to its stockholders quarterly reports for the first
three quarters of each fiscal year containing interim unaudited financial
information.
------------------------
Coleman Natural Meats-Registered Trademark-, Coleman Natural
Beef-Registered Trademark-, Coleman-Registered Trademark-, Origen-TM-, "Just
Pure Simple Beef-TM-," "Not Just a Food, But a Lifestyle-TM-" and Coleman
Originals-TM- are trademarks of the Company. Laura's Lean
Beef-Registered Trademark-, Maverick Ranch Beef-TM-, Certified Angus
Beef-Registered Trademark- and Wegmans-Registered Trademark-, are trademarks of
Laura's Lean Beef Company, Inc., Maverick Ranch Association, Inc., the American
Angus Association and Wegmans Food Markets, respectively.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Coleman Natural Products, Inc. ("Coleman" or the "Company") is the leading
U.S. supplier and marketer of fresh, branded, natural beef products from cattle
that have never received hormones and antibiotics ("Coleman Natural Meats").
Coleman believes that it is the only company with national distribution that has
an approved U.S. Department of Agriculture ("USDA") label describing its hormone
and antibiotic free cattle raising practices. In the United States, most
commodity beef comes from cattle which have been given antibiotics and implanted
with hormones to accelerate growth and weight gain. In 1979, Mel Coleman, Sr., a
fourth-generation Colorado rancher and the Company's founder, pioneered the
marketing of pure and natural beef, raised humanely and with respect for the
environment.
Coleman believes its products are not just a food, but a lifestyle. The
Company believes that there are a growing number of consumers demanding high
quality, safe and pure products, and that they are willing to pay a premium for
them. Consumer attitudes about food and eating habits are undergoing fundamental
changes relating to diet, health and food safety. Consumers are moving toward
foods which are less processed and closer to their natural state. Coleman
believes that these changes, which it considers long term in nature, are most
dramatically portrayed by the growth in the natural food industry, as well as by
the growth of many new premium products now offered in previously mature
commodity categories, such as produce, coffee and juices. As a result, Coleman
believes there is a significant growth opportunity for fresh, branded beef
promoted as natural ("Natural Beef") as a distinct segment within the $18
billion retail category for fresh beef sold annually in supermarkets. Given
Coleman's strong reputation, leadership position, unique product benefits and
focus on the consumer, the Company believes that it is strategically positioned
to capture an increasing share of the $18 billion fresh beef category.
Coleman believes the Natural Beef segment is in its early stages of
development. The fresh beef category is one of the few remaining areas in the
supermarket without a preponderance of recognizable consumer brands. Coleman has
capitalized on this opportunity by developing a premium branded natural product
. . .Coleman Natural Meats-Registered Trademark-. Today, Coleman Natural Meats
are the only beef carried in almost all of the largest natural food supermarket
chains, including substantially all of the Whole Foods/Fresh Fields and Wild
Oats/Alfalfa's stores. Coleman is also carried in conventional supermarket
stores, including various A&P divisions, Dorothy Lane, Grand Union, King Kullen,
Nob Hill and Wegmans. As of September 1996, Coleman Natural Meats were sold in
over 600 supermarkets. Coleman believes there is a signficant opportunity to
further expand into the approximately 27,000 chain and large supermarkets in the
U.S. not now carrying Natural Beef, as well as to increase share and volume
within existing and new accounts.
The Company's objective is to significantly expand the Natural Beef segment,
while profitably extending its leadership position within this segment. The
Company feels that it can achieve this growth by further expanding its
distribution in natural and conventional supermarket accounts; by building brand
awareness and household penetration and purchase rates; by improving operational
efficiencies; and by remaining true to its founding principles of producing food
that is superior tasting, good for you, safe and raised right.
The Company, originally incorporated in Colorado in 1982, was reincorporated
in Delaware in 1993. Its executive offices are located at 5140 Race Court,
Denver, Colorado 80216, and its telephone number at that location is (303)
297-9393.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 1,475,000 shares
Common Stock Offered by the Selling
Stockholders................................ 225,000 shares(1)
Common Stock Outstanding after the
Offering.................................... 3,363,181 shares(1)(2)(3)
Use of Proceeds.............................. For capital expenditures for new
facilities, redemption of Series A
Preferred Stock, sales and marketing
programs, and general corporate purposes.
Proposed Nasdaq National Market Symbol....... NTRL
</TABLE>
- ------------------------
(1) Includes 170,865 shares to be issued in connection with the exercise of
warrants to be purchased by the Underwriters from certain Selling
Stockholders. The Underwriters intend to exercise the warrants in a cashless
exercise transaction, pursuant to which a portion of the shares to be issued
are redeemed as consideration for the warrant exercise price. The number of
shares to be redeemed depends on the public offering price, which is assumed
to be $10.25 per share. The Underwriters have agreed to purchase a portion
of warrants held by certain Selling Stockholders sufficient for the
Underwriters to receive 170,865 shares in the cashless exercise transaction.
See "Principal and Selling Stockholders" and "Underwriting."
(2) Includes an estimated 48,707 shares issuable upon exercise of the remaining
warrants owned by certain Selling Stockholders. These warrants are to be
purchased by the Underwriters, exercised for cash and the shares used to
cover a portion of the over-allotment option, to the extent the option is
exercised. To the extent the over-allotment option is not exercised, the
Selling Stockholders will exercise such warrants for cash. The number of
shares issuable upon exercise of the remaining warrants is affected by the
actual public offering price used in the cashless exercise transaction
described in footnote (1) above. See "Principal and Selling Stockholders"
and "Underwriting."
(3) Excludes (i) an aggregate of 304,514 shares of Common Stock reserved for
issuance pursuant to the exercise of outstanding stock options under the
Company's Amended and Restated Stock Option Plan at a weighted average price
of $2.52 per share and (ii) an aggregate of 5,700 shares of Common Stock
reserved for issuance pursuant to exercise of outstanding stock options at
an exercise price of $9.50 per share, and 326,300 shares of Common Stock
reserved for future issuance, pursuant to the Company's Omnibus Stock and
Incentive Plan.
UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS
ASSUMES (I) THE EFFECTS OF A 2.85:1 STOCK SPLIT OF THE COMPANY'S COMMON STOCK IN
SEPTEMBER 1996 AND (II) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
SEE "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING."
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS
AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH
STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH UNDER THE
CAPTION "RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS.
6
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
<TABLE>
<CAPTION>
26 WEEK
52 WEEK FISCAL FISCAL 39/40 WEEK INTERIM
PERIODS ENDED(1) PERIOD PERIODS ENDED(1)
------------------------------- ENDED ----------------------------
JUNE 26, JUNE 25, JUNE 24, DECEMBER 23, SEPTEMBER 23, SEPTEMBER 28,
1993 1994 1995 1995(1)(4) 1995 1996
--------- --------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $ 30,410 $ 34,559 $ 43,002 $ 28,791 $ 37,755 $ 40,618
Gross profit......................... 3,304 2,829 4,635 2,696 4,211 5,428
Income (loss) from continuing
operations.......................... 290 (370) 620 1,087 767 1,081
Net income (loss).................... 290 (1,025) 505 1,087 716 1,081
Net income (loss) attributable to
common stock........................ $ 222 $ (1,077) $ 327 $ 921 $ 480 $ 772
--------- --------- --------- ------------ ------------- -------------
--------- --------- --------- ------------ ------------- -------------
Earnings (loss) per share:
Continuing operations.............. $ .16 $ (.29) $ .26 $ .51 $ .31 $ .38
Discontinued operations............ $ -- $ (.44) $ (.07) $ -- $ (.03) $ --
--------- --------- --------- ------------ ------------- -------------
Net income (loss).................. $ .16 $ (.73) $ .19 $ .51 $ .28 $ .38
--------- --------- --------- ------------ ------------- -------------
--------- --------- --------- ------------ ------------- -------------
Weighted average common and common
equivalent shares outstanding....... 1,414 1,478 1,685 1,811 1,697 2,021
--------- --------- --------- ------------ ------------- -------------
--------- --------- --------- ------------ ------------- -------------
Pro forma earnings (loss) per share
(3) (Unaudited):
Continuing operations.............. $ .31 $ .51 $ .46
Discontinued operations............ $ (.06) $ -- $ --
--------- ------------ -------------
Net income......................... $ .25 $ .51 $ .46
--------- ------------ -------------
--------- ------------ -------------
Pro forma weighted average common and
common equivalent shares outstanding
(Unaudited)......................... 2,008 2,137 2,348
--------- ------------ -------------
--------- ------------ -------------
OTHER OPERATING DATA:
Approximate number of natural
supermarket stores carrying
Coleman's products.................. N/A N/A 74 84 76 90
Approximate number of conventional
supermarket stores carrying
Coleman's products.................. N/A N/A 284 396 348 526
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 28, 1996
-------------------------
DECEMBER 23, 1995 ACTUAL AS ADJUSTED(2)
----------------- --------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 22 $ 63 $ 10,190
Working capital...................................................... 2,537 3,103 13,230
Total assets......................................................... 6,030 6,308 16,435
Notes payable........................................................ 1,161 791 791
Mandatorily redeemable preferred stock............................... 3,356 3,401 --
Total stockholders' equity (deficit)................................. (81) 855 14,383
</TABLE>
7
<PAGE>
- ------------------------
(1) Prior to December 23, 1995, the Company's fiscal year was the 52/53 week
period ending on the last Saturday in June. Effective December 23, 1995, the
Company's changed its fiscal year to the 52/53 week period ending on the
last Saturday in December. Each fiscal quarter normally consists of one
five-week period and two four-week periods.
(2) Adjusted to give effect to (i) the sale of 1,475,000 shares of Common Stock
by the Company at an assumed public offering price of $10.25 per share and
the application of the net proceeds therefrom, (ii) the mandatory redemption
of the Series A Preferred Stock (estimated to be $3.5 million as of the
closing of the offering) and (iii) the issuance of an estimated 219,572
shares upon exercise of warrants and the receipt of the proceeds therefrom.
See "Use of Proceeds" and "Underwriting."
(3) The unaudited pro forma earnings per share data has been provided to
disclose the pro forma effect of the redemption of all of the mandatorily
redeemable preferred stock with a portion of the proceeds of the proposed
public offering. The pro forma per share data gives effect to the number of
shares whose proceeds would be necessary to redeem manditorily redeemable
preferred stock using an assumed offering price of $10.25 per share, and
also gives effect to the elimination of the dividend requirements and
accretion of the manditorily redeemable preferred stock.
(4) The following table sets forth certain unaudited statement of operations
data for the 26 weeks ended December 24, 1994 (amounts in thousands except
per share amounts):
<TABLE>
<S> <C>
Net sales.......................................................... $ 19,497
Gross profit....................................................... 2,106
Income from continuing operations.................................. 281
Net income......................................................... 217
Net income attributable to common stock............................ 199
Earnings (loss) per share:
Continuing operations............................................ $ .17
Discontinued operations.......................................... $ (.04)
---------
Net income....................................................... $ .13
---------
---------
</TABLE>
8
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY'S BUSINESS
BEFORE PURCHASING SHARES OF THE COMMON STOCK OFFERED HEREBY.
MAINTENANCE AND EXPANSION OF SALES. The Company believes that its continued
success as a supplier of Natural Beef is dependent upon its ability to increase
the total number of supermarkets carrying its products and to increase its
volume within its accounts. As of September 1996, the Company sold its products
to only 616 of the approximately 30,000 chain and large supermarkets in the
United States, which includes both natural food and conventional supermarkets.
The Company has had and expects to continue to have limited marketing and
advertising resources, spending less than $300,000 in each of its last four
fiscal periods on advertising and marketing programs. These limited advertising
and marketing resources could limit the Company's ability to support greater
distribution and to build widespread brand awareness. There can be no assurance
that the Company will be successful in increasing sales to existing customers or
expanding its base of supermarket customers, or that it can do so on a
profitable basis.
CUSTOMER CONCENTRATION. For the 40 week period ended September 1996, the
Company's largest accounts were Whole Foods Market and its Fresh Fields
subsidiary, and Wegmans Food Markets, which accounted for 17% and 22%,
respectively, of the Company's net sales. Additionally, the Company's top ten
customers for its branded products accounted for 70% and 72% of its net sales
for the 26 and 40 week periods ended December 1995 and September 1996,
respectively. The Company puts considerable effort into the maintenance of these
accounts, but there can be no assurance that sales to any of these customers
will not decrease or that such customers will continue purchasing the Company's
products. The loss of one or more of these customers or any significant decrease
in the volume of products purchased by them would materially and adversely
affect the Company's business, results of operations and financial condition.
Continuity of customer relations is important, and events outside the Company's
control may have a material adverse effect on the Company's ability to retain
those relationships and thus on its business, results of operations and
financial condition. The Company believes that it may experience resistance from
existing accounts if it expands into new supermarkets within geographic areas
already served by such existing accounts. There can be no assurance that the
Company will be able to retain such existing accounts when new customers are
added within the same geographic area. The Company intends to focus its
marketing efforts, however, on the large number of geographic areas where
supermarkets are not currently carrying Natural Beef. See "Business--Customers"
and "Business--Sales and Distribution."
AVAILABILITY OF DESIRED USDA MEAT GRADES. The Company is attempting to
improve its ability to match the demand for, with the supply of, specific USDA
meat quality grades, which are comprised of prime, choice and select. Currently,
approximately 61% of the Company's customers require choice grade meats. Since
the Company averaged 69% choice grade during the 1995 calendar year, seven
percentage points higher than the industry average for 1995, the Company has not
generally experienced problems meeting customer demands. However, the supply of
choice grade product can be lower than the Company needs in any given week. This
is particularly true in the second calendar quarter because of the cattle life
cycle and weather conditions. During any such period, the Company has and may
continue to obtain inadequate levels of choice graded meat, causing it to short
customer orders. This could result in the potential loss of customers who are
dissatisfied with the lack of availability. Moreover, the Company expects that
the number of customers requesting choice grades will increase. Therefore, it is
and will be increasingly important for the Company to maintain or improve its
choice meat grading percentage. To help address this concern, the Company
intends to reward ranchers for raising cattle with choice grades and to allow
cattle to stay on feed longer to ensure maturity and improve grading. There can
be no assurance that the Company will be successful in improving the
availability of choice graded cattle. To the extent the Company is not
successful in this effort, there could be a material adverse effect on the
Company's business, results of operations and financial condition.
9
<PAGE>
PREMIUM PRICING. While the Company believes that it competes very favorably
on factors such as the quality, taste, safety and purity of its products, brand
name recognition and consumer loyalty, Coleman Natural Meats are sold at prices
substantially higher than commodity beef and somewhat higher than other fresh
branded beef products. There can be no assurance that the Company will not
experience competitive pressure, particularly with respect to pricing, that
could adversely affect its business, results of operations and financial
condition. Additionally, unlike commodity beef producers, the Company does not
regularly change its prices to customers for its branded products as a result of
changes in the commodity price of beef. The last price change of the Company's
branded beef products occurred in January 1995. In time periods during which the
price of beef is increasing, the Company may need to increase its prices. There
can be no assurance that supermarkets and their consumers will be willing to pay
these higher prices. See "Business--Pricing" and "Business--Competition."
UNPREDICTABILITY IN CATTLE PRICES; SIGNIFICANT FLUCTUATIONS IN OPERATING
RESULTS. The Company has and may continue to experience significant
fluctuations in operating results due to changes in customer demand for its
product and changes in cattle prices. The price of the cattle purchased by the
Company is affected by a number of factors beyond the control of the Company,
such as weather conditions, grain prices, national herd size and consumer demand
for beef. Historically, cattle pricing has experienced ten-year cycles as well
as yearly seasonal fluctuations, and the Company believes, based upon
predictions of industry experts, that the cattle market may be beginning a
long-term price increase. Since the cost of cattle represents approximately 68%
of the Company's cost of goods sold, the Company has initiated various
strategies to minimize the risk of price unpredictability. The Company uses its
cattle purchase contracts with its certified ranchers ("Coleman Certified
Ranchers" or "Certified Ranchers") to help minimize the effect of price
fluctuations. The Company uses the services of a futures trading firm to advise
it on general cattle market trends and to purchase futures contracts in
conjunction with the Company's risk management program. The Company's strategy
is to increase the percentage of fixed price contracts (where the purchase price
is established at contract inception) when cattle market conditions indicate a
general upward price trend. Conversely, the Company attempts to increase the
percentage of variable price contracts (where the purchase price moves in
synchonization with the general cattle market) when cattle market conditions
indicate a general downward price trend. This strategy attempts to defer the
impact of rising cattle market trends by fixing cattle prices early in upward
trending market conditions. The strategy also attempts to capitalize on falling
cattle market trends by pricing cattle as close as possible to expected use.
There can be no assurance, however, that the Company will accurately predict
market price trends and adjust the type of contract accordingly, or that
ranchers will accept these contracts, so as to permit the Company to minimize
material and adverse effects on its results of operations. The Company
instituted a purchase contract risk management program in June 1996 for its
variable price contracts. Under the risk management program, the Company
purchases futures contracts on cattle to provide a mechanism to fix the
Company's cattle pricing, to permit it to make more accurate projections of its
cattle costs, and ultimately to obtain more predictable gross margins.
Additionally, the risk management program effectively converts variable price
contracts to fixed price contracts through the use of a futures contract. The
Company only purchases futures contracts on the number of cattle it expects to
utilize. As a result of this program, losses on futures contracts due to lower
cattle market prices will be offset by lower cattle costs. Conversely, gains on
future contracts due to higher cattle market prices will be offset by higher
cattle costs. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview--Production and Cost of Goods Sold,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Management Program," "Business--Coleman's Operations" and
"Business--Pricing."
COMPETITION. The Company's products compete broadly with all protein
sources available to consumers, and more specifically with all other meat
products, including beef. The beef industry is competitive, and includes
national, regional and local producers and distributors, many of whom have
greater resources than the Company. The Company markets its products as natural
because they have never received hormones and antibiotics. The USDA definition
of "natural," however, simply requires that no artificial
10
<PAGE>
flavors, coloring ingredients, chemical preservatives or any other artificial or
synthetic ingredients are added to the meat, and that the meat is not more than
minimally processed. This definition permits virtually any branded or unbranded
meat producer and its supermarket customers in the United States to label their
meats as "natural." The Company believes it has been successful in educating
consumers that beef, to be defined as truly natural, should be completely free
of hormones and antibiotics from birth, and the Company believes that it has
associated its brand name with this definition of natural. There can be no
assurance, however, that the Company will successfully continue to associate its
brand name in this manner. Certain other beef producers market Natural Beef,
although Coleman believes that any other companies which may be selling beef
from cattle meeting the Company's definition, if any, are not doing so on a
national basis. See "Business--Competition."
Finally, there can also be no assurance that the commodity meat producers,
most of whom have significantly greater resources than the Company, will not
begin either to develop products making natural claims or to label their
conventional products as natural in an attempt to capitalize on the Company's
development of consumer recognition of this category. Although the Company has
not experienced any competition in the Natural Beef segment from these sources
to date, and while the Company believes that if such competition did develop,
consumers could differentiate its products favorably from any commodity meat
product in terms of taste and quality, a decision by any of these sources to
market its products with a natural claim could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Business--Competition."
PRODUCT LIABILITY. All meat products are highly perishable and contain some
level of bacteria. Although the Company believes that its quality assurance
program insures that its meat is safe and clean, the Company is unable to insure
that its customers and their consumers handle Coleman's products in ways which
maintain the safety of such products. There can be no assurance that the
Company's products will not cause or be alleged to cause ill effects to
consumers, and that any such alleged ill effects will not result in adverse
publicity and a materially negative impact on consumer perception of the
Company's products. Any product liability issues could also result in claims
against the Company for monetary damages. Either of these results could
materially and adversely affect the Company's business, results of operations
and financial condition. The Company currently maintains more than $2,000,000 in
product liability insurance and a $10,000,000 umbrella policy, which may not be
sufficient to cover the cost of defense or related damages in the event of a
significant product liability claim.
ABILITY TO ACCURATELY FORECAST DEMAND. Cattle purchase contracts are based
on forecasted demand and can be entered into as much as one year in advance of
actual need. Since actual demand for cattle can be either higher or lower than
forecasted, cattle commitments can result in excess cattle, requiring the
Company to slaughter more than it needs or to keep the cattle on feed longer, or
in the event of a shortage, causing the Company not to fill customer orders. To
address this issue, the Company is attempting to purchase approximately 20% of
forecasted demand from Coleman Certified Ranchers on an as-needed basis to help
stabilize supply. While this strategy should reduce the degree to which the
Company is making advance commitments, there can be no assurance that the
Company will be successful in executing this strategy. See "Risk
Factors--Availability of Desired USDA Meat Grades" and "Management's Discussion
and Analysis of Financial Conditions and Results of Operations--Production and
Cost of Goods Sold."
MANAGEMENT OF GROWTH; FACILITIES EXPANSION. Over the last several years,
the Company has experienced substantial growth in net sales, operations and
employee base, and has undergone substantial changes in its business. This
growth has placed significant demands on the Company's management, its internal
control systems, and its current fabrication plant. One of the uses of proceeds
of this offering will be capital expenditures relating to the opening of a more
efficient fabrication plant, which the Company believes will result in cost
savings. If the Company is delayed in opening a new fabrication facility, it
11
<PAGE>
believes that it could continue to use its existing facility and/or find
substitute facilities with no material interruption of its operations.
In order to have greater control over its costs and to accommodate the
Company's growth, Coleman is also investigating various options relating to
cattle slaughter, including the re-opening of its own facility in Limon,
Colorado (the "Limon Facility"). The Company's current expansion plans,
including the intended move to a new fabrication facility and any potential
opening of the Limon Facility, could consume a significant amount of management
resources. In addition, the success of any expansion plans will depend in part
upon the Company's ability to continue to improve and expand its management and
financial control systems. To the extent the Company fails to open a new
fabrication plant, experiences cost or timing difficulties if it decides to open
the Limon Facility, or encounters difficulties in upgrading its internal control
systems, there could be material adverse effects on the Company's business,
results of operations and financial condition. The Company's results of
operations will be adversely affected if revenues do not increase sufficiently
to compensate for the increase in operating expenses resulting from any
expansion, and there can be no assurance that any expansion will be profitable
or that it will not adversely affect the Company's results of operations. See
"Risk Factors--Dependence Upon Outside Slaughter Facilities."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent upon the continued service of Lee N. Arst, its President and Chief
Executive Officer. The loss of Mr. Arst's services could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company is the beneficiary of key man life insurance on Mr. Arst in the
amount of $1,000,000. The Company also has an employment agreement with Mr. Arst
pursuant to which he has agreed not to compete with the Company for a period of
one year after his termination for any reason or the period in which he is
receiving severance payments under his employment agreement, whichever is
longer. Furthermore, the Company's ability to achieve and manage sales growth
will depend in part upon its ability to attract and retain key management and
sales personnel. There can be no assurance that the Company will be successful
in such efforts or that such efforts will result in additional sales or
profitability in any future period. See "Management--Executive Compensation."
DEPENDENCE UPON OUTSIDE SLAUGHTER FACILITIES. The Company currently has its
cattle slaughtered at an Excel Corporation ("Excel") facility in Sterling,
Colorado, pursuant to an agreement with a six month termination clause. Although
the Company has certified seven other facilities, processing its cattle at any
of these other facilities would result in higher costs to the Company. The
Company is currently in negotiations with Excel regarding its agreement. Excel
has requested changes to the agreement which the Company believes are
unacceptable. The Company believes that it is unlikely to reach agreement with
Excel, and that either the Company or Excel may terminate this contract on six
months notice. In this event, the Company will likely reactivate the Limon
Facility which it has not operated since 1992. The Company believes it could
reactivate and operate the Limon Facility for substantially similar per head
costs as the current Excel contract. The Company currently believes the costs of
reactivating this facility would be approximately $1,000,000 and that it could
reactivate the facility in approximately six months. There can be no assurance,
however, that the Company will be able to reactivate this facility in this time
period or for this cost, or that its processing costs will be in line with the
Company's projections; in any such event, there could be material, adverse
effects on the Company's business, results of operations and financial
condition. See "Risk Factors--Management of Growth; Facilities Expansion" and
"Business--Coleman's Operations."
PUBLIC ATTITUDES TOWARD BEEF CONSUMPTION. In recent years, there has been
an increase in the level of health consciousness in the United States and
considerable debate has occured concerning the consumption of red meat. A number
of research reports have suggested that red meat should be limited in a healthy
diet. A decrease in general red meat consumption as a result of these reports
could have a material, adverse effect on the Company's business, financial
condition and results of operations.
12
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET
PRICE. Sales of substantial amounts of shares in the public market or the
prospect of such sales could adversely affect the market price of the Company's
Common Stock. The number of shares of the Company's Common Stock available for
sale in the public market is limited by restrictions under Rule 144 of the
Securities Act of 1933, as amended (the "Securities Act"), and lockup agreements
under which certain stockholders have agreed not to sell or otherwise dispose of
any of their shares for a period of 180 days after the date of this Prospectus
without the prior written consent of Principal Financial Securities, Inc.
However, Principal Financial Securities, Inc. may, in its sole discretion and at
any time without public notice, release all or any portion of the securities
subject to lock up agreements. In addition, shortly after the date of this
Prospectus, the Company intends to register shares reserved for issuance under
its Amended and Restated Stock Option Plan and Omnibus Stock and Incentive Plan.
After this offering, subject to the lockup agreements described above, certain
holders of shares of Common Stock will be entitled to certain demand and
piggyback registration rights with respect to such shares. If such holders were
to exercise their demand registration rights and cause a large number of shares
to be sold in the public market, such sales could have an adverse effect on the
market price for the Company's Common Stock. If the Company were required to
include shares held by such holders in a Company initiated registration, such
sales could have an adverse effect on the Company's ability to raise needed
capital in the future. See "Management--Amended and Restated Stock Option Plan,"
"Management--Omnibus Stock and Incentive Plan," "Description of Capital Stock--
Registration Rights" and "Shares Eligible for Future Sale."
INFLUENCE BY EXISTING STOCKHOLDERS. Following this offering, and assuming
the issuance of an estimated 219,572 shares issuable upon exercise of warrants,
the Company's officers, directors and principal stockholders will beneficially
own approximately 35.2% of the outstanding shares of the Company's Common Stock
(approximately 30.3% if the Underwriters' over-allotment option is exercised in
full). As a result, such persons will have the ability to exercise significant
influence over all matters requiring stockholder approval, such as the election
of directors, mergers and acquisitions. This concentration of ownership by such
persons and entities could have the effect of delaying, deferring or preventing
a change in control of the Company. See "Principal and Selling Stockholders."
BANK LOAN. The Company has pledged substantially all of its assets to
Norwest Bank Colorado, N.A. as collateral under its $4.3 million in aggregate
lines of credit. In the event that the Company defaults under either line of
credit, the bank may foreclose on assets equal in value to the amount of such
defaulted obligations. As of September 28, 1996, the Company owed a total of
$391,000 to the bank. Although the Company's total assets are substantially
greater than the total amounts it may borrow under its current credit
facilities, a default and any resulting foreclosure could have an adverse effect
on the Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Amended and
Restated Certificate of Incorporation may be deemed to have anti-takeover
effects and may discourage or make more difficult a takeover attempt that a
stockholder might consider in such stockholder's best interest. The Board of
Directors may issue up to 5,000,000 shares of undesignated Preferred Stock in
the future without stockholder approval upon such terms as the Board of
Directors may determine. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuances of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of delaying or preventing a
change in control of the Company without further action by the stockholders. The
Company has no present plans to issue any shares of Preferred Stock. See
"Description of Capital Stock-- Series A Preferred Stock; Undesignated Preferred
Stock."
Following this offering, the Company will become subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law,
which will prohibit the Company from engaging in a
13
<PAGE>
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company. See "Description of Capital
Stock--Delaware Anti-Takeover Law and Certain Charter Provisions."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE. Prior to
this offering, there has been no public market for the Common Stock, and there
can be no assurance that an active trading market will develop or be sustained
after this offering. The initial public offering price was determined through
negotiations between the Company and the representatives of the Underwriters
based on several factors and may not be indicative of the market price of the
Common Stock after this offering. The market price of the shares of Common Stock
may be highly volatile and may be significantly affected by factors such as
actual or anticipated fluctuations in the Company's operating results, increased
competition, government regulatory action, fluctuations in the price of cattle,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations which
have often been unrelated to the operating performance of particular companies.
These broad market fluctuations may also adversely affect the market price of
the Company's Common Stock. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation often
has occurred against the issuing company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, results of operations and financial condition. Any adverse
determinations in such litigation could also subject the Company to significant
liabilities. See "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION. The initial public offering price is
substantially higher than the net tangible book value per share of Common Stock.
Investors purchasing shares of Common Stock in this offering will therefore
incur immediate and substantial net tangible book value dilution. To the extent
that outstanding stock options and warrants to purchase the Company's Common
Stock are exercised, there will be further dilution. See "Dilution,"
"Management--Omnibus Stock and Incentive Plan" and "Management--Amended and
Restated Stock Option Plan."
14
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 1,475,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$10.25 per share, after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, are estimated to be $13.6
million.
The Company is undertaking a major expansion of its production facilities.
This expansion includes plans to lease a new, larger and more efficient
fabrication facility of approximately 55,000 square feet in late 1997 or early
1998. The Company also expects to apply proceeds from this offering of
approximately $6.0 million to make leasehold improvements and to purchase
fabrication equipment and furniture/fixtures for use in this new fabrication
facility. The Company may also use approximately $1.0 million of proceeds to
reactivate the Limon Facility for its slaughtering requirements if it is unable
to reach agreement with Excel regarding changes to its current slaughter
agreement. The Company intends to explore long term lease alternatives for
financing a majority of the expenses associated with purchasing equipment for
its new fabrication facility. If it does obtain such financing, some portion of
the proceeds initially used for these purposes will instead be available for
marketing, advertising and other general corporate purposes. The Company also
intends to use approximately $3.5 million of the proceeds for the redemption of
Series A Preferred Stock, which is manditorily redeemable by the Company on
November 30, 1996. The Series A Preferred Stock pays dividends quarterly in cash
or Common Stock at the rate of 9% per annum, and also provides for a 6% per
annum dividend payable quarterly in shares of Series A Preferred Stock. The
remainder of the proceeds from this offering are expected to be used for
expanded sales and marketing programs and for working capital. A portion of the
net proceeds may also be used for the acquisition of businesses that are
complementary to those of the Company. The Company has no present plans,
agreements or commitments and is not currently engaged in any negotiations with
respect to any such transaction. See "Dividend Policy."
Pending the use of the net proceeds for the above purposes, the Company
intends to invest such funds in short-term, investment-grade securities,
including government obligations and money market instruments. The Company will
not receive any of the proceeds from the sale of Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company has never declared nor paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for the expansion and operation of its business and does not anticipate paying
cash dividends in the foreseeable future. In addition, the Company's credit
facility contains provisions restricting the payment of cash dividends on shares
of Common Stock unless it is in full compliance with its credit facility and has
received approval from the lendor. The Company has paid cash and in-kind
dividends on its Series A Preferred Stock, which are permitted by its credit
facility. See "Certain Transactions."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 28, 1996, and on an as adjusted basis after giving effect to (i) the
sale of the Common Stock offered by the Company hereby at an assumed initial
public offering price of $10.25 per share and (ii) the redemption of all
outstanding shares of Series A Preferred Stock upon the closing of this
offering. See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 28, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS EXCEPT
SHARE DATA)
<S> <C> <C>
Notes payable.............................................................................. $ 791 $ 791
Mandatorily redeemable preferred stock, $.001 par value; 3,491,396 shares authorized;
3,400,962 shares issued and outstanding actual and none outstanding as adjusted(1)........ 3,401 --
Stockholders' equity:
Common stock, $.001 par value; 15,000,000 shares authorized; 1,668,609(2) shares issued
and outstanding actual and 3,363,181 shares outstanding as adjusted(3)................. 2 3
Additional paid-in capital............................................................... 860 14,387
Accumulated deficit...................................................................... (7) (7)
--------- -----------
Total stockholders' equity............................................................. 855 14,383
--------- -----------
Total capitalization................................................................. $ 5,047 $ 15,174
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Effective immediately upon the redemption of the outstanding Series A
Preferred Stock, there will be no authorized Series A Preferred Stock. After
such redemption, the Company will then have 5,000,000 shares of authorized
but undesignated Preferred Stock.
(2) Excludes (i) an aggregate of 304,514 shares of Common Stock reserved for
issuance pursuant to the exercise of outstanding stock options under the
Company's Amended and Restated Stock Option Plan at a weighted average price
of $2.52 per share, (ii) 5,700 shares of Common Stock reserved for issuance
pursuant to the exercise of outstanding stock options, and 326,300 shares of
Common Stock reserved for future issuance pursuant to the Company's Omnibus
Stock and Incentive Plan and (iii) 246,279 shares reserved for issuance upon
exercise of warrants at a weighted average exercise price of $1.39 per
share.
(3) Shares outstanding, as adjusted, includes an estimated 219,572 shares
issuable upon exercise of the warrants. See "Underwriting."
16
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock at September 28,
1996, was approximately $855,000 or $0.51 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 outstanding. After giving effect
to the sale of the 1,475,000 shares of Common Stock offered by the Company
hereby (based upon an assumed initial public offering price of $10.25 per share,
and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company), the application of the net proceeds
therefrom and the issuance of an estimated 219,572 shares upon exercise of
warrants and the receipt of the net proceeds therefrom, the net tangible book
value at September 28, 1996, would have been approximately $14.4 million, or
$4.28 per share of Common Stock. This represents an immediate dilution of $5.97
per share to new investors purchasing shares in this offering and an immediate
increase in net tangible book value of $3.77 per share to existing stockholders.
Dilution is determined by subtracting pro forma 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. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price................................ $ 10.25
Net tangible book value before the offering........................ $ 0.51
Increase attributable to new stockholders.......................... 3.77
---------
Pro forma net tangible book value after the offering................. 4.28
---------
Dilution per share to new stockholders............................... $ 5.97
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis as of September 28,
1996, the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company, and the average price paid per share by
existing stockholders and to be paid by purchasers of the shares offered by the
Company hereby (at an assumed initial public offering price of $10.25 per share
and before deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)(2)............... 1,888,181 56.1% $ 1,719,562 10.2% $ 0.91
New investors............................. 1,475,000 43.9% 15,118,750 89.8% $ 10.25
---------- ----- ------------- -----
Total................................... 3,363,181 100.0% $ 16,838,312 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
- ------------------------
(1) Includes an estimated 219,572 shares issuable upon exercise of warrants. See
"Underwriting."
(2) Sales by the Selling Stockholders (assuming no exercise of the Underwriters'
over-allotment option) in this offering will cause the number of shares held
by existing stockholders to be reduced to 1,663,181 shares or 49.5% of the
total number of shares of Common Stock to be outstanding after this offering
and will increase the number of shares held by new stockholders to 1,700,000
shares or 50.5% of the total number of shares of Common Stock to be
outstanding after this offering. See "Principal and Selling Stockholders."
The foregoing computations do not include (i) an aggregate of 304,514 shares
of Common Stock reserved for issuance pursuant to the exercise of outstanding
stock options under the Company's Amended and Restated Stock Option Plan at a
weighted average price of $2.52 per share and (ii) and an aggregate of 5,700
shares of Common Stock reserved for issuance upon exercise of outstanding stock
options at an exercise price of $9.50 per share, and 326,300 shares of Common
Stock reserved for future issuance pursuant to the Company's Omnibus Stock and
Incentive Plan.
17
<PAGE>
SELECTED FINANCIAL DATA
The following selected statement of operations data for the 52 weeks ended
June 26, 1993, June 25, 1994, June 24, 1995, for the 26 weeks ended December 23,
1995, and for the 40 weeks ended September 28, 1996 and the selected balance
sheet data at June 24, 1995, December 23, 1995, and September 28, 1996, have
been derived from the Financial Statements of the Company, which have been
audited by KPMG Peat Marwick LLP, whose report thereon also is included herein.
The selected statements of operations data for the 53 weeks ended June 29, 1991
and the 52 weeks ended June 27, 1992, and the selected balance sheet data at
June 29, 1991, June 27, 1992, June 26, 1993 and June 25, 1994, have been derived
from the audited financial statements of the Company that are not included in
this Prospectus. The selected financial data set forth below is not necessarily
indicative of results to be expected for any future period. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and Notes thereto included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
39/40 WEEK
INTERIM
26 WEEK PERIODS
53/52 WEEK FISCAL PERIODS ENDED(1) FISCAL PERIOD ENDED(1)
--------------------------------------------------------------- ENDED -------------
JUNE 29, JUNE 27, JUNE 26, JUNE 25, JUNE 24, DECEMBER 23, SEPTEMBER 23,
1991 1992 1993 1994 1995 1995(1)(4) 1995
----------- ----------- ----------- ----------- ----------- ------------- -------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(2):
Net sales...................... $ 24,674 $ 26,987 $ 30,410 $ 34,559 $ 43,002 $ 28,791 $ 37,755
Cost of sales.................. 23,050 23,765 27,106 31,730 38,367 26,095 33,544
----------- ----------- ----------- ----------- ----------- ------------- -------------
Gross profit................... 1,624 3,222 3,304 2,829 4,635 2,696 4,211
Selling, general and
administrative expenses...... 3,075 3,139 2,743 3,008 3,770 2,135 3,255
----------- ----------- ----------- ----------- ----------- ------------- -------------
Operating income (loss)........ (1,451) 83 561 (179) 865 561 956
Interest and other expenses,
net.......................... 219 662 271 191 245 119 189
----------- ----------- ----------- ----------- ----------- ------------- -------------
Income (loss) from continuing
operations before income
taxes........................ (1,670) (579) 290 (370) 620 442 767
Income tax benefit (expense)... 7 -- -- -- -- 645 --
----------- ----------- ----------- ----------- ----------- ------------- -------------
Income (loss) from continuing
operations................... (1,663) (579) 290 (370) 620 1,087 767
Loss from discontinued
operations(3)................ -- -- -- (655) (115) -- (51)
----------- ----------- ----------- ----------- ----------- ------------- -------------
Net income (loss).............. $ (1,663) $ (579) $ 290 $ (1,025) $ 505 $ 1,087 $ 716
----------- ----------- ----------- ----------- ----------- ------------- -------------
----------- ----------- ----------- ----------- ----------- ------------- -------------
Net income (loss) attributable to
common stock.................... $ (1,663) $ (649) $ 222 $ (1,077) $ 327 $ 921 $ 480
----------- ----------- ----------- ----------- ----------- ------------- -------------
----------- ----------- ----------- ----------- ----------- ------------- -------------
Earnings (loss) per share:
Continuing operations.......... $ (.97) $ .47 $ .16 $ (.29) $ .26 $ .51 $ .31
Discontinued operations........ $ -- $ -- $ -- $ (.44) $ (.07) $ -- $ (.03)
----------- ----------- ----------- ----------- ----------- ------------- -------------
Net income (loss).............. $ (.97) $ .47 $ .16 $ (.73) $ .19 $ .51 $ .28
----------- ----------- ----------- ----------- ----------- ------------- -------------
----------- ----------- ----------- ----------- ----------- ------------- -------------
Weighted average common and
common equivalent shares
outstanding..................... 1,712 1,387 1,414 1,478 1,685 1,811 1,697
----------- ----------- ----------- ----------- ----------- ------------- -------------
----------- ----------- ----------- ----------- ----------- ------------- -------------
Pro forma earnings (loss) per
share (5) (Unaudited):
Continuing operations.......... $ .31 $ .51
Discontinued operations........ $ (.06) $ --
----------- -------------
Net income..................... $ .25 $ .51
----------- -------------
----------- -------------
Pro forma weighted average common
and common equivalent shares
outstanding (Unaudited)......... 2,008 2,137
----------- -------------
----------- -------------
<CAPTION>
SEPTEMBER 28,
1996
-------------
<S> <C>
STATEMENT OF OPERATIONS DATA(2):
Net sales...................... $ 40,618
Cost of sales.................. 35,190
-------------
Gross profit................... 5,428
Selling, general and
administrative expenses...... 3,704
-------------
Operating income (loss)........ 1,724
Interest and other expenses,
net.......................... 84
-------------
Income (loss) from continuing
operations before income
taxes........................ 1,640
Income tax benefit (expense)... (559)
-------------
Income (loss) from continuing
operations................... 1,081
Loss from discontinued
operations(3)................ --
-------------
Net income (loss).............. $ 1,081
-------------
-------------
Net income (loss) attributable to
common stock.................... $ 772
-------------
-------------
Earnings (loss) per share:
Continuing operations.......... $ .38
Discontinued operations........ $ --
-------------
Net income (loss).............. $ .38
-------------
-------------
Weighted average common and
common equivalent shares
outstanding..................... 2,021
-------------
-------------
Pro forma earnings (loss) per
share (5) (Unaudited):
Continuing operations.......... $ .46
Discontinued operations........ $ --
-------------
Net income..................... $ .46
-------------
-------------
Pro forma weighted average common
and common equivalent shares
outstanding (Unaudited)......... 2,348
-------------
-------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
JUNE 29, JUNE 27, JUNE 26, JUNE 25, JUNE 24, DECEMBER 23, SEPTEMBER 28,
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- --------------- ---------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 145 $ 199 $ 237 $ 265 $ 297 $ 22 $ 63
Working capital.................. 2,318 1,585 1,777 1,308 1,756 2,537 3,103
Total assets..................... 8,539 8,055 5,726 5,783 7,329 6,030 6,308
Notes payable.................... 4,750 5,370 2,599 2,592 3,471 1,161 791
Mandatorily redeemable preferred
stock........................... 2,898 2,968 3,035 3,313 3,341 3,356 3,401
Total stockholders' equity
(deficit)....................... 27 (992) (770) (1,471) (994) (81) 855
</TABLE>
- ------------------------------
(1) Prior to December 23, 1995, the Company's fiscal year was the 52/53 week
period ending on the last Saturday in June. Effective December 23, 1995, the
Company changed its fiscal year to the 52/53 week period ending on the last
Saturday in December. Each fiscal quarter normally consists of 1 five-week
period and 2 four-week periods.
(2) The Company has never declared or paid any cash dividends on its Common
Stock.
(3) During fiscal 1995, the Company discontinued Coleman Originals, a line of
shelf-stable sauces. The Company liquidated its inventory, sold all related
machinery and equipment, trade accounts receivable were collected, and
accounts payable were settled. The loss from discontinued operations
primarily represents the operations of Coleman Originals in fiscal 1994 and
fiscal 1995. The loss from discontinued operations also includes $54,000
representing the loss on the disposition of inventory which could not be
sold and was donated to charity, along with miscellaneous costs associated
with the disposition of assets of the discontinued operation.
(4) The following table sets forth certain unaudited statement of operations
data for the 26 weeks ended December 24, 1994 (amounts in thousands except
per share amounts):
<TABLE>
<S> <C>
Net sales.............................................................................. $ 19,497
Cost of goods sold..................................................................... 17,391
---------
Gross profit......................................................................... 2,106
Selling, general and administrative expenses........................................... 1,715
---------
Operating income..................................................................... 391
Interest and other expenses, net....................................................... 110
---------
Income from continuing operations.................................................... 281
Loss from discontinued operations...................................................... (64)
---------
Net income......................................................................... $ 217
---------
---------
Net income attributable to common stock................................................ $ 199
---------
---------
Earnings (loss) per share:
Continuing operations................................................................ $ .17
Discontinued operations.............................................................. $ (.04)
---------
Net income........................................................................... $ .13
---------
---------
</TABLE>
(5) The unaudited pro forma earnings per share data has been provided to
disclose the pro forma effect of the redemption of all of the mandatorily
redeemable preferred stock with a portion of the proceeds of the proposed
public offering. The pro forma per share data gives effect to the number of
shares whose proceeds would be necessary to redeem mandatorily redeemable
preferred stock using an assumed offering price of $10.25 per share, and
also gives effect to the elimination of the dividend requirements and
accretion of the mandatorily redeemable preferred stock.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
PRODUCTS AND REVENUE
BRANDED NATURAL BEEF PRODUCTS. The Company derives its revenue primarily
from selling Coleman Natural Meats, which are fresh branded natural beef
products from cattle that have never received antibiotics, feed additives,
hormones or other growth-promoting drugs. Coleman Natural Meats consist of
primal cuts (such as steaks and roasts) and ground beef. The Company's beef
products are sold by natural food supermarkets, conventional supermarkets,
processors and export customers on a branded basis. The Company's sales to trade
customers are referred to as "Branded Sales."
Primal cuts are fabricated into either regular or close trim cuts.
Regular trim primal cuts require further preparation by supermarket
personnel while close trim primal cuts generally do not. The net selling
price of close trim products is higher than the net selling price of regular
trim products.
Ground beef is produced from chuck, round and trim generated from the
fabrication process. The Company believes that the increase in sales of
close trim cuts and ground beef is a result of a trend by conventional
supermarkets, and to a lesser extent natural food supermarkets, to reduce
their freight and in-store labor costs by purchasing products that require
less preparation in the store.
BRANDED NATURAL LAMB PRODUCTS. To accomodate certain of its supermarket
customers who wish to buy from a single source, the Company also sells branded
natural lamb products. These sales constitute only a relatively small portion of
the Company's net sales.
UNBRANDED BEEF AND LAMB PRODUCTS. The balance of the Company's net sales
are represented by sales of unbranded natural beef and lamb products. Unbranded
beef products are primarily comprised of excess trim generated from the
fabrication process that is not used in ground beef. Unbranded beef and lamb
products also include primal cuts that are not sold as branded products due to
seasonal fluctuations in consumer demand for particular cuts of meat. These
unbranded products are sold to meat brokers, distributors and processors at the
prevailing commodity market price.
PRODUCT MIX. The mix of products sold impacts the average net selling price
per pound as well as the gross profit per pound. An increase in the percentage
of production sold as branded products increases the net selling price and gross
profit per pound. Likewise, an increase in the amount of branded product sold as
close trim also increases the net selling price per pound, but to a lesser
extent the gross profit per pound. The effect of the increase in the net selling
price is offset in part by an increase in fabrication costs and an increase in
the amount of trim sold as ground beef or as unbranded product.
The extent of fabrication of the product also effects the average net
selling price and the gross profit per pound. Since February 1996, the Company
has implemented a practice of further fabricating certain cuts of unbranded
products (e.g. briskets) to remove the bones and fat. This additional
fabrication decreases the number of pounds available for sale as unbranded
products, and increases the volume of by-products (e.g. bones and fat) produced.
Proceeds from sales of by-products are recorded as a reduction of cost of sales
and offset in part the additional fabrication costs. This additional fabrication
also allows the Company to obtain a higher net selling price per pound for these
unbranded products and thereby increase its gross profit per pound. The effect
of the increase in price more than offsets the decrease in the number of pounds
available for sale and the additional fabrication costs.
PRICING. The Company has fixed wholesale prices for its branded products.
It offers price discounts to customers for in-store promotions, including
feature prices and advertising. The Company also offers discounts to increase
sales of off-season products when needed. Sales are recorded net of such
discounts. Unbranded products are sold at the prevailing commodity market
prices.
20
<PAGE>
PRODUCTION AND COST OF GOODS SOLD
Production costs include the cost of raw materials, labor, packaging and
related overhead. Of these costs, approximately 68% relate to the cost of
cattle. The Company uses a variety of cattle purchase contracts with Coleman
Certified Ranchers and with feedlots which have been certified by the Company
("Coleman Certified Feedlots" or "Certified Feedlots"). The pricing of these
contracts is either set at the inception of the contract (fixed price contracts)
or floats with the cash and/or futures market for cattle (variable price
contracts). The Company also purchases approximately 20% of its cattle on an as
needed basis from Coleman Certified Ranchers when required by market demand.
Proper feedlot management improves the yield (i.e., the amount of beef
produced when the cattle are slaughtered) and the USDA grades of the beef.
Accordingly, the Company has developed various reporting tools to assist the
ranchers and feedlots in improving the yield and grading of their cattle and has
developed cattle contracts that reward ranchers and feedlots for higher yields
and choice graded cattle. The Company recently initiated a purchase contract
risk management program for variable price contracts as a strategy to minimize
its exposure to cattle price changes. See "Risk Factors--Unpredictability in
Cattle Prices; Significant Fluctuations in Operating Results" and "Management's
Discussion and Analysis of Financial Condition and Results of Operation--Risk
Management Program."
Substantially all of the cattle purchased by the Company are slaughtered by
Excel in Sterling, Colorado, for a per head processing fee. Excel pays the
Company for the hides and other related by-products (referred to as a drop
credit). Historically, the drop credit has exceeded the fee charged by Excel.
The drop credit, net of the related processing fees, is paid to the Company by
Excel and is recorded as a credit to cost of goods sold.
The beef is transported in quarters from Excel's plant to the Company's
fabrication plant in Denver, Colorado. After fabrication, the products are
vacuum packed for freshness, put into shipping boxes and delivered directly to
the Company's customers. The costs to fabricate and package the beef quarters
consist of labor, packaging and related overhead. These costs generally vary
with the amount of product produced.
The Company's lambs are raised by one Certified Rancher and Feedlot in
Colorado, and shipped to Iowa Lamb Corporation in Haywarden, Iowa for slaughter
and fabrication. The cost of the lamb is based on a fixed premium over the
commodity market price, which is adjusted monthly, plus a processing fee. See
"Business--Coleman's Operations."
CHANGE IN YEAR END
Effective December 23, 1995, the Company changed its fiscal year to a 52/53
week period ending on the last Saturday in December. Prior to that date, the
fiscal year had been the 52/53 week period ending on the last Saturday in June.
This change was made to allow for better planning with customers. As a result of
the change in year end, the Company has separately reported its operating
results for the transition period from June 24, 1995 to December 23, 1995. In
addition, the 27 week period ended June 1996 contains one more week of operating
results than the comparable period in 1995.
DISCONTINUED OPERATIONS
In October 1994, the Company discontinued Coleman Originals, a line of
shelf-stable sauces. The Company liquidated its inventory, sold all related
equipment, collected trade accounts receivable, and settled accounts payable.
The loss from discontinued operations includes a loss from operations of Coleman
Originals of $654,000 for the 52 weeks ended June 1994 and $61,000 for the 52
weeks ended June 1995. The loss from discontinued operations for the 52 weeks
ended June 1995 also includes a $54,000 loss on the disposition of inventory
which could not be sold and was donated to charity, along with miscellaneous
costs associated with the disposition of the assets.
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected statement of operations data as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
39/40 WEEK INTERIM PERIODS ENDED
52 WEEK FISCAL PERIODS ENDED 26 WEEK FISCAL
------------------------------------- PERIOD ENDED --------------------------------
JUNE 26, JUNE 25, JUNE 24, DECEMBER 23, SEPTEMBER 23, SEPTEMBER 28,
1993 1994 1995 1995 1995 1996
----------- ----------- ----------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 89.1 91.8 89.2 90.6 88.8 86.6
----- ----- ----- ----- ----- -----
Gross profit.......................... 10.9 8.2 10.8 9.4 11.2 13.4
Selling, general and administrative
expenses............................. 9.0 8.7 8.8 7.4 8.6 9.1
----- ----- ----- ----- ----- -----
Operating income (loss)............... 1.9 (0.5) 2.0 2.0 2.6 4.3
Interest and other expenses, net...... (0.9) (0.6) (0.6) (0.4) (0.5) (0.2)
----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations before income taxes....... 1.0 (1.1) 1.4 1.6 2.1 4.1
Income tax benefit (expense).......... -- -- -- 2.2 -- (1.4)
----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations........................... 1.0 (1.1) 1.4 3.8 2.1 2.7
Loss from discontinued operations..... -- (1.9) (0.2) -- (0.2) --
----- ----- ----- ----- ----- -----
Net income (loss)..................... 1.0% (3.0)% 1.2% 3.8% 1.9% 2.7%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
The following table sets forth selected statement of operations data of the
Company expressed as an amount per pound of product sold, except total pounds
sold.
<TABLE>
<CAPTION>
26 WEEK
FISCAL PERIOD 39/40 WEEK INTERIM PERIODS
52 WEEK FISCAL PERIODS ENDED ENDED ENDED
------------------------------------- ------------- ----------------------------
JUNE 26, JUNE 25, JUNE 24, DECEMBER 23, SEPTEMBER 23, SEPTEMBER 28,
1993 1994 1995 1995 1995 1996
----------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total pounds sold (in thousands)...... 15,428 18,077 23,163 16,437 20,524 20,904
----------- ----------- ----------- ------ ------ ------
----------- ----------- ----------- ------ ------ ------
Net sales............................. $1.97 1.91 1.86 1.75 1.84 1.94
Cost of sales......................... 1.76 1.75 1.66 1.59 1.63 1.68
----------- ----------- ----------- ------ ------ ------
Gross profit.......................... 0.21 0.16 0.20 0.16 0.21 0.26
Selling, general and administrative
expenses............................. 0.18 0.17 0.16 0.13 0.16 0.18
----------- ----------- ----------- ------ ------ ------
Operating income (loss)............... $0.03 (0.01) 0.04 0.03 0.05 0.08
----------- ----------- ----------- ------ ------ ------
----------- ----------- ----------- ------ ------ ------
</TABLE>
22
<PAGE>
40 WEEKS ENDED SEPTEMBER 1996 COMPARED TO 39 WEEKS ENDED SEPTEMBER 1995
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations for
the 40 weeks ended September 1996 increased 40.9% to $1.1 million compared to
$767,000 for the 39 weeks ended September 1995. The increase in 1996 was
primarily due to higher gross profit on increased sales volume, offset by income
tax expense of $559,000. No income tax expense was recorded in 1995.
NET SALES. Net sales for the 40 weeks ended September 1996 increased 7.6%
to $40.6 million compared to $37.8 million for the 39 weeks ended September
1995. An increase in sales to new and existing customers offset the effect of
discontinuing sales to approximately 100 small or unprofitable accounts during
1995. Sales to these discontinued accounts amounted to $2.9 million for the 39
weeks ended September 1995 and $95,000 for the 40 weeks ended September 1996.
Excluding sales to these discontinued accounts from both periods, sales
increased 16.2% from September 1995 to September 1996. The increase in net sales
in 1996 was the result of a 1.9% increase in volume from 20.5 million pounds to
20.9 million pounds and a 5.4% increase in the average net selling price per
pound from $1.84 to $1.94. The increase in the average net selling price was
primarily attributable to an improvement in the net sales price per pound of
unbranded product, the mix of products sold and the amount of branded product
sold as close trim. The Company's wholesale prices for its branded products were
unchanged during these periods.
COST OF SALES. Cost of sales for the 40 weeks ended September 1996
increased to $35.2 million compared to $33.5 million for the 39 weeks ended
September 1995. For 1996, cost of sales as a percentage of net sales was 86.6%
or $1.68 per pound, compared to 88.8% or $1.63 per pound for 1995. The increase
in the cost per pound was primarily attributable to further fabrication of
certain cuts of unbranded products (E.G., briskets), partially offset by
improved plant productivity.
GROSS PROFIT. Gross profit was $5.4 million for the 40 weeks ended
September 1996 compared to $4.2 million for the 39 weeks ended September 1995.
For 1996, gross profit as a percentage of net sales was 13.4% or $0.26 per
pound, compared to 11.2% or $0.21 per pound for 1995. This increase was
attributable to an improvement in the mix of products sold and the further
fabrication of certain cuts of unbranded products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the 40 weeks ended September 1996 were $3.7 million
compared to $3.3 million for the 39 weeks ended September 1995. As a percentage
of net sales these expenses increased to 9.1% in 1996 compared to 8.6% for 1995.
The additional expenses in 1996 were primarily attributable to performance
bonuses to employees, recruiting expenses for sales personnel and salary and
benefit costs associated with additional personnel.
INTEREST AND OTHER EXPENSES. Interest and other expenses decreased to
$84,000 for the 40 weeks ended September 1996 compared to $189,000 for the 39
weeks ended September 1995. This decrease was attributable to a 39.4% reduction
in average borrowings outstanding on the lines of credit and a 52.5% decrease in
cattle notes payable compared to 1995. Average interest rates on the lines of
credit and cattle notes payable were 8.8% and 8.6%, respectively, for 1996,
compared to 10.9% and 10.1%, respectively, in 1995.
INCOME TAXES. Income tax expense was $559,000 for the 40 weeks ended
September 1996, an effective tax rate of 34.1%. The Company recorded no income
tax expense for the 39 weeks ended September 1995 since the reversal of a
portion of the valuation allowance for net deferred tax assets offset income
taxes that would otherwise have been provided.
23
<PAGE>
26 WEEKS ENDED DECEMBER 1995 COMPARED TO 26 WEEKS ENDED DECEMBER 1994
THE COMPARATIVE INFORMATION FOR THE 26 WEEKS ENDED DECEMBER 1994 IS INCLUDED
IN NOTE 16 TO THE FINANCIAL STATEMENTS. SEE "FINANCIAL STATEMENTS."
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations for
the 26 weeks ended December 1995 increased 291.5% to $1.1 million compared to
$281,000 for the 26 weeks ended December 1994. The increase in 1995 was
primarily due to a deferred tax benefit of $645,000 attributable to the reversal
of the remaining valuation allowance for the Company's net operating loss
carryforwards and other deferred tax assets.
NET SALES. Net sales for the 26 weeks ended December 1995 increased 47.7%
to $28.8 million compared to $19.5 million for the 26 weeks ended December 1994.
The increase was primarily attributable to sales to a significant new customer
and existing customers adding new stores. The impact of the significant new
customer was amplified by that customer's extensive marketing activity to
support its new product introduction. The increase in net sales in 1995 was the
result of a 56.2% increase in volume from 10.5 million pounds to 16.4 million
pounds, partially offset by a 4.9% decrease in the average net selling price per
pound from $1.84 to $1.75. The decrease in average net selling price was
attributable to lower prices received for products sold as unbranded and the
Company's decision to reduce its wholesale price for branded products 3.0% in
January 1995.
COST OF SALES. Cost of sales for the 26 weeks ended December 1995 increased
to $26.1 million compared to $17.4 million for the 26 weeks ended December 1994.
For 1995, cost of sales as a percentage of net sales was 90.6% or $1.59 per
pound, compared to 89.2% or $1.64 per pound for 1994. This increase in cost as a
percentage of net sales was primarily due to higher slaughter costs and a
decrease in the drop credit received.
GROSS PROFIT. Gross profit was $2.7 million for the 26 weeks ended December
1995 compared to $2.1 million for the 26 weeks ended December 1994. For 1995,
gross profit as a percentage of net sales, was 9.4% or $0.16 per pound, compared
to 10.8% or $0.20 per pound for 1994. This decrease was attributable to the 3.0%
wholesale price decrease in January 1995 and an increase in the volume of
products sold as unbranded. The Company also took actions to address an
over-supply of cattle during that period, including selling some live natural
cattle at commodity market prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the 26 weeks ended December 1995 were $2.1 million
compared to $1.7 million for the 26 weeks ended December 1994. As a percentage
of net sales these expenses declined to 7.4% in 1995, compared to 8.8% for 1994.
The additional expenses in 1995 related to salary and benefit costs for
additional personnel. The increase in net sales in 1995 was achieved with a
smaller increase in selling, general and administrative expenses, many of which
are fixed in nature.
INTEREST AND OTHER EXPENSES. Interest and other expenses increased to
$118,000 for the 26 weeks ended December 1995 compared to $110,000 for the 26
weeks ended December 1994. This increase was attributable to an increase in the
average interest rates on the line of credit and cattle notes payable. The
average interest rates on the line of credit and the cattle notes payable were
10.1% and 10.4%, respectively, for 1995, compared to 9.7% and 8.2%,
respectively, for 1994. These increases were partially offset by a 24.7%
reduction in average borrowings outstanding on the line of credit, along with a
26.9% decrease in average cattle notes payable outstanding compared to the 26
weeks ended December 1994.
INCOME TAXES. An income tax benefit of $645,000 was recorded for the 26
weeks ended December 1995. This benefit related to the reversal of the remaining
valuation allowance for the Company's net operating loss carryforwards and other
deferred tax assets. The Company recorded no income tax expense for the 26 weeks
ended December 1994 since the reversal of a portion of the valuation allowance
for net deferred tax assets offset income taxes that would otherwise have been
provided.
24
<PAGE>
52 WEEKS ENDED JUNE 1995 COMPARED TO 52 WEEKS ENDED JUNE 1994
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income from continuing operations
for the 52 weeks ended June 1995 increased to $620,000 compared to a loss from
continuing operations of $370,000 for the 52 weeks ended June 1994. The
improvement in operating results for 1995 was due to an improvement in the mix
of products sold and improved plant productivity.
NET SALES. Net sales for the 52 weeks ended June 1995 increased 24.3% to
$43.0 million compared to $34.6 million for the 52 weeks ended June 1994. The
increase was primarily attributable to adding new customers, existing customers
opening new stores, and a significant new customer's chainwide introduction of
the Company's products in April 1995. The increase in net sales in 1995 was the
result of a 28.2% increase in volume from 18.1 million pounds to 23.2 million
pounds, partially offset by a 2.6% decrease in the average net selling price per
pound from $1.91 to $1.86. The decrease in the average net selling price was
primarily attributable to lower prices received for products sold as unbranded
and the Company's decision to reduce its wholesale price for branded products
3.0% in January 1995.
COST OF SALES. Cost of sales for the 52 weeks ended June 1995 increased to
$38.4 million compared to $31.7 million for the 52 weeks ended June 1994. For
1995, cost of sales as a percentage of net sales was 89.2% or $1.66 per pound,
compared to 91.8% or $1.75 per pound for 1994. This decrease, both as a
percentage of sales and cost per pound was attributable to a reduction in the
cost of cattle, an increase in the drop credit received and improved plant
productivity.
GROSS PROFIT. Gross profit was $4.6 million for the 52 weeks ended June
1995 compared to $2.8 million for the 52 weeks ended June 1994. For 1995, gross
profit as a percentage of net sales was 10.8% or $0.20 per pound, compared to
8.2% or $0.16 per pound for 1994. This increase was attributable to an
improvement in the mix of products sold and higher sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the 52 weeks ended June 1995 were $3.8 million
compared to $3.0 million for the 52 weeks ended June 1994. As a percentage of
net sales these expenses were 8.8% in 1995 compared to 8.7% for 1994. The
additional expenses in 1995 were primarily attributable to additional broker
commissions on additional sales volume to conventional supermarkets, salary and
related benefit costs for additional personnel, and a charge for severance costs
associated with the former chief financial officer.
INTEREST AND OTHER EXPENSES. Interest and other expenses increased to
$245,000 for the 52 weeks ended June 1995 compared to $191,000 for the 52 weeks
ended June 1994. This increase was attributable to higher average outstanding
cattle notes payable of $667,000, partially offset by a decline in average
borrowings outstanding on the line of credit in 1995. Average interest rates on
the line of credit and the cattle notes payable were 10.4% and 9.3%,
respectively for 1995, compared to 8.1% and 7.4%, respectively for 1994.
INCOME TAXES. The Company recorded no income tax expense for the 52 weeks
ended June 1995 since a decrease in the valuation allowance for net deferred tax
assets offset income taxes that would otherwise have been provided.
25
<PAGE>
52 WEEKS ENDED JUNE 1994 COMPARED TO 52 WEEKS ENDED JUNE 1993
INCOME (LOSS) FROM CONTINUING OPERATIONS. Loss from continuing operations
for the 52 weeks ended June 1994 was $370,000 compared to income from continuing
operations of $290,000 for the 52 weeks ended June 1993. The loss in 1994 was
primarily attributable to a greater sales volume of unbranded products at a
lower net selling price per pound.
NET SALES. Net sales for the 52 weeks ended June 1994 increased 13.8% to
$34.6 million compared to $30.4 million for the 52 weeks ended June 1993. The
increase in net sales in 1994 was the result of a 17.5% increase in volume from
15.4 million pounds to 18.1 million pounds. This increase was attributable to
existing customers opening new stores and the addition of new customers. The
increase was partially offset by a 3.1% decrease in the average net selling
price per pound from $1.97 to $1.91. The decrease in the average net selling
price was attributable to lower prices received for products sold as unbranded.
COST OF SALES. Cost of sales for the 52 weeks ended June 1994 increased to
$31.7 million compared to $27.1 million for the 52 weeks ended June 1993. For
1994, cost of sales as a percentage of net sales was 91.8% or $1.75 per pound,
compared to 89.1% or $1.76 per pound for 1993. This increase in cost as a
percentage of net sales was primarily due to a decrease in the drop credit.
GROSS PROFIT. Gross profit was $2.8 million for the 52 weeks ended June
1994 compared to $3.3 million for the 52 weeks ended June 1993. In 1994, gross
profit, as a percentage of net sales was 8.2% or $0.16 per pound, compared to
10.9% or $0.21 per pound for 1993. This decrease was attributable to an increase
in the volume of products sold as unbranded.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the 52 weeks ended June 1994 were $3.0 million
compared to $2.7 million for the 52 weeks ended June 1993. As a percentage of
net sales these expenses declined to 8.7% in 1994 compared to 9.0% for 1993. The
additional expenses in 1994 were attributable to higher marketing costs, salary
and related benefit costs for additional personnel and a charge for severance
costs associated with the former chief executive officer.
INTEREST AND OTHER EXPENSES. Interest and other expenses decreased to
$191,000 for the 52 weeks ended June 1994 compared to $271,000 for the 52 weeks
ended June 1993. This decrease was attributable to the repayment of $600,000 in
debt in 1994 with proceeds from the sale of common stock and Series A Preferred
Stock. The average interest rate on cattle notes payable decreased to 7.4% in
1994 from 8.2% in 1993. The average interest rate on the line of credit was 8.0%
in both periods.
INCOME TAXES. The Company recorded no income tax expense for the 52 weeks
ended June 1994 since a valuation allowance was provided for the tax benefit of
the operating losses incurred during the period. The Company recorded no income
tax expense for the 52 weeks ended June 1993, since the reversal of a portion of
the valuation allowance for net deferred tax assets offset income taxes that
would otherwise have been provided.
26
<PAGE>
QUARTERLY DATA AND SEASONALITY
The following table sets forth certain financial information for the eight
quarters in the period ending September 28, 1996. The information for each of
these quarters is unaudited but includes all adjustments, consisting only of
normal recurring adjustments that management considers necessary to fairly
present this information when read in conjunction with the Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. The results of
operations for any quarter and any quarter-to-quarter trends are not necessarily
indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------
DEC. 24 MAR. 25 JUN. 24 SEP. 23 DEC. 23 MAR. 23 JUN. 29 SEP. 28
1994 1995 1995 1995 1995 1996 1996 1996
--------- --------- --------- --------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $ 10,514 $ 9,710 $ 13,795 $ 14,250 $ 14,541 $ 12,195 $ 14,927 $ 13,496
Cost of sales.................. 9,499 9,059 11,917 12,568 13,527 11,295 12,856 11,039
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit................... 1,015 651 1,878 1,682 1,014 900 2,071 2,457
Selling, general and
administrative expenses....... 949 840 1,215 1,200 935 974 1,272 1,458
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss)........ 66 (189) 663 482 79 (74) 799 999
Interest and other expenses,
net........................... 68 66 69 54 65 22 23 39
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income
taxes......................... (2) (255) 594 428 14 (96) 776 960
Income tax benefit (expense)... -- -- -- -- 645 34 (272) (321)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations.................... (2) (255) 594 428 659 (62) 504 639
Loss from discontinued
operations.................... (11) (51) -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).............. $ (13) $ (306) $ 594 $ 428 $ 659 $ (62) $ 504 $ 639
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) attributable
to common stock............... $ (22) $ (391) $ 519 $ 352 $ 569 $ (153) $ 413 $ 512
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings (loss) per share:
Continuing operations........ $ -- $ (.20) $ .31 $ .21 $ .30 $ (.08) $ .21 $ .25
Discontinued operations...... $ (.01) $ (.03) $ -- $ -- $ -- $ -- $ -- $ --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)............ $ (.01) $ (.23) $ .31 $ .21 $ .30 $ (.08) $ .21 $ .25
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Weighted average common and
common equivalent shares
outstanding................... 1,685 1,685 1,685 1,722 1,878 1,897 1,965 2,072
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Pro forma earnings (loss) per
share (Unaudited):
Continuing operations........ $ -- $ (.13) $ .30 $ .21 $ .30 $ (.03) $ .22 $ .27
Discontinued operations...... $ (.01) $ (.02) $ -- $ -- $ -- $ -- $ -- $ --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)............ $ (.01) $ (.15) $ .30 $ .21 $ .30 $ (.03) $ .22 $ .27
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Pro forma weighted average
common and common equivalent
shares outstanding
(Unaudited)................... 2,009 2,010 2,011 2,047 2,204 2,225 2,294 2,402
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
27
<PAGE>
The following table sets forth certain of the foregoing financial
information as a percentage of the Company's net sales for the periods
indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
DEC. 24 MAR. 25 JUN. 24 SEP. 23 DEC. 23 MAR. 23 JUN. 29
1994 1995 1995 1995 1995 1996 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 90.4 93.3 86.4 88.2 93.0 92.6 86.1
----- ----- ----- ----- ----- ----- -----
Gross profit.......................... 9.6 6.7 13.6 11.8 7.0 7.4 13.9
Selling, general and administrative
expenses............................. 9.0 8.7 8.8 8.4 6.4 8.0 8.5
----- ----- ----- ----- ----- ----- -----
Operating income (loss)............... 0.6 (2.0) 4.8 3.4 0.6 (0.6) 5.4
Interest and other expenses, net...... 0.6 0.7 0.5 0.4 0.5 0.2 0.2
----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations before income taxes....... -- (2.7) 4.3 3.0 0.1 (0.8) 5.2
Income tax benefit (expense).......... -- -- -- -- 4.4 0.3 (1.8)
----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations........................... -- (2.7) 4.3 3.0 4.5 (0.5) 3.4
Loss from discontinued operations..... (0.1) (0.5) -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
Net income (loss)..................... (0.1)% (3.2 )% 4.3% 3.0% 4.5% (0.5 )% 3.4%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
<CAPTION>
SEP. 28
1996
-----------
<S> <C>
Net sales............................. 100.0%
Cost of sales......................... 81.8
-----
Gross profit.......................... 18.2
Selling, general and administrative
expenses............................. 10.8
-----
Operating income (loss)............... 7.4
Interest and other expenses, net...... 0.3
-----
Income (loss) from continuing
operations before income taxes....... 7.1
Income tax benefit (expense).......... (2.4)
-----
Income (loss) from continuing
operations........................... 4.7
Loss from discontinued operations..... --
-----
Net income (loss)..................... 4.7%
-----
-----
</TABLE>
Historically, the Company has experienced lower earnings in the first and
fourth calendar quarters of the year, due to changes in consumer demand,
inclement weather, and seasonally higher prices for cattle in those periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the issuance of
privately placed debt and equity securities, raising a total of $4.9 million
between March 1989 and November 1995. The Company also has maintained credit
facilities with Norwest Bank Colorado, N.A. under a revolving line of credit,
and has financed cattle purchases with notes payable to cattle feeders and
ranchers.
LINES OF CREDIT. The Company currently has a line of credit for up to $2.3
million under a loan agreement with a bank (the "Loan Agreement"). The maximum
that can be borrowed under the line of credit is based on a formula of eligible
accounts receivable, cattle inventory, and meat inventory. The Loan Agreement
contains provisions requiring the Company to maintain certain financial ratios
and provides for limits on the amount of additional debt, capital expenditures
and the payment of dividends. Currently, the Company is in compliance with the
covenants of the Loan Agreement. The line of credit expires on November 1, 1996,
and is subject to annual renewal. The interest rate on the line of credit is
0.5% over the bank prime rate. As of September 28, 1996, no borrowings were
outstanding under the line of credit.
The Company entered into an additional $2 million revolving line of credit
(the "New Loan Agreement") in June 1996, with interest at 0.5% over the bank
prime rate. The New Loan Agreement is used to fund any margin calls associated
with outstanding futures contracts related to the Company's risk management
program. The New Loan Agreement expires on November 1, 1996, is subject to
annual renewal, and contains generally the same provisions as the Loan
Agreement. Currently, the Company is in compliance with the covenants of the new
Loan Agreement. As of September 28, 1996, $391,000 was outstanding under this
line of credit.
NOTES PAYABLE. The Company occasionally utilizes notes payable to finance
cattle inventory when either the interest rate is lower than the Company's line
of credit or when the line of credit is fully utilized. The interest rates on
these notes generally range from 0.75% to 3% over prime, although some notes do
28
<PAGE>
not bear interest. These notes are due when the cattle are delivered for
slaughter. As of September 28, 1996, $400,000 was outstanding on notes payable
to cattle feeders and ranchers.
The Company is discussing with its lender the renewal of the Loan Agreement
and the New Loan Agreement. In the event the Company does not renew such loans,
management believes that it would be able to find alternative sources for such
financing on similar terms.
CASH FLOWS. Net cash provided by operations for the 40 weeks ended
September 1996 was $1.5 million and primarily consisted of net income plus
depreciation, a decrease in the amount of cattle deposits required by ranchers,
and a reduction in accounts receivable due to cash collection efforts. These
sources of cash were partially offset by increased cattle inventory to meet
growing customer demand, an increase in prepaid expenses, lower accounts payable
and lower accrued expenses.
Net cash used in investing activities for the 40 weeks ended September 1996
was $804,000 and primarily related to deposits for future contracts in
conjunction with the risk management program, and the purchase of new equipment
for the Company's fabrication plant. Net cash used in financing activities was
$695,000 and consisted of net payments on the line of credit and cash dividends
on the Series A Preferred Stock. These sources of cash were offset in part by an
increase in cattle notes payable and borrowings on the line of credit for future
contracts.
Net cash provided by operations for the 39 weeks ended September 1995 was
$1.4 million and primarily consisted of net income plus depreciation, reduced
cattle inventory, and reduced supplies inventory. These sources of cash were
offset by an increase in cattle deposits, meat inventory and accounts receivable
due to growth in sales and lower accounts payable.
Net cash used in investing activities for the 39 weeks ended September 1995
was $147,000 and primarily related to the purchase of new equipment for the
Company's fabrication plant. Net cash used by financing activities was $1.6
million and consisted of repayments on the line of credit and capital leases.
These repayments were offset in part by borrowings on cattle notes payable.
Net cash provided by operations for the 26 weeks ended December 1995 was
$2.2 million and primarily consisted of net income plus depreciation, reduced by
the deferred income tax benefit, a decrease in cattle inventory due to a
decision by the Company during this period to not purchase cattle until directly
after slaughter, and an increase in accounts payable. These sources of cash were
partially offset by an increase in accounts receivable resulting from higher
sales volume and lower accrued expenses.
Net cash used in investing activities for the 26 weeks ended December 1995
was $236,000 and related to the purchase of new equipment for the Company's
fabrication plant. Net cash used in financing activities for the 26 weeks ended
December 1995 was $2.3 million, and consisted of repayments on cattle notes and
the line of credit, and cash dividends paid to holders of Series A Preferred
Stock. These payments were offset by proceeds from the issuance of additional
Common Stock.
Net cash used by operations for the 52 weeks ended June 1995 was $677,000
and primarily consisted of net income plus depreciation and reduced cattle
deposits. These sources of cash were offset by an increase in accounts
receivable and cattle inventories in response to higher sales volume.
Net cash used in investing activities for the 52 weeks ended June 1995 was
$147,000 and related to the purchase of new equipment for the Company's
fabrication plant. Net cash provided by financing activities was $856,000 and
primarily consisted of borrowings on cattle notes payable.
Net cash used by operations for the 52 weeks ended June 1994 was $353,000
and primarily consisted of a net loss offset in part by depreciation, and an
increase in accounts receivable due to growth in sales. These uses of cash were
offset in part by an increase in accounts payable and accrued expenses, a
decrease in cattle deposits, and a decrease in prepaid expenses.
29
<PAGE>
Net cash used in investing activities was $178,000 in 1994 and primarily
related to the purchase of new equipment for the Company's fabrication plant.
Net cash provided by financing activities was $559,000 for 1994 and primarily
consisted of proceeds from the issuance of additional Series A Preferred Stock
and Common Stock.
WORKING CAPITAL AND FUTURE OPERATIONS. At September 28, 1996, the Company
had working capital of $3.1 million compared to $2.5 million at December 23,
1995. As of June 29, 1996, the Company's current ratio (ratio of current assets
to current liabilities) was 2.5:1 compared to a current ratio of 1.9:1 as of
December 23, 1995.
The Company intends to use a portion of the net proceeds from this offering
for working capital and general corporate purposes. The Company believes that
the cash generated from operations and the net proceeds to the Company from this
offering will be sufficient, based on the Company's presently anticipated needs,
to fund capital expenditures, including the proposed new fabrication facility,
to fund the redemption of the Series A Preferred Stock, to fund capital
expenditures and start-up operations in the event the Company reactivates the
Limon Facility, and to provide for working capital to finance the Company's
growth for the next 24 months. There can be no assurance, however, that the
Company will not require additional financing prior to such date to fund its
operations. There can be no assurance that the Company will be able to raise
such capital on acceptable terms, if required. See "Risk Factors-- Management of
Growth; Facilities Expansion" and "Use of Proceeds."
RISK MANAGEMENT PROGRAM
In June 1996, the Company initiated a risk management program which utilizes
non-speculative purchases of futures contracts to help manage the risk
associated with fluctuations in variable priced contracts. These futures
contracts are designed to make the cost of cattle more predictable. The Company
has a risk management committee that reviews the Company's futures position on a
periodic basis to ensure compliance with the Company's risk management policies,
including the maximum amount of risk to be assumed in conjunction with such
activities. The Company expects that any gains or losses associated with the
risk management program will be offset on a dollar for dollar basis by higher or
lower cattle costs. The gains and losses associated with this program will be
recorded as an increase or reduction in cost of sales. See "Risk
Factors--Unpredictability in Cattle Prices; Significant Fluctuations in
Operating Results."
As of September 28, 1996, the Company had 772 futures contracts outstanding.
Each futures contract is for 40,000 pounds of live cattle weight or
approximately 35 head of cattle. The futures contracts are for cattle to be
delivered for the period October 1996 through October 1997 and represent
approximately 40% of forecasted cattle requirements. The aggregate unrealized
loss on the futures contracts outstanding at September 28, 1996 was
approximately $17,000. The unrealized gain or (loss) on futures contracts will
be recognized as an adjustment of the cost of the related cattle when they are
delivered to the Company for slaughter.
RECENT ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) was issued by the Financial Accounting
Standards Board in October 1995. This standard addresses the timing and
measurement of stock-based compensation expense. Entities electing to continue
to follow Accounting Principles Board Opinion No. 25 (APB 25) must make pro
forma disclosures of net income and earnings per share, as if the fair value
based method of accounting defined by SFAS 123 had been applied. SFAS 123 is
applicable to fiscal years beginning after December 15, 1995. The Company has
elected to retain the approach of APB 25 (the intrinsic value method), for
recognizing stock-based compensation in its consolidated financial statements.
The Company will include the disclosures required by SFAS 123 in future
financial statements.
30
<PAGE>
BUSINESS
[Company logo of mountains and cattle in black & white with following slogan:
"Not just a food, but a lifestyle"]
Coleman is the leading U.S. supplier and marketer of fresh, branded, natural
beef products from cattle which have never received hormones and antibiotics.
Since first pioneering this product concept in 1979, Coleman Natural Meats have
grown to command an estimated 56% share of the Natural Beef market segment, more
than three times the market share of its nearest competitor. Coleman believes
that its products have built a strong brand loyalty with consumers. This loyalty
is based on consistent superior taste and purity resulting from its certified
raising practices. Cattle in Coleman's program never receive antibiotics, feed
additives, hormones or other growth-promoting drugs, unlike commodity beef, most
of which comes from cattle which have received hormones and have been fed growth
stimulants or antibiotics. Coleman believes that it is the only company with
national distribution that has a USDA approved label stating that it has never
used such drugs. Coleman believes that beef sold by other producers in the
Natural Beef segment come from cattle that either have received antibiotics, or
have only not been given drugs in the 100 days prior to slaughter.
The Company's products are targeted at consumers who are part of a growing
lifestyle trend toward choosing foods that are superior tasting, closer to their
natural state, safe and grown with a commitment to the environment. This trend
is evidenced by the 18.5% compound annual growth rate in the natural food
industry from 1991 to 1995. At June 1996, Coleman's products were sold in only
535 natural and conventional supermarkets, or 2% of total U.S. chain and large
supermarkets. Despite this limited penetration, the Company generated $55.9
million in net sales for the 53 weeks ending June 1996.
Since the 1870s, the Coleman family ranch in Saguache County, Colorado, has
raised cattle without growth-stimulating hormones and antibiotics. In 1979, Mel
Coleman, Sr., a fourth generation Colorado rancher and the Company's founder and
Chairman of the Board, pioneered the Natural Beef market segment. Mr. Coleman is
generally recognized as the first supplier of branded beef products raised
without hormones and antibiotics. Demand for the product soon exceeded the
cattle supply of the Coleman family ranch. In 1984, the Coleman Certified
Rancher and Feedlot program was established to ensure a consistent and on-going
supply of cattle. Under this program, Coleman Certified Ranchers and Feedlots
are required to raise cattle following strict protocols. In 1986, the Company
opened its own fabricating and packaging facility in Denver, Colorado. Coleman
believes its control over cattle raising and the production process provides
confidence in its products with customers and consumers.
Coleman's objective is to increase the Natural Beef segment while profitably
extending its leadership within this segment. Coleman believes it can achieve
this objective by further penetrating supermarket accounts (both natural food
and conventional grocery) in existing and new geographic markets, by building
brand awareness with targeted consumer groups, by continuously improving its
operational efficiencies and by remaining true to its founding principles of
producing food that is superior tasting, good for you, safe
31
<PAGE>
and raised right -- the "slow, old-fashioned way." The Company believes it
enjoys a high degree of credibility within the cattle and retail food industries
as well as with consumers because of its integrity and commitment to remain
"true to the trail."
COLEMAN'S MARKETPLACE
The Company believes that consumer attitudes about foods are undergoing
fundamental, long term changes. These changes are being brought about by
healthier eating habits, changes in demographics caused by aging "baby boomers,"
increasing concerns regarding food safety, freshness and purity, and a greater
awareness of the environment. Consumers are rethinking what they eat and how
they live, creating many new market segments for lifestyle products such as
organic produce, bottled water and premium juices and coffees. The Company
believes a growing number of consumers are not only demanding high quality, good
tasting, fresh and pure products, but are also willing to pay a premium price
for them.
In 1995, The Trends Research Institute projected that one of the top 10
trends for 1996 and beyond would be the CLEAN FOOD DIET -- "a diet of foods free
of artificial preservatives, coloring, irradiation, pesticides, drug residues
and growth hormones." Further national consumer research by The Hartman Group in
1996 confirms that one out of ten people is currently purchasing "clean foods"
and that four out of every ten people are pre-disposed to selecting this "clean
food diet." The Company believes that the motivations for this lifestyle change
are nutrition and health concerns, environmental issues and the perception that
clean is safer. A 1996 Food Marketing Institute consumer research study revealed
that 97% of U.S. consumers are changing their eating habits to a healthier diet,
nine in ten U.S. shoppers choose their primary grocery store based in part on
the quality of its meat, nearly eight out of ten U.S. shoppers believe that
hormones and antibiotics in meats constitute a health hazard and one out of two
U.S. consumers seek out products labeled "environmentally sound."
The Company believes that Coleman Natural Meats, which deliver superior
taste while addressing nutrition, safety, purity and environmental concerns, are
uniquely positioned to take advantage of these consumer lifestyle trends. The
Company's reputation for integrity, combined with its certified cattle raising
and production processes, provide the consumer with assurances that its product
benefits are genuine. The Company believes the Natural Beef segment is poised
for the same type of growth as other premium segments within commodity-like
industries, such as produce, fresh juices or coffee, where taste, freshness and
quality have created growth opportunities.
The Company believes the rise of consumer trends to buy fresh, pure, high
quality food is most dramatically portrayed by the growth of the natural food
industry. According to the NATURAL FOOD MERCHANDISER, the natural food industry
has experienced 18.5% compound annual growth from 1991 to 1995. Further, sales
in this industry increased 22% in each of 1994 and 1995, to a total market of
$9.2 billion. Natural food supermarkets, such as Whole Foods Market and its
Fresh Fields subsidiary and Wild Oats Community Market and its Alfalfa's
subsidiary, share the Company's commitment to fresh, good tasting foods that are
produced using ecologically sound principles. The Company's products are now
carried in virtually all of the largest natural food supermarket accounts, and
are generally the only beef sold in these natural food supermarkets.
The Company believes that natural food products are now being more readily
accepted by mainstream consumers, as evidenced by a recent Food Marketing
Institute study indicating that over 67% of conventional supermarkets now carry
these products. The Company also estimates that Natural Beef is presently
carried in approximately 2,300 supermarkets out of the nearly 30,000 chain and
large natural food and conventional supermarket stores in the U.S. Coleman
Natural Meats are currently distributed in approximately 616 supermarkets. The
Company estimates that, as of December 1995, total wholesale and retail sales of
Natural Beef were approximately $85 million and $110 million, respectively.
Coleman believes that, relative to its nearest competitor, its products are
carried in fewer stores but it has three times the net sales. Since there is no
trade or industry data available on the Natural Beef segment, the
32
<PAGE>
Company has based these estimates on its review of certain publicly available
information. Although the Company believes such information is accurate, there
can be no assurance of this.
According to the USDA, after a decade of decline, per capita beef
consumption has risen 4% from 1993 to 1995. The Company believes that the
Natural Beef segment has grown dramatically in that same period. Given consumer
trends toward good tasting, safe, pure and healthful foods, the Company believes
that the Natural Beef segment will capture an increasing proportion of the
approximately $18 billion in annual retail supermarket sales. The Company
believes that as a result of its leadership position and marketing focus, it is
in a solid position to capitalize on this significant opportunity.
COLEMAN'S STRATEGY
Coleman's objective is to continue to expand the market for Natural Beef
while profitably extending its leadership of that market. In 1994, the Company
hired a new management team experienced in branded consumer products. This team
developed and is implementing the following business strategies to achieve its
market share and financial growth objectives:
- GROW THROUGH RETAIL EXPANSION. The Company's strategy is to expand its
business in the $18 billion fresh retail beef category by growing its
share within existing accounts, expanding with existing accounts as they
open new stores, further penetrating existing accounts where the Company
does not have chain wide distribution, and gaining distribution in new
accounts among the over 27,000 chain and large supermarkets that currently
do not carry Natural Beef.
- BUILD BRAND AWARENESS. The Company is committed to building lasting
consumer relationships and brand loyalty by consistently providing
superior tasting, safe and wholesome products that are raised and produced
using ecologically focused principles. The Company's marketing research
indicates that its consumers have above average education levels and react
well to factual, issue-based information. In order to build brand
awareness and credibility and to educate consumers about the benefits of
Coleman's products, the Company employs various types of marketing
communications, including focused local and national public relations
efforts, an integrated program of co-op advertising, in-store education,
product demonstrations, couponing, sponsorship and participation in
various community events, including product tastings and cooking classes
developed by its customers. As the Company grows in particular geographic
areas, it intends to use other media vehicles, on a very targeted basis,
to increase household penetration and purchase rates.
- ENHANCE OPERATING EFFICIENCIES. A larger and more efficient production
facility, funded by a portion of the proceeds of this offering, will allow
the Company to capture efficiencies seen by larger commodity producers.
The Company will continue its efforts to improve the mix of products sold
as branded, thereby improving gross profits. The Company has made, and
intends to continue making, investments in technology in order to remain
"leading edge" in the areas of quality, safety and customer service. These
investments include its quality assurance program, expanded use of and
enhancements to its patented Origen animal tracking software system, and
information systems advancements such as a UPC system for variable case
weight products and EDI (electronic data interface) for the grocery
industry.
- STAY TRUE TO THE TRAIL. The Company's business strategy is built on a
foundation of integrity and credibility. The Company's cattle have always
been raised slowly, "the way nature intended," and have never received
growth hormones and antibiotics. Like many of its consumers, Coleman is
concerned that overuse of antibiotics in livestock production may
contribute to the reduced ability of antibiotics to fight disease. The
Company also does not believe in giving drugs to healthy animals just to
speed up their growth and maximize weight gain. The Company intends to
remain true to these founding principles even though using antibiotics and
growth-promoting hormones would help reduce its costs. In order to fulfill
this strategy, Coleman continues to emphasize food safety, environmental
leadership, strong team relationships with its customers and a culture for
its employees that fosters commitment to the Company's goals.
33
<PAGE>
PRODUCT LINE
The Company provides to its retail, export and processing customers a full
range of fresh natural meat products, including steaks, roasts and ground beef,
from beef and lamb raised from birth without hormones and antibiotics. The
Company's retail customers receive products with approximately 28 days of shelf
life which is made possible by vacuum packaging. Products such as steaks and
roasts are sold in primal cuts, available in either regular or close trim.
Ground beef is produced from chuck, round and trim generated from the
fabrication process. The Company has approximately 50 different cuts of meat
that translate into approximately 350 stock keeping units ("SKUs") due to USDA
quality grades (prime, choice, select) and product specifications relating to
size ranges. Coleman Natural Meats are sold for a premium price which reflects
the value added to the products from the Company's natural raising process and
food safety practices. Supermarkets then market these products primarily under
the Coleman Natural Beef-Registered Trademark- or Coleman Natural
Lamb-Registered Trademark- brand names and, for two of the Company's customers,
under a premium positioned store brand name. For the 40 weeks ended September
1996, 86.3% of Coleman's net sales are attributable to these Branded Sales. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Products and Revenue."
The Company sells the trim from its processing at commodity prices as
unbranded products. Occasionally, a small portion of the Company's branded
products cannot be sold at a premium due to seasonal fluctuations in consumer
demand for particular items and must be sold at commodity prices. Combined,
these items constituted 13.7% of the Company's net sales for the 40 weeks ended
September 1996.
COLEMAN'S OPERATIONS
AT THE RANCH AND FEEDLOT
There are over 900,000 ranchers in the United States, some of whom are
presently raising cattle without hormones and antibiotics. All Coleman cattle
and lambs are raised by Coleman Certified Ranchers and Coleman Certified
Feedlots. In order to be certified, ranchers and feedlots must follow Coleman's
raising protocols. Currently, the Company has 350 Certified Ranchers in 17
western states. Additionally, over 1,000 ranchers have expressed an interest in
becoming Coleman Certified Ranchers. The Company also utilizes 9 Certified
Feedlots. All Coleman cattle graze free range until they are 12 to 15 months
old, at which time they are moved to a feedlot for finishing. The Coleman
production protocols for its Certified Ranchers and Feedlots include:
- NO DRUGS ADMINISTERED OR ADDED TO FEEDS. Hormones, antibiotics and other
drugs may not be used . . . ever. If an animal does become ill and
requires therapeutic treatment, it is treated, but then it is removed from
the Coleman program.
- NO ANIMAL BY-PRODUCTS CAN BE USED IN FEEDS. All Coleman cattle and lamb
are raised as vegetarians, the way nature intended.
- PURE FOOD AND WATER. Feed and water are randomly and periodically tested
for pesticide and herbicide residues.
- HUMANE ANIMAL HUSBANDRY PRACTICES. The Company believes that minimizing
the stress an animal undergoes during transportation or handling can help
improve the quality of the beef and lamb. Overcrowding on shipping
trailers and at feedlots is strictly prohibited.
- CATTLE BREEDS. The Company focuses on Angus bloodlines for consistent
flavor and tenderness crossed with other breeds such as Limousin or
Charolais for leanness.
Adherence to these protocols is verified through an affidavit process,
through the Company's Origen animal tracking system, through random testing of
the animal's blood and urine, and by periodic, unannounced site checks by
Coleman personnel. As a final verification that hormones and antibiotics were
34
<PAGE>
never used, all beef carcasses are tested for Coleman by an independent
laboratory for 48 different residues of antibiotics, pesticides, herbicides and
hormones.
All Coleman Certified Ranchers and Feedlots must adhere to the Company's
protocols. In addition, these ranchers and feedlots are encouraged to follow
nutrition and wellness programs that build the animals' natural immunities so
later therapeutic interventions can be avoided. They are also encouraged and
taught to utilize a system of planned pasture rotation for cattle that can help
improve the quality of the grassland, improve the watershed and return wildlife
to natural grasslands.
The Company typically takes title to and pays for cattle at the time of
slaughter. The Company pays a premium over the price of conventionally raised
cattle to compensate its Certified Ranchers and Feedlots for the extra time
required to raise Coleman certified cattle without growth-promotants and for the
extra care exercised in following the Coleman raising protocols.
The Company uses several types of cattle purchase contracts including a
variable price contract which follows either the cash or futures market and a
fixed price contract. The Company has implemented a purchase contract risk
management program to stabilize the cost of cattle. See "Risk
Factors--Unpredictability of Cattle Prices; Significant Fluctuations in
Operating Results" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Management Program."
AT THE PRODUCTION FACILITIES
The Company has an agreement with Excel for cattle slaughter at its
Sterling, Colorado facility. The Company has also pre-qualified seven additional
facilities and is evaluating reactivating its Limon Facility. All Coleman cattle
are USDA inspected and graded. In addition, the Company maintains its own
quality inspectors at the Excel facility to augment the efforts of the USDA
inspection team. Throughout this process, all Coleman cattle are segregated to
ensure no commingling with conventionally raised cattle. See "Risk
Factors--Dependence Upon Outside Slaughter Facilities."
All fabrication of Coleman Natural Beef occurs at the Company's USDA
inspected facility in Denver, Colorado. Orders are received, fabricated and
shipped to customers weekly. This practice allows the Company to achieve
inventory turnover in excess of 60 times per year, further insuring the
freshness of its products. Coleman's Quality Assurance Department works closely
with the USDA inspection team during processing and fabrication to insure that
Coleman's safety and cleanliness standards are consistently met. Additionally,
Coleman's processes are certified by the OCIA, the Organic Crop Improvement
Association. The Company believes it is the only U.S. meat company to have such
a certification.
All Coleman Natural Lamb is USDA choice and is processed at Iowa Lamb
Corporation, a contract facility in Hawarden, Iowa. The Company also maintains
its own quality inspector at this facility. Boxed lamb is shipped to Coleman's
Denver facility for staging and shipment to customers.
FOOD SAFETY INITIATIVES
The safety, quality and integrity of Coleman Natural Meats have been
paramount to the Company since its inception. In 1993, the Company voluntarily
formalized many of its food safety initiatives in a Hazard Analysis and Critical
Control Points program ("HACCP"). HACCP is a recognized food industry approach
to food safety that is based on developing systems to keep food safe, rather
than just inspecting product. Under its HACCP program, the Company assesses
potential food safety hazards associated with each of its operational steps from
the ranch to processing to distribution. Preventative or corrective measures are
taken at each step as needed to insure that every Coleman product is safe, clean
and free of hormones and antibiotics. In July 1996, the USDA finalized
regulations requiring all federally inspected meat and poultry plants to have
HACCP programs. The required implementation date for a HACCP program for a
facility of Coleman's size is January 1999.
35
<PAGE>
The primary focus of the Company's food safety program is to reduce and
eliminate bacteria. In a typical month, the Company performs over 6,500 tests or
inspections for over 70 conditions or bacteria that could compromise product
purity. Some of the Company's HACCP activities and testing include:
- Maintaining plant temperatures 5-10F DEG. below current USDA standards to
inhibit bacteria growth.
- Requiring microbial and visual inspections of the Company's fabrication
facility prior to the start of each day's production.
- Hiring additional meat inspectors to supplement the efforts of the USDA's
inspection team.
- Testing every batch of ground beef for pathogens, including fecal
coliforms, the source of E.coli.
- Statistical sampling of all finished products for bacterial contamination.
- Maintaining a toll-free consumer information telephone line where the
Company can obtain direct consumer feedback. The Company historically has
received fewer than two consumer complaints for every 1 million pounds of
meat sold.
SALES AND DISTRIBUTION
The Company believes that, unlike most commodity meat companies, it is
consumer driven rather than production driven. The Company believes that one of
its strengths is the flexibility and responsiveness with which it meets
customers' needs. Coleman strives to become a partner with each account. The
Company's products are sold by a staff of five sales people who cover the
various distribution channels. In addition, five food brokers represent the
Company in selected geographic areas. The Company's products are distributed to
all customers via common carrier either to individual stores or to central
warehouses. In all instances, the freight costs are ultimately borne by the
customer. The Company intends to take advantage of alternative distribution
channels such as export and restaurant and other foodservice accounts, and may
also seek to expand through strategic acquisitions.
CUSTOMERS
BRANDED RETAIL CUSTOMERS. As of September 1996, the Company distributed its
products to 17 natural food supermarket accounts representing 90 stores,
including chains such as Whole Foods Market and its Fresh Fields subsidiary, and
Wild Oats Community Market and its Alfalfa's subsidiary. These stores
concentrate on selling natural and organic foods. They share the Company's
philosophical commitment to minimizing the use of chemicals in agriculture and
providing high quality, good tasting, safe and pure foods. As a result, the only
brands of beef and lamb these stores typically carry are Coleman Natural Meats.
For the 40 weeks ending September 1996, this channel represented approximately
38.8% of net sales.
Additionally, as of September 1996, the Company's products are distributed
either directly or through distributors to 36 conventional supermarket accounts,
representing approximately 526 stores. The Company has system wide distribution
in 14 of these accounts. Some customers include Dorothy Lane Market, Grand
Union, King Kullen Grocery Co. Inc., Nob Hill Foods, Wegmans Food Markets, and
various divisions of the Great Atlantic & Pacific Tea Company, Inc. ("A&P"). The
Company's products are typically carried as a branded alternative to the chain's
commodity beef. These customers carry Coleman Natural Meats because it allows
them to address the growing consumer desire for natural foods, differentiate
themselves from their competition and feature a premium branded alternative to
commodity beef. A 1996 Food Marketing Institute consumer research study
indicates that the quality of meat carried by a supermarket is the third most
frequently mentioned reason for shopping that supermarket. For the 40 weeks
ending September 1996, this channel represented approximately 44.6% of net
sales.
The Company also exports its beef to Japan where two distributors sell the
products to a company which specializes in home delivery of prepared meals.
Sales to these Japanese distributors represent
36
<PAGE>
approximately 2.2% of the Company's net sales for the 40 weeks ending September
1996. The Company also sells to processors that use its products as an
ingredient in a further processed product which carries the benefits of Coleman.
The Company's processor sales represent approximately 0.7% of the Company's net
sales for the 40 weeks ending September 1996.
OTHER CUSTOMERS. The Company's unbranded trim and primal cuts not sold as
branded are sold on a commodity basis to numerous meat brokers, distributors or
foodservice processors. This channel represented approximately 13.7% of net
sales for the 40 weeks ending September 1996.
PRICING
The Company's branded products are premium priced, reflecting the extra time
required to raise cattle without growth-promotants and the value added to the
products through the Company's strict raising protocols and food safety
initiatives. The Company believes that, as the largest producer of Natural Beef,
it is able to establish its own prices and historically has not followed the
commodity market or any competitors in determining price. The Company's prices
have not changed since January 1995. This pricing strategy creates retail price
stability and makes it easier for customers to plan promotional and
merchandising activities for the Company's products. The Company estimates the
retail prices charged by its customers for its products are significantly higher
than retail prices for comparable cuts of commodity beef. See "Risk
Factors--Premium Pricing."
MARKETING
The Company's primary marketing focus is to expand the leadership position
it currently holds in the Natural Beef segment by continuing to build brand
awareness and educate the consumer. The Company believes this focus will
increase household penetration and purchase rates of the Company's products.
Coleman tries to build dialogues with consumers by educating them about the
uniqueness and benefits of its products. To do this, the Company relies
primarily on public relations activities, extensive point-of-sale materials and
targeted advertising programs. The Company also maintains a toll-free consumer
information line, displayed on its point-of-sale information materials, to
provide a direct link for consumers. Because the Company believes that meat
departments are regularly shopped by 92% of the Company's targeted consumers,
its complete program of merchandising tools, including posters, signs, brochures
and recipes, helps educate the consumer at the point where meal decisions are
made.
The Company believes that due to the commodity nature of beef sales in
general, very little consumer advertising occurs other than generic advertising
by beef industry trade associations. The Company believes this makes it easier
and more efficient for a branded niche company like Coleman to build brand
equity and awareness than it might be in other highly advertised branded
consumer categories. As the Company's distribution in specific geographic areas
increases, Coleman intends to increase the advertising programs for its
products.
COMPETITION
The Company's products compete broadly with all protein sources available to
consumers. More specifically, it competes with commodity beef and lamb sold in
most grocery stores, and with other branded beef and lamb products sold with
"natural" or other claims. As the Company's products are sold at prices
substantially higher than commodity beef, and somewhat higher than other fresh
branded beef products, there can be no assurance that the Company will not
experience competitive pressure with respect to pricing that could adversely
affect its business, results of operations and financial condition. See "Risk
Factors--Premium Pricing."
The Company believes it has no direct competition in the national sale and
distribution of beef from cattle that have never received hormones and
antibiotics and that were raised on feed and water tested for pesticides and
herbicides. There are several companies, such as Laura's Lean Beef Company, Inc.
and
37
<PAGE>
Maverick Ranch Association, Inc., which sell branded meat products that are
marketed under various leanness, natural or other claims. The Company believes
that some of these producers do not administer hormones to their cattle, but do
give antibiotic treatment, while others only avoid the administration of such
drugs, including hormones, during the 100 days prior to slaughter. The Company
also competes with Certified Angus Beef-Registered Trademark-, a marketing and
licensing program of the American Angus Association, which bases its brand
positioning on taste, but does not make any claims to be drug free or natural.
Coleman believes that it competes favorably on product quality and taste, brand
name recognition, safety and cleanliness, nutritional claims, customer service
(including the ability to service large volume accounts) and customer and
consumer loyalty. However, there can be no assurance that Coleman will not
experience increased competition, including price, from any one of these
entities, or from new companies that may enter the market.
The USDA's Food Safety and Inspection Service defines "natural" to mean that
during processing, nothing synthetic is added to the meat, a definition which
permits almost any beef producer to make natural claims. Thus, the Company has
focused its attention on developing brand name recognition by consumers as a
supplier of beef from cattle which is raised from birth completely free of
hormones and antibiotics. There can be no assurance that the Company will
successfully continue to associate its brand name in this manner or that any one
of the commodity meat producers or any retailer will not begin to make natural
claims for their commodity beef products in an attempt to benefit from the
Company's development of consumer recognition of this category. Most of these
commodity producers, and many grocery retailers, have significantly greater
resources than the Company. Although to date the Company has not experienced any
competition from commodity producers or retailers making natural claims, the
Company believes that if such competition did develop, consumers could
differentiate its products favorably on the basis of taste and quality from any
commodity meat product marketed under a natural claim. However, a decision by
any of these sources to market conventional products with a natural claim could
have a material adverse effect on the Company's business, results of operations
and financial condition. See "Risk Factors--Competition."
PROPRIETARY RIGHTS
The Company regards its trademarks, trade dress, trade secrets and similar
intellectual property as important to its success and attempts to protect such
property with registered and common law trademarks and copyrights, restrictions
on disclosure and other actions to forestall infringement. The Company has
developed and patented the proprietary Origen animal tracking system, which, if
fully implemented, would permit the Company to identify any meat product and its
origin at any point in the distribution stream, starting at its Certified
Ranchers. There can be no assurance that third parties will not infringe or
misappropriate the Company's trademarks, trade dress, patent or similar
proprietary rights.
GOVERNMENTAL REGULATIONS
The production and sale of the Company's products are subject to the rules
and regulations of various federal, state and local food and health agencies,
including the USDA. USDA inspectors are present at each slaughter facility used
by the Company and at the Company's fabrication plant on a daily basis. The
Company has not experienced any difficulty meeting the USDA requirements, and
believes it exceeds all USDA requirements as to cleanliness and processing
practices.
In addition to laws relating to its products, the Company is subject to
various federal, state and local environmental laws and regulations that limit
the discharge, storage, handling and disposal of a variety of substances.
Operations of the Company, and especially its processing facilities, are
governed by laws and regulations relating to workplace safety and worker health,
principally the Occupational Safety and Health Administration Act and
regulations thereunder as well as similar state laws and regulations. The
Company believes that it presently complies in all material respects with the
foregoing laws and regulations, although there can be no assurance that future
compliance with such laws, including any new laws which may be
38
<PAGE>
adopted, will not have a material adverse effect on the Company's business,
results of operations or financial condition.
EMPLOYEES
As of September 28, 1996, the Company had 145 employees, including 103 in
operations and 42 in selling, general and administrative positions. The Company
believes that it generally has good relationships with its employees. None of
its work force is unionized.
FACILITIES/PROPERTIES
Coleman's principal offices and its production facility are located in
Denver, Colorado, and consist of approximately 25,000 square feet of processing,
warehouse and office space. The Company leases this property pursuant to a lease
expiring December 1997. The Company is currently exploring the lease or purchase
of new facilities for its offices and fabrication plant and the reopening of the
Limon Facility, which has not been used by the Company since 1992. The Company's
Limon Facility is not subject to any mortgage or lien.
LEGAL PROCEEDINGS
The Company is not party to any legal proceedings.
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors and executive officers as of September 16, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
G. Melvin Coleman, Sr........................... 71 Chairman of the Board of Directors
Lee N. Arst..................................... 50 President and Chief Executive Officer; Director
Richard P. Dutkiewicz........................... 41 Vice President of Finance, Chief Financial
Officer, Treasurer and Secretary
Barry M. Davis(1)(2)............................ 56 Director
Wayne B. Kingsley(1)(2)......................... 53 Director
Howard Liszt.................................... 50 Director
C. Mickey Skinner............................... 62 Director
</TABLE>
- ------------------------
(1) Member of compensation committee.
(2) Member of audit committee.
G. MELVIN COLEMAN, SR., the founder of Coleman, has been Chairman of the
Board since the Company's incorporation in 1982, and served as President from
1982 until 1990. Mr. Coleman acts as the Company's public relations
spokesperson, but is not active in the day-to-day operations of the business.
Mr. Coleman also serves on the Board of Directors of The Nature Conservancy and
the Humane Sustainable Agriculture Advisory Board. Mr. Coleman received his B.S.
degree in Electrical Engineering from the University of Colorado.
LEE N. ARST has been President, Chief Executive Officer and a director since
July 1994. Prior to joining Coleman, Mr. Arst was President of DCCM, Inc., a
consulting firm, from September 1993 to June 1994. From 1972 to September 1993,
Mr. Arst was employed by Borden, Incorporated, including as Group Vice President
for the North American Pasta Division from February 1991 to August 1993, and as
Group Vice President of Confection and Main Meals, Grocery Products Division,
from 1986 to 1991. Mr. Arst received B.B.A. and M.B.A. degrees in Business from
the University of Wisconsin.
RICHARD P. DUTKIEWICZ has been Vice President of Finance, Treasurer and
Secretary, since April 1995. From December 1993 to March 1995, Mr. Dutkiewicz
was Controller of Tetrad Corporation, a manufacturer of image guided medical
products. Prior to his association with Tetrad, Mr. Dutkiewicz served as
Director of Finance and Administration for MicroLithics, Inc. from June 1990 to
November 1993, and in various accounting and finance positions with United
Technologies Corporation, Hamilton Trust Interests and KPMG Peat Marwick. Mr.
Dutkiewicz received a B.B.A. degree in Accounting from Loyola University of
Chicago, and received his C.P.A. designation in Illinois in 1978.
BARRY M. DAVIS has served as a director of the Company since March 1989.
Since 1985, Mr. Davis has been the Managing General Partner of Davis Venture
Partners, a venture capital partnership and a principal stockholder of the
Company. Mr. Davis serves on the board of directors of Numar Corporation, a
publicly traded energy technology company, Hillcrest Healthcare Systems, a
non-profit hospital management system located in Tulsa, and the University of
Tulsa. Mr. Davis is the past national Board Chairman of NASBIC and a recent past
director of the National Venture Capital Association. Mr. Davis received a
B.B.A. degree in Finance from the University of Oklahoma.
WAYNE B. KINGSLEY has served as a director of the Company since March 1989.
Since 1984, Mr. Kingsley has been Chairman of InterVen Partners, Inc., a venture
capital management firm, and since 1985 has been
40
<PAGE>
a general partner of the general partnership which is the general partner of
InterVen II, L.P., a principal stockholder of the Company. Mr. Kingsley serves
on the Board of Directors of several private companies, as well as Northwest
Pipe Company, a publicly traded manufacturer of steel pipe. Mr. Kingsley
received a B.A. degree in Government from Miami University and an M.B.A. from
the Darden School at the University of Virginia.
HOWARD LISZT has served as a director of the Company since September 1996.
Since January 1995, Mr. Liszt has been Chief Executive Officer of Campbell
Mithun Esty, a national marketing communications agency. Prior to that time, Mr.
Liszt served as President and Chief Operating Officer of Campbell Mithun Esty
from April 1989, and as General Manager of its Minneapolis office from 1984
until April 1989. Mr. Liszt received a B.A. in Journalism/Marketing and an
M.B.A. from the University of Minnesota.
C. MICKEY SKINNER has served as a director of the Company since August 1996.
Since April 1996, Mr. Skinner has been President of the Hershey Pasta and
Grocery Group, a division of Hershey Foods Corporation. Previously, he served as
President of the Hershey Pasta Group, a position he held since January 1984. Mr.
Skinner was an executive with Skinner Macaroni Company from 1972 until that
company was acquired by Hershey Foods Corporation in 1979, and has held various
executive positions with Hershey since that time. Mr. Skinner received a B.A.
degree in Business Administration and Engineering from the University of
Nebraska.
See "Certain Transactions" and "Principal and Selling Stockholders" for
information concerning certain of the Company's directors and executive
officers.
Directors of the Company hold office until the next annual meeting of
stockholders and until their successors are elected and qualified, or until
their earlier resignation or removal. All officers are appointed and serve at
the discretion of the Board of Directors. There are no family relationships
among any directors or executive officers of the Company.
The Company has established a compensation committee, an audit committee and
a risk management committee. The compensation committee reviews executive
salaries, administers any bonus, incentive compensation and stock option plans
of the Company, including the Company's Amended and Restated Stock Option Plan
and Omnibus Stock and Incentive Plan, and makes recommendations to the Board of
Directors regarding the salaries and other benefits of the executive officers of
the Company. In addition, the compensation committee consults with the Company's
management regarding benefit plans, and compensation policies and practices of
the Company.
The audit committee reviews the professional services provided by the
Company's independent auditors, the independence of such auditors from
management of the Company, the annual financial statements of the Company and
the Company's system of internal accounting controls. The audit committee also
reviews such other matters with respect to the accounting, auditing and
financial reporting practices and procedures of the Company as it may find
appropriate or as may be brought to its attention, and meets with the Company's
management.
The risk management committee consists of the Chief Executive Officer and
the Chief Financial Officer of the Company, as well as employees of the cattle
acquisition department. It reviews the practices and procedures of the Company's
risk management program on a periodic basis, and regularly reports its findings
to the Board of Directors.
Messrs. Davis, Kingsley, Coleman and Arst were elected to the Board of
Directors pursuant to a shareholders agreement entered into in connection with a
transaction pursuant to which entities affiliated with Messrs. Kingsley and
Davis purchased Common Stock and Series A Preferred Stock of the Company. Such
agreement terminates upon the consummation of the offering contemplated by this
Prospectus, although each of Messrs. Davis, Kingsley, Coleman and Arst will
remain as members of the Board of Directors after such termination.
41
<PAGE>
KEY PERSONNEL
The following are key management employees of the Company:
JOHN VAN ORMAN, 55, has been Director of Operations for the Company since
October 1987. Mr. Van Orman oversees the Company's plant operations, purchasing
and distribution functions. Mr. Van Orman has over 36 years of meat industry
experience, including with the Armour Company and Sterling Beef Company, a
division of Excel.
D'LEA MARTENS, 37, has been Director of Marketing for the Company since
April 1994. Ms. Martens oversees advertising, promotions, product development
and quality assurance. Prior to April 1994, Ms. Martens was a Business Line
Manager for Gerry Baby Products Company, a division of Huffy Corp., and a
Marketing Manager at Celestial Seasonings, Inc. She also held various marketing
positions with Vipont Pharmaceutical. Ms. Martens has a B.S. degree from
Stanford University and an M.B.A. degree from the University of California, Los
Angeles.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Beginning in fiscal 1995, the Company's Compensation Committee has made
recommendations to the Board of Directors regarding the compensation of its
executive officers. Messrs. Arst and Coleman are members of the Board of
Directors, and Mr. Arst is the President of the Company. Messrs. Arst and
Coleman have participated in the deliberations of the Board of Directors
concerning executive officer compensation, other than their own compensation.
DIRECTOR COMPENSATION
Directors are reimbursed for their expenses in performing duties and
attending board and committee meetings. Prior to and after the offering for
Messrs. Skinner and Liszt, and effective after the offering for Messrs. Davis
and Kingsley, each non-employee director receives $1,000 for each meeting of the
Board of Directors which he attends, $500 for each telephonic meeting of the
Board of Directors at which he is present, and $500 for each committee meeting
attended. At the meeting of the Board of Directors held on August 7, 1996, the
Board of Directors granted non-qualified stock options to purchase 2,850 shares
of the Company's Common Stock to each of Messrs. Kingsley, Davis and Skinner at
an exercise price per share of $6.15. For Messrs. Kingsley and Davis, fifty
percent of these options become exercisable on August 7, 1997, and are fully
exercisable on August 7, 1998. For Mr. Skinner, fifty percent of these options
become exercisable on August 30, 1997, and are fully exercisable on August 30,
1998. In addition, Mr. Skinner was granted an immediately exercisable
non-qualified stock option to purchase 2,850 shares of Common Stock at a price
of $6.15 per share. On September 16, 1996, the Board of Directors granted a
non-qualified stock option to purchase 2,850 shares of the Company's Common
Stock to Mr. Liszt at an exercise price per share of $9.50. Fifty percent of
these options became exercisable on September 16, 1997 and are fully exercisable
on September 16, 1998. In addition, Mr. Liszt was granted an immediately
exercisable non-qualified stock option to purchase 2,850 shares of Common Stock,
also at a price of $9.50 per share.
42
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation earned for services rendered in all capacities to the Company for
the calendar year ended December 31, 1995 ("Calendar Year 1995"), by the
Company's Chief Executive Officer and each other executive officer whose salary
and bonus for such calendar year was in excess of $100,000 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
-------------------------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OTHER($) GRANTED(#) COMPENSATION($)
- ---------------------------------------- ---------- ------------ ------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Lee N. Arst, Chief Executive Officer and
President.............................. $ 162,500 $ 25,000(2) $ 1,466(4) -- $ 555(6)
G. Melvin Coleman, Sr., Chairman of the
Board.................................. $ 114,442 $ 7,000(3) $ 17,470(5) -- --
</TABLE>
- ------------------------
(1) Prior to December 23, 1995, the Company's fiscal year was the 52/53 week
period ending on the last Saturday in June. Effective December 23, 1995, the
Company's fiscal year is the 52/53 week period ending on the last Saturday
in December. The compensation set forth in this table reflects the
compensation for Calendar Year 1995.
(2) Consists of a $25,000 bonus earned in Calendar Year 1995.
(3) Consists of a $7,000 bonus earned and paid in Calendar Year 1995.
(4) Consists of payments by the Company for additional life and disability
insurance policies, which the Company provides to all senior management
employees.
(5) Consists of $8,109 for use of an automobile leased by the Company. Also,
includes $9,361 in payments for life and disability insurance policies which
are separate from the Company's group insurance policies because of Mr.
Coleman's age.
(6) Consists of payments for a country club membership owned by the Company of
which Mr. Arst is currently the designated user.
43
<PAGE>
OPTION GRANTS
The following table contains information concerning the stock options
granted under the Company's Stock Option Plan to each of the Named Executive
Officers during the Calendar Year 1995.
OPTION GRANTS IN THE CALENDAR YEAR 1995
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE
UNDERLYING EMPLOYEES IN EXERCISE OR APPRECIATION FOR
OPTIONS CALENDAR YEAR BASE PRICE/ EXPIRATION OPTION TERM(2)
NAME GRANTED(1) 1995 SHARE DATE 5% 10%
- -------------------------------------------- ------------- ------------- ------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Lee N. Arst................................. -- -- -- -- -- --
G. Melvin Coleman Sr........................ 5,273 7.3% $ 1.74 8/1/2000 $ 2,535 $ 5,601
</TABLE>
- ------------------------
(1) All options were granted under the Company's Amended and Restated Stock
Option Plan. Generally, options granted under the Company's Amended and
Restated Stock Option Plan become exercisable as to 25% of the shares
underlying the option one year from the date of grant, and an additional 2%
every month thereafter, becoming fully vested four years after the grant
date. Options have ten-year terms so long as the optionee's employment with
the Company continues. Incentive stock options granted to a 10% stockholder,
of which Mr. Coleman is one, have terms no longer than five years. Incentive
stock options are granted at no less than fair market value as determined by
the Board of Directors, provided that grants to 10% stockholders, of which
Mr. Coleman is one, have an exercise price not less than 110% of fair market
value. Non-qualified stock options have an exercise price not less than fair
market value. All of the options shown above were granted as incentive stock
options.
(2) This column reflects the potential realizable value of each grant assuming
that the market value of the Company's stock appreciates at five percent or
ten percent annually from the date of grant over the term of the option,
which is five years for Mr. Coleman. There is no assurance provided to any
executive officer or any other holder of the Company's securities that the
actual stock price appreciation over the option term will be at the assumed
five percent and ten percent levels or at any other defined level. Unless
the market price of the Common Stock does in fact appreciate over the option
term, no value will be realized from the option grants made to the Named
Executive Officers.
44
<PAGE>
OPTION EXERCISES AND HOLDINGS
None of the Named Executive Officers exercised any options during Calendar
Year 1995. The following table sets forth information concerning option holdings
and the value of exercised options under the Company's Stock Option Plan for the
Calendar Year 1995, with respect to the Named Executive Officers.
CALENDAR YEAR 1995 OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED,
OPTIONS HELD AT DECEMBER IN-THE-MONEY OPTIONS
31, 1995 AT DECEMBER 31, 1995(2)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Lee N. Arst............................................. 35,786 66,461 $ 38,796 $ 72,048
G. Melvin Coleman, Sr................................... 8,761 6,515(3) $ 9,498( (4) $ 7,063(3)(4)
</TABLE>
- ------------------------
(1) Prior to December 23, 1995, the Company's fiscal year was the 52/53 week
period ending on the last Saturday in June. Effective December 23, 1995, the
Company's fiscal year is the 52/53 week period ending on the last Saturday
in December. The numbers set forth in this table reflect the option values
at January 26, 1996.
(2) Based on the fair market value of the underlying shares of Common Stock of
$2.47 per share, as determined by the Company's Board of Directors at the
then most recent Board meeting held January 26, 1996, less the per share
exercise price.
(3) Includes 306 and 406 exercisable and unexercisable options held by Polly
Coleman, Mr. Coleman's wife.
(4) Mr. Coleman, as a holder of greater than 10% of the Company's Common Stock,
has exercise prices for his options of 110% of the fair market value at the
date of grant.
EMPLOYMENT AGREEMENT
As of July 1, 1996, Mr. Arst entered into a two-year employment agreement
with the Company which is automatically renewable for additional one-year terms.
Under the Agreement, Mr. Arst will receive two years of salary and benefits upon
a termination of his employment with the Company, other than a termination for
cause. Mr. Arst has agreed to be subject to a non-compete for the longer of one
year after his termination for any reason or the period in which he is receiving
severance payments under the Agreement. See "Risk Factors--Dependence on Key
Personnel" and "Certain Transactions."
OMNIBUS STOCK AND INCENTIVE PLAN
On September 6, 1996, the Company adopted an Omnibus Stock and Incentive
Plan (the "Omnibus Plan") to provide long-term incentives to the Company's
directors, consultants and employees and to provide flexibility to the Company
in its ability to motivate, attract and retain the services of key employees
whose judgment, interest and special effort the Board considers especially
important to the success of the Company. As of September 16, 1996, options to
purchase 5,700 shares of Common Stock had been granted under the Omnibus Plan.
The Omnibus Plan is administered by the Company's Compensation Committee
(the "Committee") consisting of not less than two non-employee Directors. All
actions of the Committee, including all awards granted, are subject to
ratification by the Board of Directors. The Committee or the Board of Directors
select the key employees or consultants ("Participants") to whom grants
("Awards") are made under the Omnibus Plan; the size and type of Awards; and the
terms and conditions of such Awards. Awards may include Non-Qualified Stock
Options ("NQSOs"), Incentive Stock Options ("ISOs"), Stock Appreciation Rights
("SARs"), Phantom Stock Rights ("Phantom Rights"), restricted shares of Common
Stock
45
<PAGE>
("Restricted Stock") and incentive compensation in the form of shares of Common
Stock ("Performance Shares") or valued by reference to shares ("Performance
Units"). The Committee may make any Award in conjunction with any other amount
or compensation, including Awards previously made under the Omnibus Plan or any
other plan. Subject to the right of the Board of Directors to terminate the
Omnibus Plan, it remains in effect until all shares subject to it have been
purchased or acquired pursuant to its provisions; however, no Award may be
granted on or after September 5, 2006.
Subject to adjustment as set forth therein, the maximum number of shares
that may be granted under the Omnibus Plan is 332,000. Shares delivered under
the Omnibus Plan are authorized and unissued shares or treasury shares. All
shares subject to any Award which terminates, expires or lapses for any reason
without the issuance of such shares or without payment therefor, are available
for further Awards under the Omnibus Plan.
Options may be granted under the Omnibus Plan, either as ISOs, which comply
with the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or NQSOs which do not meet such requirements. The purchase
or option price per share, as determined by the Committee, may not be less than
100% of the fair market value of a share of Common Stock on the date of grant of
an ISO and not less than 85% of the fair market value of a share of Common Stock
on the date of grant of an NQSO. An ISO granted to a holder of more than 10% of
the combined voting power for all classes of stock of the Company, must have an
exercise price which is at least 110% of the fair market value of the shares.
The Committee determines the duration and conditions of exercisability of
Options, provided that no ISO may be exercisable later than the tenth
anniversary date of its grant. Further, no Participant may receive an Award of
ISOs that are first exercisable during any calendar year to the extent that the
aggregate fair market value of the shares subject to the Award or any other ISOs
under the Omnibus Plan or any other of the Company's option plans (determined as
of the date the Award is granted) exceeds $100,000.
SARs may be granted to Participants in lieu of Options, in addition to
Options, upon lapse of Options, independent of Options, and in each of the
foregoing manners in connection with previously awarded Options. Each Award of
an SAR shall specify the fair market value of the underlying shares of Common
Stock on the date of grant, the term of the SAR (not to exceed ten years) and
such other provisions as the Committee determines. Upon exercise of an SAR, a
Participant receives the excess of the fair market value of the Common Stock on
the date of exercise over the price fixed by the Committee at the day of grant,
multiplied by the number of shares as to which the SAR is exercised.
The Committee may grant Phantom Rights to Participants in such amounts, upon
such terms and subject to such conditions as the Committee shall determine. The
Committee shall establish the appropriate method of establishing the value of
each Phantom Right, provided that the method used at date of payment may not
differ from the method used to establish the initial value. Holders of Phantom
Rights shall not be deemed stockholders and have no rights related to any shares
of Common Stock, except to the extent provided in the Omnibus Plan. Payment for
Phantom Rights may be made in cash, in shares of Common Stock of equivalent
value or any combination thereof.
The Committee may grant shares of Restricted Stock to Participants in such
amounts, subject to such restrictions and for such periods as the Committee
determines. Shares subject to restrictions established by the Committee may not
be sold or otherwise transferred prior to the lapse of such restrictions.
The Committee may grant Performance Units or Performance Shares to
Participants in such amounts as the Committee determines. Each Award of a
Performance Unit or Performance Share specifies the value of the Performance
Unit or Performance Share, the duration of the performance period, the number of
Performance Units or Performance Shares and such other provisions as the
Committee determines. Each Performance Unit has an initial value of $1.00, and
each Performance Share initially represents one share. The Committee sets
performance goals which, depending on the extent to which they are met, will
46
<PAGE>
determine the ultimate value of the Performance Unit or Performance Share to the
Participant. Payment for Performance Units or Performance Shares shall be made
in cash, shares of Common Stock of equivalent value or any combination thereof.
In the event of a change in control of the Company, the Omnibus Plan
generally provides for the acceleration of applicable exercise dates and vesting
periods for the Options and other Awards granted to Participants under the
Omnibus Plan, in order to maintain the rights of the Participants. Performance
Units and Performance Shares shall be paid out based upon the extent to which
performance goals during the performance period have been met up to the date of
the change in control.
The Company believes that under current federal tax laws, the grant of
Options will not result in any tax liability for the Company. The Company will
be entitled to subsequent deductions to the extent, and only to the extent, that
Participants recognize ordinary income upon exercise of Options. A Participant
must generally recognize ordinary income equivalent to the difference between
the exercise price and the fair market value of a share of Common Stock on the
date of exercise of an NQSO. A Participant generally will have no taxable income
upon exercise of an ISO. Generally, if the Participant does not dispose of
shares acquired pursuant to the exercise of an ISO within two years of the grant
or one year of the exercise, any gain or loss realized on their subsequent
disposition will be capital gain or loss. If such holding period requirements
are not satisfied, the Participant generally will realize ordinary income at the
time of disposition in an amount equal to the excess of the fair market value of
the shares of Common Stock on the date of exercise (or, if less, the amount
realized upon disposition) over the option price. Any remaining gain is taxed as
long- or short-term capital gain.
The Committee, with the approval of the Board of Directors, may terminate,
amend or modify the Omnibus Plan, but without the approval of the stockholders
of the Company, no such termination, amendment or modification may: increase the
total number of shares of Common Stock which may be issued under the Omnibus
Plan or change the class of employees eligible to participate in the Omnibus
Plan.
The foregoing description of the Omnibus Plan is qualified in its entirety
by the provisions of the Omnibus Plan, a copy of which has been filed as an
exhibit to the Company's Registration Statement of which this Prospectus is a
part.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors on October 17, 1996 and approved by the Company's
stockholders on October 21, 1996, although such approval, and the start of the
first offering period under the Purchase Plan, is conditioned upon closing of
the offering to which this Prospectus relates. A total of 50,000 shares of
Common Stock have been reserved for issuance under the Purchase Plan. The
Purchase Plan, which is intended to qualify under Section 423 of the Code,
provides for two six-month offering periods each year beginning on the first of
January and the first of July. The Purchase Plan may be administered by the
Board of Directors or a committee appointed by the Board, with all major actions
ratified by the Board. Employees (including officers and employee directors) of
the Company are eligible to participate if they are employed by the Company for
at least 20 hours per week. The Purchase Plan permits eligible employees to
purchase Common Stock through payroll deductions, which may not exceed 10% of
the employee's base pay, at a price equal to the lower of 85% of the fair market
value of the Company's Common Stock at the beginning or end of the offering
period. Employees may end their participation in the offering at any time during
the offering period, and participation ends automatically on termination of
employment with the Company. In the event of certain changes in control, holders
of a right to purchase a share of Common Stock under the Purchase Plan are
entitled to receive the same consideration (whether cash, securities or other
property) which a holder of one share of Common Stock was entitled to receive
upon and at the time of such change
47
<PAGE>
in control. The Board of Directors has the power to amend or terminate the
Purchase Plan as long as such action does not adversely affect any outstanding
rights to purchase stock thereunder.
AMENDED AND RESTATED STOCK OPTION PLAN
On March 24, 1989, the Company adopted the Company's Stock Option Plan,
which was amended and restated on September 6, 1996 (the "Option Plan"). The
Option Plan provides for the grant of ISOs and NQSOs to key employees and
directors of the Company.
ADMINISTRATION. The Option Plan is administered by the Compensation
Committee of the Company's Board of Directors (the "Committee") consisting of
not less than two non-employee Directors. All actions of the Committee,
including grants of ISOs and NQSOs under the Option Plan, are subject to
ratification by the Board of Directors. The Committee or the Board of Directors
determines the key employees and directors eligible to receive options and the
terms thereof, all in a manner consistent with the Option Plan.
SHARES SUBJECT TO OPTIONS. The Option Plan provides that the total number
of shares of Common Stock that may be subject to options shall be 334,929
shares. As a result of the adoption of the Omnibus Plan, the Company no longer
intends to grant options under this Plan.
OPTIONS. The Option Plan provides for the grant of ISOs to key employees of
the Company and of non-qualified stock options to key employees, consultants and
directors, as selected by the Committee or the Board of Directors. The exercise
price of incentive stock options granted under the Option Plan must be at least
100% of the fair market value of the Common Stock on the date of grant and at
least 110% of such value for ISOs granted to any holder of 10% or more of the
voting power of all classes of stock of the Company. The exercise price of
NQSO's shall be at least 85% of the fair market value of the Common Stock on the
date of grant. Options granted under the Option Plan shall be exercisable for no
more than ten years or, in the case of ISOs granted to a 10% stockholder, for no
more than five years. The Committee may provide that any optionee may pay for
shares upon exercise of an option (i) in cash or (ii) by transferring to the
Company shares of Common Stock held for at least six months prior to the date of
exercise. In the event of a change in control of the Company, all vesting or
outstanding options would be accelerated. As of September 28, 1996, options to
purchase a total of 11,269 shares of Common Stock had been exercised, and
options to purchase a total of 304,514 shares at a weighted average price of
$2.52 per share were outstanding. See "Management--Omnibus Stock and Incentive
Plan" for tax effects of grants of ISOs and NQSOs under the Option Plan.
The foregoing description of the Option Plan is qualified in its entirety by
he provisions of the Option Plan, a copy of which has been filed as an exhibit
to Company's Registration Statement of which the Prospectus is a part.
401(K) PLAN
The Company adopted a 401(k) plan, effective March 5, 1992. The plan is
available to all employees who may join on the first of the month following 30
days of employment with the Company. An employee may contribute, on a pre-tax
basis, from 2% to 15% of the employee's total annual compensation from the
Company, not to exceed in any given year the maximum amount allowable under
Internal Revenue Service Regulations. The Company may make matching
contributions, but is not required to under the 401(k) plan. Employee
contributions, as well as certain other contributions, are fully vested and
non-forfeitable.
48
<PAGE>
CERTAIN TRANSACTIONS
In October 1993, the Company issued and sold to entities that may be deemed
affiliates of certain directors and/or principal stockholders of the Company an
aggregate of 216,000 shares of Series A Preferred Stock for an aggregate
purchase price of $216,000 and 51,953 shares of Common Stock for an aggregate
purchase price of $72,005, paid in cash. Additionally, such entities were issued
warrants to purchase an aggregate of 82,148 shares of Common Stock at an
exercise price of $1.3859 per share in consideration of the agreement by such
entities to waive the Company's failure to pay accrued cash dividends on shares
of Series A Preferred Stock, to waive the default interest which would have
accumulated on such dividends, to extend the dividend accrual dates for the
Series A Preferred Stock and to extend the redemption date for such Series A
Preferred Stock. In May 1994, the Company issued and sold to entities that may
be deemed affiliates of certain directors and/or principal stockholders of the
Company an aggregate of 213,206 shares of Common Stock for an aggregate price of
$295,496, paid in cash. See "Principal and Selling Shareholders."
The ownership of such Series A Preferred Stock, Common Stock and/or warrants
purchased or issued in 1993 and 1994 is as follows (Series A Preferred Stock,
Common Stock and warrants to purchase Common Stock issued in prior years are not
included in the following table):
<TABLE>
<CAPTION>
SHARES OF SERIES WARRANTS TO PURCHASE
NAME A PREFERRED STOCK SHARES OF COMMON STOCK COMMON STOCK(1)
- ------------------------------------------------ ----------------- ----------------------- ---------------------
<S> <C> <C> <C>
Boettcher Venture Capital Partners, L.P......... 34,824 42,750 13,247
InterVen II, L.P.(2)............................ 90,814 111,483 34,536
Davis Venture Partners, L.P.(3)................. 90,362 110,925 34,365
</TABLE>
- ------------------------
(1) These warrants, along with other warrants held by such persons, are required
to be exercised in connection with the offering to which this Prospectus
relates.
(2) Includes 452 shares of Series A Preferred Stock, 556 shares of Common Stock
and warrants to purchase 174 shares of Common Stock held by InterVen
Ventures 1987.
(3) Includes 18,072 shares of Series A Preferred Stock, 22,184 shares of Common
Stock and warrants to purchase 3,947 shares of Common Stock held by Energy
Minerals, L.L.C.
In October 1995, certain entities that may be deemed affiliates of certain
directors and/or principal stockholders of the Company agreed with the Company
to waive the failure of the Company to pay accrued dividends and to waive the
payment of default interest thereon, and to extend the redemption date of the
Series A Preferred Stock, in exchange for (a) the payment in cash by the Company
of such previously accrued dividends and (b) the payment by the Company of
additional dividends of 6% per annum on a quarterly basis, paid in shares of
Series A Preferred Stock (the "Paid-in-Kind Dividend"), on the shares of Series
A Preferred Stock which had been scheduled for redemption. The following table
sets forth the shares of Series A Preferred Stock which have been issued
pursuant to the Paid-in-Kind Dividend to such entities as of June 30, 1996, and
which would be issued to such entities prior to the redemption date of the
Series A Preferred Stock on November 30, 1996, if such stock is not earlier
redeemed.
<TABLE>
<CAPTION>
SHARES REQUIRED TO BE
SHARES ISSUED ON OR PRIOR ISSUED
NAME TO JUNE 30, 1996 PRIOR TO NOVEMBER 30, 1996
- ------------------------------------------------------------ ------------------------- ---------------------------
<S> <C> <C>
Boettcher Venture Capital Partners, L.P..................... 9,632 8,027
InterVen II, L.P.(1)........................................ 25,112 20,928
Davis Venture Partners, L.P.(2)............................. 24,988 20,823
</TABLE>
- ------------------------
(1) Includes 124 and 105 shares issued and to be issued, respectively, to
InterVen Ventures 1987.
(2) Includes 3,008 and 2,506 shares issued and to be issued, respectively, to
Energy Minerals, L.L.C.
49
<PAGE>
In May 1995, Lee N. Arst, the Company's Chief Executive Officer and
President, purchased 102,247 shares of the Company's Common Stock for aggregate
consideration of $141,710, paid in cash. See "Principal and Selling
Shareholders."
Mr. Arst entered into an Employment Agreement effective as of July 1, 1996,
with the Company. See "Management--Employment Agreement."
During the 52 weeks ended June 25, 1994 and June 24, 1995 the 26 weeks ended
December 23, 1995 and the 27 weeks ended June 29, 1996, the Company purchased
approximately $827,000, $588,000, $246,000 and $609,000, respectively, of cattle
from Coleman Ranches, Inc. pursuant to an Organic Cattle Supply Agreement dated
May 10, 1990 and amended as of May 7, 1992, May 7, 1993 and March 3, 1994. The
Organic Cattle Supply Agreement was initially entered into because the Company
intended to market and sell organic cattle in Japan. However, most of the
organic cattle purchased from Coleman Ranches, Inc. were sold by the Company in
Japan and the United States as natural rather than organic at lower prices. This
was primarily due to a lower demand in Japan for organic cattle than anticipated
by the Company. The aggregate purchase price for the cattle purchased pursuant
to this Agreement was approximately $123,000, $145,000, $90,000 and $239,000,
respectively, above the average market price for natural cattle purchased by the
Company from various Coleman Certified Ranchers during these periods. G. Melvin
Coleman, Sr., a director and principal shareholder of the Company, is the
President, a director and a principal shareholder of Coleman Ranches, Inc. This
agreement has expired.
On October 31, 1996, the Company is required to redeem all outstanding
shares of Series A Preferred Stock. The holders of Series A Preferred Stock have
agreed to waive the mandatory redemption date of such shares until November 30,
1996. Certain entities that may be deemed affiliates of certain directors and/or
principal stockholders of the Company hold shares of Series A Preferred Stock,
and assuming the redemption of such shares on November 30, 1996, such entities
will receive the following payments in such redemption:
<TABLE>
<CAPTION>
DOLLAR AMOUNTS TO BE PAID FOR REDEMPTION OF
SERIES A PREFERRED STOCK ON OR PRIOR TO NOVEMBER 30,
NAME 1996
- ----------------------------------------------------------- -----------------------------------------------------
<S> <C>
Boettcher Venture Capital Partners, L.P.................... $ 552,775
InterVen II, L.P.(1)....................................... $ 1,441,260
Davis Venture Partners, L.P.(2)............................ $ 1,434,088
</TABLE>
- ------------------------
(1) Includes $7,171 to be paid to InterVen Ventures 1987.
(2) Includes $172,599 to be paid to Energy Minerals, L.L.C.
Certain holders of shares of Common Stock, including Mr. Coleman, Mr. Arst,
Boettcher Venture Capital Partners, L.P., InterVen II, L.P. and InterVen
Ventures 1987 (of which entities Mr. Kingsley, a director of the Company, may be
deemed to be an affiliate), and Davis Venture Partners, L.P., and Energy
Minerals, L.L.C. (of which entities Mr. Davis, a director of the Company, may be
deemed to be an affiliate), have been granted certain demand and piggyback
registration rights, all of which have been waived in connection with this
offering except to the extent any such person or entity is a Selling
Stockholder. See "Description of Capital Stock--Registration Rights."
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of September 16, 1996, and as
adjusted to reflect the sale of the Common Stock offered hereby, by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
Common Stock; (ii) each of the Company's directors; (iii) the Company's Chief
Executive Officer and each of the Named Executive Officers; (iv) each Selling
Shareholder; and (v) the Company's directors and executive officers as a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING SHARES OWNED AFTER OFFERING
----------------------- BEING -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED(3) NUMBER PERCENT
- ---------------------------------------------------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
InterVen II, L.P.(2)(4)............................. 557,077 29.7% 71,550 485,527 14.5%
1011 Swarthmore Avenue, Suite 5
Pacific Palisades, CA 90272
Davis Venture Partners(2)(5)........................ 554,301 29.5 71,190 483,111 14.4
One Williams Center, Suite 2000
Tulsa, OK 74172
Boettcher Venture Capital Partners, L.P.(2)(6)...... 213,628 11.4 27,450 186,178 5.6
77 West Wacker Drive, 26th Floor
Chicago, IL 60601
G. Melvin Coleman, Sr.(7)........................... 148,254 7.8 34,695 113,559 3.4
5140 Race Court
Denver, CO 80216
James W. Coleman(8)................................. 120,641 6.4 17,348 103,293 3.1
P.O. Box 196
Saguache, CO 81149
Lee N. Arst(9)...................................... 164,174 8.5 -- 164,174 4.8
Barry M. Davis(2)(5)................................ 554,301 29.5 71,190 483,111 14.4
Wayne B. Kingsley(2)(4)............................. 557,077 29.7 71,550 485,527 14.5
Howard Liszt(10).................................... 2,850 * -- 2,850 *
C. Mickey Skinner(10)............................... 2,850 * -- 2,850 *
Ted V. Bell(2)(11).................................. 5,228 * 675 4,553 *
Mack H. Graves...................................... 16,701 * 2,092 14,609 *
All directors and executive officers as a group
(7 persons)(2)(12)................................ 1,437,403 73.4% 177,435 1,259,968 36.7%
</TABLE>
- ------------------------
* less than 1%
(1) The persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and except as indicated
in the other footnotes to this table. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options held by that person that are currently exercisable or exercisable
within 60 days are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) Warrants to purchase Common Stock held by any such persons will be
exercised in connection with this offering and are included in the
computations of shares beneficially owned by a person and the percentage
ownership of that person. The number of shares issuable upon exercise of
warrants has been estimated assuming that a portion of such warrants are
exercised on a cashless basis using
51
<PAGE>
$10.25 per share as the fair market price for purposes of determining the
number of shares tendered in consideration for the exercise price. See
"Underwriting."
(3) Assumes that the Underwriters' over-allotment option is not exercised. If
such over-allotment option is exercised in full, InterVen II, L.P. (and its
affiliate, InterVen Ventures 1987), Davis Venture Partners (and its
affiliate, Energy Minerals, Inc.), Boettcher Venture Capital Partners,
L.P., G. Melvin Coleman, Sr., James W. Coleman, Ted V. Bell and Mack H.
Graves will sell an additional 81,090 (including 20,402 upon exercise of
warrants), 80,682 (including 20,305 upon exercise of warrants), 31,110
(including 7,816 upon exercise of warrants), 39,321, 19,660, 765 (including
184 upon exercise of warrants) and 2,372 shares, respectively, in this
offering.
(4) Consists of 554,299 shares (including 91,940 upon exercise of warrants)
held by InterVen II, L.P. and 2,778 shares (including 462 upon exercise of
warrants) held by InterVen Ventures 1987. Does not include an option to
purchase 2,850 shares of Common Stock held by Mr. Kingsley, which option is
not currently exercisable. Mr. Kingsley, a director of the Company, is a
general partner of the partnership which is the general partner of InterVen
II, L.P., and is a trustee of a general partner of Interven Ventures 1987
and, as such, may be deemed to share voting and investment power with
respect to such shares. Mr. Kingsley disclaims beneficial ownership of such
shares, except to the extent of his interest in such shares arising from
his interests in the entities referred to herein. The number of shares
being offered includes 360 shares held by InterVen Ventures 1987.
(5) Consists of 475,963 shares (including 78,718 upon exercise of warrants)
held by Davis Venture Partners, L.P., and 78,388 shares (including 12,777
upon exercise of warrants) held by Energy Minerals, L.L.C. Does not include
an option to purchase 2,850 shares of Common Stock held by Mr. Davis, which
option is not currently exercisable. Mr. Davis, a director of the Company,
is the general partner of Davis Venture Partners, L.P., and the managing
member of Energy Minerals, L.L.C., and, as such, may be deemed to share
voting and investment power with respect to such shares. Mr. Davis
disclaims beneficial ownership of such shares, except to the extent of his
interest in such shares arising from his interests in Davis Venture
Partners, L.P., and Energy Minerals, L.L.C. The number of shares being
offered includes 10,058 shares being offered by Energy Minerals, L.L.C.
(6) Includes 35,266 shares issuable upon exercise of warrants.
(7) Includes 10,925 shares issuable upon exercise of options held by Mr.
Coleman and 449 shares issuable upon exercise of options held by his spouse
which are exercisable within the next 60 days. Does not include 138,633
shares which are held by Mr. Coleman's children, grandchildren and their
spouses, and of which Mr. Coleman disclaims beneficial ownership.
(8) Held jointly with his wife. Does not include 17,100 shares held by Mr.
Coleman's children, grandchildren and their spouses, and of which Mr.
Coleman disclaims beneficial ownership.
(9) Includes 56,236 shares issuable upon exercise of options held by Mr. Arst
which are exercisable within the next 60 days.
(10) Consists of a currently exercisable option to purchase 2,850 shares of
Common Stock.
(11) Includes 859 shares issuable upon exercise of warrants.
(12) Includes 81,207 shares issuable upon exercise of options which are
currently exercisable.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000 shares of
common stock, $.001 par value (the "Common Stock"), and 5,000,000 shares of
undesignated preferred stock, $.001 par value (the "Preferred Stock"), after
giving effect to the redemption of the Series A Preferred Stock immediately
following the closing of this offering, and the authorization of shares of
undesignated Preferred Stock, as described below. The discussions of the Common
Stock and Preferred Stock here and elsewhere in this Prospectus are qualified in
their entirety by reference to (i) the Amended and Restated Certificate of
Incorporation of the Company, as amended, a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part, and
(ii) the applicable provisions of Delaware law.
COMMON STOCK
As of September 28, 1996, there were 1,668,609 shares of Common Stock
outstanding which were held of record by 29 stockholders. There will be
3,363,181 shares of Common Stock outstanding (assuming the exercise of warrants
to purchase 219,572 shares of Common Stock, no exercise of outstanding options
after September 28, 1996, and no exercise of the Underwriters' over-allotment
option) after giving effect to the sale of the shares of Common Stock to the
public offered hereby.
Holders of Common Stock are entitled to one vote per share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights in the election of directors. Stockholders casting a plurality of votes
of the shares present in person or represented by proxy at a meeting for an
election of directors may elect all of the directors standing for election.
Subject to the preferences that may be applicable to any outstanding Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. Dividends are not cumulative,
except to the extent they are declared but unpaid. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of Preferred Stock, if any, then
outstanding. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be issued upon
completion of this offering will be fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to the rights
of the holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
SERIES A PREFERRED STOCK; UNDESIGNATED PREFERRED STOCK
The Company's Amended and Restated Certificate of Incorporation authorizes
3,491,396 shares of Series A Preferred Stock, of which 3,400,962 shares are
outstanding at September 16, 1996. The Company expects to redeem all outstanding
Series A Preferred Stock immediately following the closing of this offering.
Upon such redemption, the shares of Series A Preferred Stock so redeemed, as
well as the remaining shares of authorized Series A Preferred Stock, are
automatically cancelled and shall return to the status of undesignated Preferred
Stock, of which the Company will then have 5,000,000 shares authorized under its
Amended and Restated Certificate of Incorporation. The Board of Directors has
the authority to issue such Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the stockholders. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock. The issuance of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. At
present, the Company has no plans to issue any of the Preferred Stock.
53
<PAGE>
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (for the purposes of determining the number of shares
outstanding, under Delaware law, those shares owned (x) by persons who are
directors and also officers and (y) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer are
excluded from the calculation); or (iii) on or subsequent to such date, the
business combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder.
Section 203 defines a business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation, equity incentive plans, Bylaws and Delaware law may have a
significant effect in delaying, deferring or preventing a change in control of
the Company and may adversely affect the voting and other rights of other
holders of Common Stock. In particular, the ability of the Board of Directors to
issue Preferred Stock without further stockholder approval may have the effect
of delaying, deferring or preventing a change in control of the Company and may
adversely affect the voting and other rights of other holders of Common Stock.
REGISTRATION RIGHTS
After this offering, the holders of 1,672,932 shares of Common Stock
(assuming no exercise of the Underwriters' overallotment option) will be
entitled to certain rights with respect to the registration of such shares under
the Act. Under the terms of the agreement between the Company and the holders of
such registrable securities, if the Company proposes to register any of its
securities under the Act, either for its own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein. The stockholders benefiting from these rights may also require
the Company on two (2) separate occasions to file a registration statement under
the Act at the Company's expense with respect to their shares of Common Stock,
and the Company is required to use its diligent best efforts to effect such
registration. These rights are subject to certain conditions and limitations,
among them the right of the underwriters of an offering to limit (but not
eliminate) the number of shares included in such registration.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Norwest Shareowner
Services.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 3,352,472 shares of
Common Stock outstanding (assuming the exercise of warrants to purchase 219,572
shares of Common Stock, no exercise of the Underwriters' overallotment option,
and no exercise of outstanding options after September 16, 1996). Of these
shares, the 1,700,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Act, except that any
shares purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Act ("Affiliates"), may generally only be sold in compliance with
the limitations of Rule 144 described below. See "Underwriting."
SALES OF RESTRICTED SHARES
The remaining 1,652,472 shares of Common Stock outstanding upon completion
of this offering are deemed "Restricted Shares" under Rule 144, of which
1,651,916 shares are subject to the lock-up agreements described below (the
"Lock-up Agreements"). Beginning 90 days and 180 days after the date of this
Prospectus, 556 and 1,651,916 Restricted Shares, respectively, will first become
eligible for sale in the public market pursuant to Rules 144 and 701 under the
Act, upon the expiration of the Lock-up Agreements, or as a result of a
combination of the foregoing. Of the Restricted Shares that will first become
available for sale in the public market 180 days after the date of this
Prospectus, approximately 1,178,761 shares will be subject to certain volume and
other resale restrictions pursuant to Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
including an Affiliate, who has beneficially owned Restricted Shares for at
least two years, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Common Stock (approximately 33,735 shares immediately
after this offering) or (ii) the average weekly trading volume of the Common
Stock in the Nasdaq National Market during the four calendar weeks preceding the
date on which notice of the sale is filed, provided certain requirements
concerning availability of public information, manner of sale and notice of sale
are satisfied. In addition, Affiliates must comply with the restrictions and
requirements of Rule 144, other than the two-year holding period requirement, in
order to sell shares of Common Stock which are not restricted securities. Under
Rule 144(k), a person who is not an Affiliate and has not been an Affiliate for
at least three months prior to the sale and who has beneficially owned
Restricted Shares for at least three years may resell such shares without
compliance with the foregoing requirements. In meeting the two and three year
holding periods described above, a holder of Restricted Shares can include the
holding periods of a prior owner who was not an Affiliate. The two and three
year periods described above do not begin to run until the full purchase price
or other consideration is paid by the person acquiring the Restricted Shares
from the issuer or an Affiliate.
In addition, the Commission has proposed an amendment to Rule 144 which
would reduce the holding period for shares subject to Rule 144 to become
eligible for sale in the public market. This proposal, if adopted, would
increase the number of shares of the Company's Common Stock eligible for
immediate resale following the expiration of the Lock-up Agreements.
OPTIONS
Rule 701 under the Act provides that the shares of Common Stock acquired on
the exercise of options granted under the Company's stock plans prior to the
date of this Prospectus may be resold by persons, other than Affiliates,
beginning 90 days after the date of this Prospectus, subject only to the manner
of sale provisions of Rule 144, and by Affiliates under Rule 144 without
compliance with its two-year minimum holding period, subject to certain
limitations.
At September 16, 1996, there were 7,482 shares of Common Stock outstanding
from prior exercises of options and 108,950 shares of Common Stock were issuable
upon the exercise of currently exercisable stock options (collectively, the
"Option Shares"). Beginning 90 days after the date of this Prospectus, all of
55
<PAGE>
the Option Shares would be eligible for sale in reliance on Rule 701; the
holders of 81,207 Option Shares have entered into Lock-up Agreements pursuant to
which they have agreed not to offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of any Option Shares for a period of 180 days
after the date of this Prospectus.
The Company intends to file a registration statement on Form S-8 under the
Act to register approximately 696,671 shares of Common Stock issuable upon
exercise of outstanding stock options and options that may be granted pursuant
to the Company's Option Plan, Omnibus Plan and Employee Stock Purchase Plan.
Such registration statement is expected to be filed shortly after the date of
this Prospectus and will become effective automatically upon filing. Shares
covered by such registration statement will thereupon be eligible for sale in
the public markets to the extent applicable.
LOCK-UP AGREEMENTS
The Selling Stockholders, all executive officers and directors of the
Company and certain other shareholders have agreed, pursuant to the Lock-up
Agreements, not to directly or indirectly without the prior written consent of
Principal Financial Securities, Inc., offer to sell, contract to sell or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to an
aggregate of 1,651,916 shares of Common Stock, options or warrants to purchase
an aggregate of 304,322 shares of Common Stock and any securities convertible or
exchangeable for shares of Common Stock beneficially owned by them or any such
securities hereafter acquired by them for a period of 180 days after the date of
this Prospectus otherwise than (a) as a bona fide gift or gifts or (b) as a
distribution to such holder's limited partners or shareholders, provided the
donee or donees or distributees thereof, as the case may be, agree to be bound
by the Lock-up Agreement. The Company has agreed to a similar 180-day Lock-up
Agreement, provided, that such Lock-up Agreement does not apply to securities
issued pursuant to the Company's Option Plan, Omnibus Plan and Employee Stock
Purchase Agreement.
REGISTRATION RIGHTS
After the offering pursuant to this Prospectus, certain stockholders will be
entitled to registration rights with respect to shares held by them.
Registration of such shares under the Act would result in such shares becoming
freely tradeable without restriction under the Act (except for shares purchased
by affiliates of the Company) immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."
56
<PAGE>
UNDERWRITING
The Underwriters named below, acting through the representatives, Principal
Financial Securities, Inc. and Hanifen, Imhoff Inc. (the "Representatives"),
have severally agreed with the Company and the Selling Stockholders, subject to
the terms and conditions of the Underwriting Agreement, to purchase from the
Company and the Selling Stockholders the number of shares of Common Stock set
forth opposite their respective names below. The Underwriters are committed to
purchase and pay for all of such shares if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Principal Financial Securities, Inc........................................
Hanifen, Imhoff Inc........................................................
-----------------
Total.................................................................. 1,700,000
-----------------
-----------------
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession of not in
excess of $ per share, of which $ may be reallowed to other dealers.
After the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representative. No such reduction
shall change the amount of proceeds to be received by the Company and the
Selling Stockholders as set forth on the cover page of this Prospectus.
Warrants to purchase an aggregate of 197,572 shares of Common Stock are
being purchased by the Underwriters from certain Selling Stockholders. The
Underwriters intend to exercise these warrants as part of this offering in a
cashless exercise transaction. In this cashless exercise transaction, a portion
of the shares to be issued are redeemed as consideration for the warrant
exercise price. The portion of shares to be redeemed depends on the public
offering price, which is assumed to be $10.25 per share. Upon such cashless
exercise, the Underwriters will receive 170,865 shares, which shares will be
sold in the offering. The purchase price paid by the Underwriters for such
warrants will be the public offering price for the 170,865 shares to be received
upon exercise less the related underwriting discounts and commissions.
Solely to cover over-allotments, if any, the Selling Stockholders have
granted to the Underwriters an option, exercisable during the 30-day period
after the date of this Prospectus, to purchase 206,293 shares and warrants to
purchase 48,707 shares (assuming the previously described cashless exercise
transaction is effected using a $10.25 per share market price). The 206,293
shares would be purchased by the Underwriters at the offering price less
underwriting discounts and commissions. The warrants would be purchased at the
public offering price less underwriting discounts and commissions and the
warrant exercise price. The Underwriters intend to exercise such warrants for
cash at an exercise price of $1.3859 per share. Upon exercise, the Underwriters
will pay the Company the warrant exercise price. If the Underwriters do not
exercise their over-allotment option, the Selling Stockholders must exercise
these warrants for cash. To the extent that the Underwriters exercise the
over-allotment option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares of Common Stock to be purchased by it shown in the above table
represents as a percentage of the
57
<PAGE>
1,700,000 shares offered hereby. If purchased, the additional shares will be
sold by the Underwriters on the same terms as those on which the 1,700,000
shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Act.
Pursuant to the terms of lock-up agreements, all officers and directors and
the Selling Stockholders have agreed with Principal Financial Securities, Inc.
that, until 180 days after the date of this Prospectus, they will not offer to
sell, contract to sell or otherwise sell, dispose of or grant any rights with
respect to any shares of Common Stock, (other than shares and warrants sold in
this offering), any options or warrants to purchase shares of Common Stock or
any securities convertible or exchangeable for shares of Common Stock, now owned
or hereafter acquired directly by such holders or with respect to which they
have the power of disposition, other than with the prior written consent of
Principal Financial Securities, Inc., which may, in its sole discretion and at
any time without public notice, release all or any portion of the securities
subject to lock-up agreements. Certain other stockholders of the Company have
agreed to a similar lock-up for 90 days after the date of this Prospectus. The
Company has also agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, or any options or warrants to
purchase Common Stock other than options or other securities issued under the
Company's Omnibus Plan until 180 days after the date of this Prospectus, except
with the prior written consent of Principal Financial Securities, Inc. See
"Shares Eligible for Future Sale."
The Underwriters will not make sales to accounts over which they exercise
discretionary authority (i) in excess of 5% of the number of shares of Common
Stock offered hereby, and (ii) unless they obtain specific written consent from
the customer.
Prior to this offering, there was been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock has been determined through negotiations among the Company and the
Representatives. Among the factors considered in such negotiations were
prevailing market conditions, certain financial information of the Company,
market valuations of other companies that the Company and the Representatives
believe to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.
LEGAL MATTERS
The validity of the Common Stock offered hereby is being passed upon for the
Company by Ireland, Stapleton, Pryor & Pascoe, P.C., Denver, Colorado. Certain
legal matters in connection with the offering are being passed upon for the
Underwriters by Fredrikson & Byron, P.A., Minneapolis, Minnesota.
EXPERTS
The financial statements of Coleman Natural Products, Inc. as of June 24,
1995, December 23, 1995 and September 28, 1996, and for the 52 weeks ended June
26, 1993, June 25, 1994 and June 24, 1995, for the 26 weeks ended December 23,
1995, and for the 40 weeks ended September 28, 1996 have been included herein
and in the registration statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
58
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto, part of which has been omitted in accordance
with the rules and regulations of the Commission. For further information about
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as part thereof.
Statements contained in the Prospectus as to the contents of any contract or any
other document referred to are not necessarily complete, and in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement. The Registration Statement (with exhibits
and schedules thereto) can be inspected and copied at the public reference
facilities maintained by the Commission at its principal offices at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can also be obtained from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
59
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-3
Balance Sheets, June 24, 1995, December 23, 1995, and September 28, 1996................................... F-4
Statements of Operations, 52 weeks ended June 26, 1993, June 25, 1994 and June 24, 1995, 26 weeks ended
December 23, 1995, 39 weeks ended September 23, 1995 (unaudited), and 40 weeks ended September 28,
1996..................................................................................................... F-6
Statements of Stockholders' Equity (Deficit), 52 weeks ended June 26, 1993, June 25, 1994 and June 24,
1995, 26 weeks ended December 23, 1995, 39 weeks ended September 23, 1995 (unaudited), and 40 weeks ended
September 28, 1996....................................................................................... F-7
Statements of Cash Flows, 52 weeks ended June 26, 1993, June 25, 1994 and June 24, 1995, 26 weeks ended
December 23, 1995, 39 weeks ended September 23, 1995 (unaudited), and 40 weeks ended September 28,
1996..................................................................................................... F-8
Notes to Financial Statements.............................................................................. F-9
</TABLE>
F-1
<PAGE>
(This page has been left blank intentionally.)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
COLEMAN NATURAL PRODUCTS, INC.:
We have audited the accompanying balance sheets of Coleman Natural Products,
Inc. (the Company) as of June 24, 1995, December 23, 1995, and September 28,
1996, and the related statements of operations, stockholders' equity (deficit),
and cash flows for the 52 weeks ended June 26, 1993, June 25, 1994 and June 24,
1995, for the 26 weeks ended December 23, 1995, and for the 40 weeks ended
September 28, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Coleman Natural Products,
Inc. as of June 24, 1995, December 23, 1995, and September 28, 1996, and the
results of its operations and its cash flows for the 52 weeks ended June 26,
1993, June 25, 1994 and June 24, 1995, for the 26 weeks ended December 23, 1995,
and for the 40 weeks ended September 28, 1996, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
October 18, 1996
F-3
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 24, DECEMBER 23, SEPTEMBER 28,
1995 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 296,591 $ 21,531 $ 63,391
Trade accounts receivable net of allowance for doubtful accounts of
$15,000 at June 24, 1995, $20,000 at December 23, 1995, and
$87,500 at September 28, 1996 (notes 5 and 7)..................... 3,102,229 3,297,290 3,005,282
Other receivables................................................... 94,199 101,476 147,533
Inventories (notes 3, 5 and 8)...................................... 2,971,365 992,211 1,221,573
Deposits on cattle purchases (note 8)............................... 248,360 198,902 --
Margin account (notes 4 and 5)...................................... -- -- 510,340
Prepaid expenses.................................................... 25,516 36,209 120,870
Deferred tax assets (note 6)........................................ -- 645,000 86,000
------------ ------------ -------------
Total current assets.............................................. 6,738,260 5,292,619 5,154,989
------------ ------------ -------------
Property and equipment:
Machinery and equipment............................................. 379,424 384,663 495,156
Office furniture and equipment...................................... 631,601 750,188 860,818
Leasehold improvements.............................................. 157,366 258,599 299,783
Vehicles............................................................ 18,161 29,243 62,658
------------ ------------ -------------
1,186,552 1,422,693 1,718,415
Less accumulated depreciation....................................... 699,088 766,425 896,722
------------ ------------ -------------
Net property and equipment........................................ 487,464 656,268 821,693
------------ ------------ -------------
Other assets.......................................................... 102,879 80,977 331,273
------------ ------------ -------------
$ 7,328,603 $6,029,864 $ 6,307,955
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
(CONTINUED)
F-4
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
JUNE 24, DECEMBER 23, SEPTEMBER 28,
1995 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current liabilities:
Cash overdrafts.................................................... $ -- $ 211,144 $ --
Accounts payable................................................... 887,746 978,432 837,307
Accrued expenses................................................... 596,986 390,951 394,189
Notes payable (notes 4 and 5)...................................... 3,470,621 1,161,084 791,052
Deferred hedging gain (note 4)..................................... -- -- 29,700
Obligation under capital lease..................................... 26,495 13,745 --
------------- ------------- -------------
Total current liabilities........................................ 4,981,848 2,755,356 2,052,248
------------- ------------- -------------
Mandatorily redeemable preferred stock, $.001 par value, 3,491,396
shares authorized, 3,340,826, 3,355,860, and 3,400,962 shares
issued and outstanding at June 24, 1995, December 23, 1995, and
September 28, 1996, respectively; aggregate liquidation preference
of $3,400,962 at September 28, 1996 (note 9)....................... 3,340,826 3,355,860 3,400,962
Stockholders' equity (deficit):
Common stock, $.001 par value, authorized 15,000,000 shares; issued
1,549,403 shares at June 24, 1995, 1,651,650 shares at December
23, 1995, and 1,668,610 shares at September 28, 1996 (note 14)... 1,549 1,652 1,669
Additional paid-in capital......................................... 1,179,862 1,005,083 860,348
Accumulated deficit................................................ (2,175,482) (1,088,087) (7,272)
------------- ------------- -------------
Total stockholders' equity (deficit)............................. (994,071) (81,352) 854,745
------------- ------------- -------------
Commitments (note 13)
$ 7,328,603 $ 6,029,864 $ 6,307,955
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
52 WEEKS ENDED 26 WEEKS 39 WEEKS 40 WEEKS
------------------------------------- ENDED ENDED ENDED
JUNE 26, JUNE 25, JUNE 24, DECEMBER 23, SEPTEMBER 23, SEPTEMBER 28,
1993 1994 1995 1995 1995 1996
----------- ----------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(NOTE 16) (UNAUDITED)
Net sales (note 7)................... $30,410,215 $34,558,685 $43,002,412 $28,790,675 $37,755,477 $40,617,584
Cost of goods sold (note 8).......... 27,106,128 31,729,728 38,367,453 26,094,755 33,544,336 35,190,037
----------- ----------- ----------- ------------ ------------- -------------
Gross profit..................... 3,304,087 2,828,957 4,634,959 2,695,920 4,211,141 5,427,547
----------- ----------- ----------- ------------ ------------- -------------
Operating expenses:
Selling............................ 1,302,797 1,322,918 1,403,205 841,075 1,191,525 1,322,321
General and administrative......... 1,440,662 1,685,240 2,367,005 1,294,190 2,063,389 2,381,669
----------- ----------- ----------- ------------ ------------- -------------
2,743,459 3,008,158 3,770,210 2,135,265 3,254,914 3,703,990
----------- ----------- ----------- ------------ ------------- -------------
Operating income (loss).......... 560,628 (179,201) 864,749 560,655 956,227 1,723,557
----------- ----------- ----------- ------------ ------------- -------------
Other income (expense):
Interest expense................... (269,409) (200,855) (256,483) (118,826) (189,049) (61,989)
Other, net......................... (1,663) 9,748 11,471 566 -- (21,753)
----------- ----------- ----------- ------------ ------------- -------------
(271,072) (191,107) (245,012) (118,260) (189,049) (83,742)
----------- ----------- ----------- ------------ ------------- -------------
Income (loss) from continuing
operations before income
taxes.......................... 289,556 (370,308) 619,737 442,395 767,178 1,639,815
Income tax benefit (expense) (note
6)................................. -- -- -- 645,000 -- (559,000)
----------- ----------- ----------- ------------ ------------- -------------
Income (loss) from continuing
operations..................... 289,556 (370,308) 619,737 1,087,395 767,178 1,080,815
Discontinued operations (note 2):
Loss from operations of Coleman
Originals, Inc................... -- (654,283) (61,015) -- -- --
Loss on disposal of Coleman
Originals, Inc................... -- -- (54,088) -- (51,386) --
----------- ----------- ----------- ------------ ------------- -------------
Net income (loss)................ $ 289,556 $(1,024,591) $ 504,634 $1,087,395 $ 715,792 $ 1,080,815
----------- ----------- ----------- ------------ ------------- -------------
----------- ----------- ----------- ------------ ------------- -------------
Net income (loss) attributable to
common stock....................... $ 222,090 $(1,076,885) $ 326,582 $ 921,235 $ 480,470 $ 772,085
----------- ----------- ----------- ------------ ------------- -------------
----------- ----------- ----------- ------------ ------------- -------------
Earnings (loss) per share:
Continuing operations.............. $ .16 $ (.29) $ .26 $ .51 $ .31 $ .38
Discontinued operations............ $ -- $ (.44) $ (.07) $ -- $ (.03) $ --
----------- ----------- ----------- ------------ ------------- -------------
Net income (loss).................. $ .16 $ (.73) $ .19 $ .51 $ .28 $ .38
----------- ----------- ----------- ------------ ------------- -------------
----------- ----------- ----------- ------------ ------------- -------------
Weighted average common and common
equivalent shares outstanding...... 1,413,952 1,477,532 1,684,705 1,811,302 1,697,358 2,020,884
----------- ----------- ----------- ------------ ------------- -------------
----------- ----------- ----------- ------------ ------------- -------------
Pro forma earnings (loss) per share
(note 17) (Unaudited):
Continuing operations.............. $ .31 $ .51 $ .46
Discontinued operations............ $ (.06) $ -- $ --
----------- ------------ -------------
Net income......................... $ .25 $ .51 $ .46
----------- ------------ -------------
----------- ------------ -------------
Pro forma weighted average common and
common equivalent shares
outstanding (Unaudited)............ 2,007,968 2,137,236 2,348,285
----------- ------------ -------------
----------- ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK (NOTE 14) ADDITIONAL STOCKHOLDERS'
------------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 27, 1992...................... 1,278,650 $ 953,293 $ -- $ (1,945,081) $ (991,788)
Accretion of preferred stock................ -- (67,466) -- -- (67,466)
Net income.................................. -- -- -- 289,556 289,556
------------ ----------- ----------- ------------ ------------
BALANCE, JUNE 26, 1993...................... 1,278,650 885,827 -- (1,655,525) (769,698)
Common stock issued for cash................ 270,753 375,254 -- -- 375,254
Accretion of preferred stock................ -- (52,294) -- -- (52,294)
Net loss.................................... -- -- -- (1,024,591) (1,024,591)
------------ ----------- ----------- ------------ ------------
BALANCE, JUNE 25, 1994...................... 1,549,403 1,208,787 -- (2,680,116) (1,471,329)
Change in par value of common stock......... -- (1,207,238) 1,207,238 -- --
Accretion of preferred stock................ -- -- (27,376) -- (27,376)
Net income.................................. -- -- -- 504,634 504,634
------------ ----------- ----------- ------------ ------------
BALANCE, JUNE 24, 1995...................... 1,549,403 1,549 1,179,862 (2,175,482) (994,071)
Common stock issued for cash................ 102,247 103 141,607 -- 141,710
Cash dividends paid on preferred stock...... -- -- (301,352) -- (301,352)
In-kind dividends on preferred stock........ -- -- (15,034) -- (15,034)
Net income.................................. -- -- -- 1,087,395 1,087,395
------------ ----------- ----------- ------------ ------------
BALANCE, DECEMBER 23, 1995.................. 1,651,650 1,652 1,005,083 (1,088,087) (81,352)
Common stock issued for cash................ 16,959 17 52,411 -- 52,428
Cash dividends on preferred stock........... -- -- (152,044) -- (152,044)
In-kind dividends on preferred stock........ -- -- (45,102) -- (45,102)
Net income.................................. -- -- -- 1,080,815 1,080,815
------------ ----------- ----------- ------------ ------------
BALANCE, SEPTEMBER 28, 1996................. 1,668,609 $ 1,669 $ 860,348 $ (7,272) $ 854,745
------------ ----------- ----------- ------------ ------------
------------ ----------- ----------- ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
52 WEEKS ENDED 26 WEEKS 39 WEEKS 40 WEEKS
---------------------------------------- ENDED ENDED ENDED
JUNE 26, JUNE 25, JUNE 24, DECEMBER 23, SEPTEMBER 23, SEPTEMBER 28,
1993 1994 1995 1995 1995 1996
------------ ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)........................... $ 289,556 $ (1,024,591) $ 504,634 $1,087,395 $ 715,792 $ 1,080,815
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization............. 134,241 127,862 142,640 67,337 117,360 130,296
Loss (gain) on sale of property and
equipment............................... (15,032) 1,226 1,602 -- -- (2,000)
Deferred income tax benefit............... -- -- -- (645,000) -- 559,000
Changes in operating assets and
liabilities:
Trade accounts receivable, net.......... (308,253) (334,570) (945,497) (195,061) (68,151) 292,008
Other receivables....................... (54,431) 1,123 (11,651) (7,277) 16,459 (46,057)
Inventories............................. 3,236,227 37,674 (833,651) 1,979,154 835,853 (229,362)
Deposits on cattle purchases............ (387,020) 208,859 327,435 49,458 (9,752) 198,902
Prepaid expenses........................ (56,227) 84,703 (9,587) (10,693) (18,946) (84,661)
Other assets............................ (14,574) 21,500 (21,902) 21,902 (63,946) (250,296)
Accounts payable and accrued expenses... 342,016 522,750 169,225 (115,349) (169,411) (137,887)
Deferred hedging gain................... -- -- -- -- -- 29,700
------------ ------------ ------------ ------------ ------------- -------------
Net cash provided (used) by operating
activities.......................... 3,166,503 (353,464) (676,752) 2,231,866 1,355,258 1,540,458
------------ ------------ ------------ ------------ ------------- -------------
Cash flows from investing activities:
Purchase of equipment....................... (190,720) (212,834) (171,561) (236,141) (159,583) (295,721)
Proceeds from the sale of equipment......... 23,250 58,397 24,250 -- 12,500 2,000
Increase in margin account.................. -- -- -- -- -- (510,340)
Increase in other assets.................... -- (23,183) -- -- -- --
------------ ------------ ------------ ------------ ------------- -------------
Net cash used by investing
activities.......................... (167,470) (177,620) (147,311) (236,141) (147,083) (804,061)
------------ ------------ ------------ ------------ ------------- -------------
Cash flows from financing activities:
Borrowings under notes payable.............. 32,333,849 38,500,308 56,402,528 40,392,040 44,743,915 28,185,888
Payments under notes payable................ (32,189,710) (38,507,748) (55,523,449) (42,701,577) (46,229,562) (28,555,920)
Increase (decrease) in cash overdrafts...... (97,898) -- -- 211,144 78,853 (211,144)
Cash dividends on preferred stock........... -- -- -- (301,352) (149,546) (152,044)
Payments on long-term debt and capital
leases.................................... (3,007,253) (34,230) (23,436) (12,750) (26,040) (13,745)
Proceeds from the issuance of common stock.. -- 375,254 -- 141,710 -- 52,428
Proceeds from the issuance of preferred
stock..................................... -- 225,856 -- -- -- --
------------ ------------ ------------ ------------ ------------- -------------
Net cash provided (used) by financing
activities.......................... (2,961,012) 559,440 855,643 (2,270,785) (1,582,380) (694,537)
------------ ------------ ------------ ------------ ------------- -------------
Increase (decrease) in cash and cash
equivalents......................... 38,021 28,356 31,580 (275,060) (374,205) 41,860
Cash and cash equivalents at beginning of
period...................................... 198,634 236,655 265,011 296,591 382,559 21,531
------------ ------------ ------------ ------------ ------------- -------------
Cash and cash equivalents at end of period.... $ 236,655 $ 265,011 $ 296,591 $ 21,531 $ 8,354 $ 63,391
------------ ------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------ ------------- -------------
Supplemental disclosure of cash flow
information--cash paid during the period for
interest.................................... $ 370,956 $ 197,347 $ 256,139 $ 118,826 $ 197,208 $ 61,989
------------ ------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------ ------------- -------------
Supplemental disclosure of noncash investing
and financing activities--equipment acquired
under capital leases........................ $ -- $ -- $ 15,970 $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------- -------------
------------ ------------ ------------ ------------ ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Coleman Natural Products, Inc. (the Company) is engaged in producing,
packaging and marketing fresh branded natural beef and lamb products, primarily
in the United States. The Company's branded natural beef and lamb products are
produced from cattle and lamb raised from birth without antibiotics, feed
additives, hormones, or other growth-promoting drugs. The principal customers of
the Company are natural food supermarkets and conventional grocery supermarkets.
On June 28, 1996, Coleman Natural Products, Inc. (the Parent) entered into
an agreement and plan of merger whereby each of its wholly-owned subsidiaries
merged with and into the Parent.
CHANGE IN YEAR END
Effective for the 26 weeks ended December 23, 1995, the Company changed its
fiscal year to the 52/53 week period ending on the last Saturday in December.
The years ended June 26, 1993, June 25, 1994 and June 24, 1995 each included 52
weeks.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers treasury bills,
commercial paper, certificates of deposit, and money market funds with a
maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
The provision for doubtful accounts was $10,091, none, $71,264, $5,582 and
$67,500 and uncollectible accounts charged to the allowance were $57,898, none,
$106,265, $582 and none for the 52 weeks ended June 26, 1993, June 25, 1994 and
June 24, 1995, for the 26 weeks ended December 23, 1995, and for the 40 weeks
ended September 28, 1996, respectively. The allowance for doubtful accounts was
$97,807 as of June 26, 1992 and $50,000 as of June 27, 1993.
F-9
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Dressed meat, meat products, and by-product inventories are stated at the
lower of cost, based on a weighted average cost basis, or market.
Cattle inventories are stated at the lower of cost, based on a specific lot
identification, or market, and include feed and freight costs.
Losses on cattle purchase commitments are recorded when the price of the
purchase commitments exceeds the current market price.
Supply inventories are stated at the lower of cost (first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided
principally using the straight-line method over the estimated useful lives of
the assets, which range from 3 to 7 years.
Machinery and equipment includes equipment acquired under capital leases
with a net book value of $26,556 at June 24, 1995, $17,400 at December 23, 1995,
and none at September 28, 1996.
On an ongoing basis, the Company assesses the recoverability of property and
equipment taking into consideration any events or circumstances which may have
diminished its fair value. Impairment losses are recorded when indications of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Based on current
circumstances, management has determined that no indicators of impairment exist.
OTHER ASSETS
The Company incurred certain specific incremental costs directly
attributable to the proposed offering of securities which have been deferred and
included in other assets. The deferred amounts will be charged against the
proceeds of the offering upon closing.
SALES
Sales are recognized upon shipment to the customer and are recorded net of
discounts granted to customers for in-store promotions.
PER SHARE DATA
Historical earnings (loss) per share is computed based on net income (loss)
for the period reduced by dividends on and accretion of mandatorily redeemable
preferred stock, divided by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
include stock options and warrants. Common and common equivalent shares issued
at prices below the anticipated public offering price during the 12-month period
prior to the proposed offering have been included in the calculation as if they
were outstanding for all periods presented (using the treasury stock method and
the anticipated initial public offering price).
F-10
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with the Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS No.
109). Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the statement of
operations in the period that includes the enactment date.
FUTURES CONTRACTS
From time to time, the Company manages the risk associated with fluctuations
in the price of cattle through the use of futures contracts. Gains and losses
from hedging transactions are recognized in the period the corresponding cattle
purchases or sales are recorded.
INTERIM FINANCIAL STATEMENTS
The financial statements for the 39 weeks ended September 23, 1995 are
unaudited. In management's opinion, these unaudited financial statements have
been prepared on the same basis as the audited financial statements and include
all adjustments, consisting only of normal recurring accruals, necessary for the
fair presentation of the Company's results of operations and cash flows for that
period.
Results for interim periods are not necessarily indicative of the results
that may be expected for the complete fiscal year.
(2) DISCONTINUED OPERATIONS
During the 52 weeks ended June 25, 1994, the Company discontinued operations
of its subsidiary, Coleman Originals, Inc., a producer of shelf-stable sauces.
Throughout the 52 weeks ended June 24, 1995, the Company continued to fill
customer orders to liquidate its inventory. During the 52 weeks ended June 24,
1995, all machinery and equipment was sold, trade receivables were collected,
and trade accounts payable were paid. The loss on disposal represents the loss
on the inventory which could not be sold and was donated to charity, and
miscellaneous costs associated with the disposition of the assets. The Company
reported total cumulative losses of this former subsidiary of $769,386. These
losses were recognized over a period commencing the quarter ended December 1993
and terminating the quarter ended March 1995. An additional loss of $54,088 from
the disposal of this former subsidiary was reported during the quarter ended
March 1995. The amounts presented in the statements of operations reflect no
applicable income taxes, as the tax benefits of the losses incurred were offset
by an increase in the valuation allowance for net deferred tax assets.
F-11
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 24, DECEMBER 23, SEPTEMBER 28,
1995 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Live cattle (3,108, 249, and 471 head, respectively)........ $ 2,341,650 $ 181,164 $ 350,060
Dressed meat and by-products................................ 526,595 722,758 812,754
Supplies.................................................... 103,120 88,289 58,759
------------ ------------ -------------
$ 2,971,365 $ 992,211 $ 1,221,573
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
(4) RISK MANAGEMENT PROGRAM
The Company has a risk management program which utilizes non-speculative
purchases of futures contracts to help manage the risk associated with
fluctuations in variable priced cattle purchase contracts.
Cattle futures contracts require the Company to buy cattle at a fixed price
at a future date. Each futures contract is for 40,000 pounds of live cattle
weight or approximately 35 head of cattle. The futures contracts are traded on
the Chicago Mercantile Exchange (The Exchange) and are guaranteed by the
Exchange and all clearing members of the Exchange and therefore have nominal
credit risk.
At September 28, 1996, the Company had 772 outstanding futures contracts to
purchase approximately 30,880,000 pounds of cattle which offset the risk of
price fluctuations associated with variable priced contracts to purchase natural
cattle. The futures contracts are for cattle to be delivered for the period
October 1996 through October 1997. The Company is required to maintain a margin
account equal to $600 per contract adjusted for unrealized gains or losses. At
September 28, 1996, the Company had $510,340 in margin accounts to service these
futures contracts, of which $30,390 is available for general corporate purposes.
Unrealized losses on open futures contracts at September 28, 1996 were
approximately $17,000.
Any gains or losses relating to the hedging contracts described above are
deferred and subsequently recognized as an adjustment of the cost of the related
cattle when they are delivered to the Company for slaughter. At September 28,
1996, $29,700 of unrecognized gains on closed contracts were deferred. Hedging
transactions prior to December 24, 1995 were not significant.
F-12
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(5) NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
JUNE 24, DECEMBER 23, SEPTEMBER 28,
1995 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Notes payable under line of credit, variable interest rate
of .5% over the bank's prime rate (8.25% at September 28,
1996), interest payable monthly........................... $ 1,495,186 $1,161,084 $ --
Notes payable under line of credit, variable interest rate
of .5% over the bank's prime rate (8.25% at September 28,
1996), interest payable monthly........................... -- -- 390,713
Notes payable to cattle feeders and ranchers, variable
interest rate of .75% over prime rates charged by various
banks..................................................... 1,975,435 -- 400,339
------------ ------------ -------------
$ 3,470,621 $1,161,084 $ 791,052
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
In June 1996, the Company entered into a loan agreement (loan agreement)
which provides for borrowings under a line of credit up to a maximum of $2.3
million, with interest at .5% over the bank's prime rate. The loan agreement
contains provisions requiring the Company to maintain certain financial
statement ratios and provides for limits on the amount of additional debt,
capital expenditures and the payment of dividends. Advances under the line are
limited to amounts determined under a borrowing base formula contained in the
agreement. The line of credit expires on November 1, 1996, and is subject to
annual renewal. This line of credit replaces the $3.1 million line of credit
which existed as of December 23, 1995 and June 24, 1995 which had terms and
conditions similar to the current loan agreement. As of September 28, 1996, no
borrowings were outstanding under this line of credit.
Also in June 1996, the Company entered into an agreement (the new loan
agreement) covering an additional revolving line of credit for up to a maximum
of $2.0 million, with interest at .5% over the bank's prime rate. The new loan
agreement is used to fund any margin calls associated with outstanding futures
contracts. The new loan agreement expires on November 1, 1996, is subject to
annual renewal, and contains generally the same provisions as the loan
agreement. As of September 28, 1996, $390,713 was outstanding under this line of
credit.
Advances under the lines of credit are collateralized by the Company's
accounts receivable and inventories. Maximum borrowings available on the loan
agreement and the new loan agreement are limited to an amount which is based on
a formula of eligible accounts receivable, cattle inventory, and meat inventory.
Maximum borrowings available under the lines of credit totaled $2.4 million at
September 28, 1996.
Notes payable to cattle feeders and ranchers are secured by the related
cattle and the principal amount plus accrued interest are due when the cattle
are delivered to the Company for processing. As of September 28, 1996, $400,339
was outstanding on the notes payable.
F-13
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(6) INCOME TAXES
The income tax benefit attributable to income from continuing operations for
the 26 weeks ended December 23, 1995 represents a deferred federal tax benefit
of $645,000. The income tax expense attributable to income from continuing
operations for the 40 weeks ended September 28, 1996 consists of deferred
federal tax expense of $484,000 and deferred state tax expense of $75,000.
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to significant portions of
the deferred taxes at June 24, 1995, December 23, 1995, and September 28, 1996
related to the following:
<TABLE>
<CAPTION>
JUNE 24, DECEMBER 23, SEPTEMBER 28,
1995 1995 1996
----------- ------------ -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................................... $ 662,000 $ 589,000 $ 30,000
Accrued items, principally due to loss on fixed price contracts and
severance pay, deductible when paid for tax purposes............... 94,000 50,000 14,000
Property and equipment, principally due to differences in
depreciation....................................................... 56,000 -- --
Inventories, due to additional costs inventoried for tax purposes and
obsolescence reserves.............................................. 39,000 9,000 16,000
Accounts receivable, due to the allowance for doubtful accounts...... 5,000 7,000 33,000
----------- ------------ -------------
Total gross deferred tax assets.................................... 856,000 655,000 93,000
Less valuation allowance............................................... (856,000) -- --
----------- ------------ -------------
Net deferred tax assets............................................ -- 655,000 93,000
Deferred tax liability--property and equipment, principally due to
differences in depreciation.......................................... -- 10,000 7,000
----------- ------------ -------------
Net deferred tax assets............................................ $ -- $ 645,000 $ 86,000
----------- ------------ -------------
----------- ------------ -------------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. As of June 24, 1995,
management believed that the benefits of future deductible differences might not
be realized, due to the losses incurred in recent years and the uncertainty
about future earnings. Accordingly, a valuation allowance was provided for the
net deferred tax assets at that date.
As of December 23, 1995, based upon projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believed the "more likely than not" criteria had been satisfied at that date,
and that the benefits of future deductible differences would be realized.
Accordingly, the remaining valuation allowance was reversed to income for the 26
weeks ended December 23, 1995.
Total income tax expense differed from the amounts computed by applying the
U.S. federal statutory income tax rate of 34% for the 52 weeks ended June 26,
1993, June 25, 1994 and June 24, 1995, for the 26
F-14
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(6) INCOME TAXES (CONTINUED)
weeks ended December 23, 1995, and for the 40 weeks ended September 28, 1996 to
income (loss) from continuing operations before income taxes as a result of the
following:
<TABLE>
<CAPTION>
52 WEEKS ENDED 26 WEEKS 40 WEEKS
------------------------------------- ENDED ENDED
JUNE 26, JUNE 25, JUNE 24, DECEMBER 23, SEPTEMBER 28,
1993 1994 1995 1995 1996
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Income tax expense (benefit) computed at the
statutory rate of 34%..................... $ 98,000 $ (348,000) $ 172,000 $ 150,000 $ 558,000
State tax expense, net of federal tax
benefit................................... -- -- -- -- 49,500
Nondeductible expenses...................... 11,000 11,000 8,000 8,000 8,000
Increase (decrease) in valuation allowance
for net deferred tax assets............... (109,000) 337,000 (180,000) (856,000) --
Other....................................... -- -- -- 53,000 (56,500)
----------- ----------- ----------- ------------ -------------
Total income tax expense (benefit)
attributable to continuing operations... $ -- $ -- $ -- $ (645,000) $ 559,000
----------- ----------- ----------- ------------ -------------
----------- ----------- ----------- ------------ -------------
</TABLE>
The Company had net operating loss carryforwards at December 31, 1995 of
approximately $1,731,000 which, unless previously utilized, will expire as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
2006............................................................................ $ 724,000
2007............................................................................ 523,000
2008............................................................................ 5,000
2009............................................................................ 479,000
------------
$ 1,731,000
------------
------------
</TABLE>
F-15
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(7) TRANSACTIONS WITH MAJOR CUSTOMERS
The Company had net sales to and trade accounts receivable from certain
major customers which are reflected in the following table. No other customer
accounted for more than 10% of net sales during these periods.
<TABLE>
<CAPTION>
52 WEEKS ENDED 26 WEEKS 40 WEEKS
------------------------------------------ ENDED ENDED
JUNE 26, JUNE 25, JUNE 24, DECEMBER 23, SEPTEMBER 28,
1993 1994 1995 1995 1996
------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net Sales:
Company A............................ $ -- $ -- $ 4,845,654 $7,711,752 $ 8,953,095
Company B............................ $ -- $ 10,045,458 $ 12,087,548 $6,439,595 $ 6,897,045
<CAPTION>
52 WEEKS 26 WEEKS 40 WEEKS
ENDED ENDED ENDED
JUNE 24, DECEMBER 23, SEPTEMBER 28,
1995 1995 1996
------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Trade Accounts Receivable:
Company A............................ $ 1,082,912 $ 646,856 $ 660,589
Company B............................ $ 531,943 $ 545,194 $ 470,223
</TABLE>
(8) RELATED PARTY TRANSACTIONS
The Company has agreements with Coleman Ranches, Inc., an affiliate, to
purchase up to 1,000 head of cattle per crop year comprised of 500 organic
feeder cattle at a fixed price per pound and up to 500 head of natural cattle at
a formula price based on current market and for the use of Coleman Ranches,
Inc.'s name in marketing its product. These agreements expire in December 1996
and April 1999, respectively.
The financial statements include the following balances relating to these
agreements:
<TABLE>
<CAPTION>
JUNE 26, JUNE 25, JUNE 24, DECEMBER 23, SEPTEMBER 28,
1993 1994 1995 1995 1996
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Inventories................................. $ 212,931 $ 426,039 $ 388,525 $ 211,287 $ 39,402
Deposits on cattle purchases (1,579, 1,458,
1,401, 865, and 0 head, respectively)..... 87,900 56,200 61,560 60,950 --
Cost of goods sold (for the period ended)... 1,156,556 996,167 526,614 285,090 816,095
</TABLE>
(9) MANDATORILY REDEEMABLE PREFERRED STOCK
The Company authorized and issued 3,114,970 shares of no par value Series A
Preferred Stock on November 21, 1990. The shares were issued at a discount and
the preferred stock balance was accreted annually using the interest method of
amortization such that the book value of the preferred shares equaled the
redemption value as of March 31, 1995, the original redemption date. During the
period November 21, 1990 to October 6, 1995, the Company entered into various
agreements with the preferred stockholders to waive the payment of dividends for
the period from November 18, 1993 through January 1, 1995 and to extend the
redemption dates by issuing warrants to the preferred stockholders (see note
10).
F-16
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(9) MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
Effective January 1, 1995, the Company is required to pay a quarterly
dividend of 9% per annum, in cash or common stock, on the Series A Preferred
Stock outstanding. During the 26 weeks ended December 23, 1995, the Company
declared and paid cash dividends totaling $301,352. During the 40 weeks ended
September 28, 1996, the Company declared and paid cash dividends totaling
$152,044.
Effective October 6, 1995, the Company entered into an agreement with the
holders of the Series A Preferred Stock to waive the Company's failure to pay
accrued dividends, to waive the payment of default interest thereon, and to
extend the redemption date of the preferred stock to October 31, 1996. In
exchange the Company agreed to pay the cash dividends previously accrued as
described above, and to pay an additional dividend of 6% per annum payable
quarterly in shares of Series A Preferred Stock (In-kind dividends) during the
term of the extension. During the 26 weeks ended December 23, 1995, the Company
paid $15,034 of in-kind dividends. During the 40 weeks ended September 28, 1996,
the Company paid $45,102 of in-kind dividends.
Effective September 6, 1996, the Company entered into an agreement with the
holders of the Series A Preferred Stock to extend the redemption date of the
preferred stock to November 30, 1996. The Company agreed to pay an additional
dividend of 6% per annum payable quarterly in shares of Series A Preferred Stock
during the term of the extension.
During the 52 weeks ended June 25, 1994, the Company issued 225,856 shares
of Series A Preferred Stock for $225,856.
The preferred stockholders and certain common stockholders have preemptive
rights relating to any additional preferred stock offered by the Company.
Changes in the number of shares and amount of Series A Preferred Stock
outstanding are as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
---------- ------------
<S> <C> <C>
BALANCE, JUNE 27, 1992................................................................. 2,967,834 $ 2,967,834
Accretion of preferred stock........................................................... 67,466 67,466
---------- ------------
BALANCE, JUNE 26, 1993................................................................. 3,035,300 3,035,300
Accretion of preferred stock........................................................... 52,294 52,294
Shares of preferred stock issued for cash.............................................. 225,856 225,856
---------- ------------
BALANCE, JUNE 25, 1994................................................................. 3,313,450 3,313,450
Accretion of preferred stock........................................................... 27,376 27,376
---------- ------------
BALANCE, JUNE 24, 1995................................................................. 3,340,826 3,340,826
In-kind dividends on preferred stock................................................... 15,034 15,034
---------- ------------
BALANCE, DECEMBER 23, 1995............................................................. 3,355,860 3,355,860
In-kind dividends on preferred stock................................................... 45,102 45,102
---------- ------------
BALANCE, SEPTEMBER 28, 1996............................................................ 3,400,962 $ 3,400,962
---------- ------------
---------- ------------
</TABLE>
(10) STOCK OPTION PLANS AND WARRANTS
The Company has a non-qualified stock option plan and an incentive stock
option plan. Up to 666,929 shares of common stock may be issued under the plans
at September 28, 1996. The option prices and
F-17
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(10) STOCK OPTION PLANS AND WARRANTS (CONTINUED)
terms, not to exceed 10 years, are determined by the Board of Directors. Options
granted at the estimated fair market value of the common stock at the date of
grant and vest over four years. Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
SHARES UNDER
OPTION PRICE RANGE
------------- -------------
<S> <C> <C>
Options outstanding at June 27, 1992...................................... 114,276 $ 1.17 - 1.52
Canceled................................................................ (21,859) 1.17
-------------
Options outstanding at June 26, 1993...................................... 92,417 1.17 - 1.52
Granted................................................................. 16,533 1.39
Canceled................................................................ (64,182) 1.17 - 1.52
-------------
Options outstanding at June 25, 1994...................................... 44,768 1.17 - 1.52
Granted................................................................. 175,714 1.39
Canceled................................................................ (23,615) 1.39
-------------
Options outstanding at June 24, 1995...................................... 196,867 1.39 - 1.52
Granted................................................................. 48,142 1.58 - 1.74
-------------
Options outstanding at December 23, 1995.................................. 245,009 1.39 - 1.74
Granted................................................................. 83,933 2.47 - 9.50
Canceled................................................................ (7,459) 1.39 - 3.36
Exercised............................................................... (11,269) 1.39 - 1.74
-------------
Options outstanding at September 28, 1996................................. 310,214 1.39 - 9.50
-------------
Options exercisable at September 28, 1996................................. 105,381
-------------
-------------
</TABLE>
On November 21, 1990, the Company issued warrants to purchase 81,339 shares
of common stock in conjunction with the conversion of subordinated debentures to
preferred stock. These warrants are exercisable at $1.3849 per share and expire
on November 21, 1998. The warrants provide that the exercise price may be paid
in cash or by redeeming shares of common stock issuable upon exercise of such
warrants, valued at the fair market value of the common stock on the date of
exercise.
On June 25, 1992 and November 18, 1993, the Company issued warrants to
purchase shares of common stock and warrants to purchase 82,470 shares of common
stock in conjunction with the waiver of preferred stock dividends payable for
the period from July 1, 1992 to June 30, 1993 and from July 1, 1993 through
November 18, 1993, respectively. These warrants are exercisable at $1.3859 per
share and expire on June 25, 1998 and November 18, 1998, respectively. The
warrants provide that the exercise price may be paid in cash or by redeeming
shares of common stock issuable upon exercise of such warrants, valued at the
fair market value of the common stock on the date of exercise.
Effective September 6, 1996, the Board of Directors amended and restated the
Stock Option Plan. Up to 334,929 shares of common stock may be issued under this
plan. This plan permits the granting of incentive stock options and nonqualified
stock options.
Effective September 6, 1996, the Board of Directors adopted and approved an
Omnibus Stock and Incentive Plan (the "Omnibus Plan") whereby 332,000 shares of
common stock are reserved for issuance. This plan permits the granting of
nonqualified stock options, incentive stock options, stock appreciation rights,
phantom stock rights, restricted stock, performance units, and performance
shares.
F-18
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(10) STOCK OPTION PLANS AND WARRANTS (CONTINUED)
Effective October 17, 1996, the Board of Directors adopted an Employee Stock
Purchase Plan (the "Purchase Plan"). The Company has reserved 50,000 shares of
Common Stock for issuance under the Purchase Plan. The Purchase Plan permits all
eligible employees to purchase Common Stock of the Company through payroll
deductions up to the maximum percentage of an employee's base pay allowed.
(11) EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan which is qualified under Section
401(a) of the Internal Revenue Code. All employees are eligible to participate
in the plan. Contributions to the plan are made through employee salary
reductions and discretionary employer matching contributions. No employer
contributions were made to the plan for the 52 weeks ended June 26, 1993 and
June 25, 1994, or for the 26 weeks ended December 23, 1995. The Company
contributed $23,905 to the plan for the 52 weeks ended June 24, 1995 and $69,094
to the plan for the 40 weeks ended September 28, 1996.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, (SFAS No. 107) requires that all entities
disclose the fair value of certain on and off-balance sheet financial
instruments in their financial statements. SFAS No. 107 defines the fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amounts
of certain of the Company's financial instruments, including cash and cash
equivalents, trade accounts receivable, other receivables, cash overdrafts, and
accounts payable, approximate fair value because of their short maturity. The
fair value of notes payable approximate the carrying value because of the short
maturity of these notes and because the notes bear interest at a variable
interest rate. The fair value of outstanding cattle futures contracts represents
the amount that the Company would receive or pay if these contracts were closed
out at market prices on the balance sheet date. As of September 28, 1996, the
Company would be required to pay approximately $17,000 to settle the Company's
open cattle futures contracts.
(13) COMMITMENTS
At September 28, 1996, the Company had outstanding agreements with cattle
suppliers to purchase 7,329 head of cattle at fixed prices ranging from $1.12 to
$1.27 per carcass pound for cattle to be slaughtered from October 1996 to
October 1997.
The Company has an operating lease expiring in 1997 for part of its
operating facilities for which future minimum rental payments as of September
28, 1996 are as follows:
<TABLE>
<S> <C>
1996...................................................... $ 46,200
1997...................................................... 184,800
---------
$ 231,000
---------
---------
</TABLE>
For the 52 weeks ended June 26, 1993, June 25, 1994 and June 24, 1995, for
the 26 weeks ended December 23, 1995, and for the 40 weeks ended September 28,
1996 rent expense was approximately $147,000, $158,000, $155,900, $77,400, and
$127,200 respectively.
F-19
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(14) AUTHORIZATION OF STOCK AND COMMON STOCK SPLIT
On September 6, 1996, the stockholders approved an increase in the
authorized number of shares of common stock to 15,000,000. Upon the redemption
of the shares of Series A Preferred Stock, the shares will be automatically
cancelled and the Company will then authorize 5,000,000 shares of undesignated
preferred stock under its Amended and Restated Certificate of Incorporation.
Also on that date, the Board of Directors of the Company declared a 2.85 to 1
split of the Company's common stock, to be effected in the form of a stock
dividend. In the accompanying financial statements, all numbers of common shares
and per share amounts have been restated to reflect the common stock split
retroactively.
(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth certain unaudited statements of operations
data for each of the Company's last eight quarters in the period ending
September 28, 1996, and in the opinion of management of the Company, contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation thereof.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
DEC. 24 MAR. 25 JUN. 24 SEP. 23
1994 1995 1995 1995
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales............................................. $ 10,514,112 $ 9,710,819 $ 13,795,130 $ 14,249,528
Cost of sales......................................... 9,498,742 9,059,797 11,916,589 12,567,950
------------- ------------ ------------- -------------
Gross profit........................................ 1,015,370 651,022 1,878,541 1,681,578
Selling, general and administrative expenses.......... 949,011 840,190 1,214,598 1,200,126
------------- ------------ ------------- -------------
Operating income (loss)............................. 66,359 (189,168) 663,943 481,452
Interest and other expenses, net...................... 68,117 65,369 70,218 53,462
------------- ------------ ------------- -------------
Income (loss) from continuing operations............ (1,758) (254,537) 593,725 427,990
Loss from discontinued operations..................... (11,108) (51,386) -- --
------------- ------------ ------------- -------------
Net income (loss)................................... $ (12,866) $ (305,923) $ 593,725 $ 427,990
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Net income (loss) attributable to common stock........ $ (22,012) $ (390,548) $ 518,535 $ 352,483
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Earnings (loss) per share:
Continuing operations............................... $ -- $ (.20) $ .31 $ .21
Discontinued operations............................. $ (.01) $ (.03) $ -- $ --
------------- ------------ ------------- -------------
Net income (loss)................................... $ (.01) $ (.23) $ .31 $ .21
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Weighted average common and common equivalent shares
outstanding......................................... 1,684,705 1,684,705 1,684,705 1,721,509
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Pro forma earnings (loss) per share (see note 17):
Continuing operations............................... $ -- $ (.13) $ .30 $ .21
Discontinued operations............................. $ (.01) $ (.02) $ -- $ --
------------- ------------ ------------- -------------
Net income (loss)................................... $ (.01) $ (.15) $ .30 $ .21
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Pro forma weighted average common and common
equivalent shares outstanding....................... 2,008,855 2,009,748 2,010,637 2,047,443
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
F-20
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
DEC. 23 MAR. 23 JUN. 29 SEP. 28
1995 1996 1996 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales........................................... $ 14,541,147 $ 12,194,788 $ 14,927,404 $ 13,495,392
Cost of sales....................................... 13,526,805 11,295,206 12,856,427 11,038,404
------------- ------------- ------------- -------------
Gross profit...................................... 1,014,342 899,582 2,070,977 2,456,988
Selling, general and administrative expenses........ 935,139 973,801 1,271,990 1,458,199
------------- ------------- ------------- -------------
Operating income (loss)........................... 79,203 (74,219) 798,987 998,789
Interest and other expenses, net.................... 64,798 22,141 22,923 38,678
------------- ------------- ------------- -------------
Income (loss) before income taxes................. 14,405 (96,360) 776,064 960,111
Income tax benefit (expense)........................ 645,000 34,000 (272,000) (321,000)
------------- ------------- ------------- -------------
Net income (loss)................................. $ 659,405 $ (62,360) $ 504,064 $ 639,111
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income (loss) attributable to common stock...... $ 568,752 $ (153,239) $ 412,847 $ 512,477
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income (loss) per share......................... $ .30 $ (.08) $ .21 $ .25
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average common and common equivalent shares
outstanding....................................... 1,877,924 1,897,361 1,965,250 2,072,114
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma net income (loss) per share (see note
17)............................................... $ .30 $ (.03) $ .22 $ .27
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Pro forma weighted average common and common
equivalent shares outstanding..................... 2,203,858 2,224,762 2,294,118 2,402,449
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
F-21
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 24, 1995, DECEMBER 23, 1995, AND SEPTEMBER 28, 1996
(16) TRANSITION PERIOD COMPARATIVE FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth certain unaudited statement of operations
data for the 26 weeks ended December 24, 1994:
<TABLE>
<S> <C>
Net sales...................................................... $19,496,463
Cost of goods sold............................................. 17,391,067
----------
Gross profit............................................... 2,105,396
----------
Selling, general and administrative expenses................... 1,715,422
----------
Operating income........................................... 389,974
Interest and other expenses, net............................... 109,425
----------
Income from continuing operations.......................... 280,549
Loss from discontinued operations.............................. (63,717)
----------
Net income................................................. $ 216,832
----------
----------
Net income attributable to common stock........................ $ 198,595
----------
----------
Earnings per share:
Continuing operations........................................ $ .17
Discontinued operations...................................... $ (.04)
----------
Net income................................................... $ .13
----------
----------
Weighted average common and common equivalent shares
outstanding.................................................. 1,581,119
----------
----------
</TABLE>
(17) PRO FORMA EARNINGS (LOSS) PER SHARE (UNAUDITED)
The unaudited pro forma earnings (loss) per share has been provided to
disclose the pro forma effect of the redemption of all of the mandatorily
redeemable preferred stock with a portion of the proceeds of the proposed public
offering. The pro forma per share data gives effect to the number of shares
whose proceeds would be necessary to redeem mandatorily redeemable preferred
stock using an assumed offering price of $10.25 per share, and also gives effect
to the elimination of the dividend requirements and accretion of the mandatorily
redeemable preferred stock. The number of shares whose proceeds would be
necessary to redeem mandatorily redeemable preferred stock using an assumed
offering price of $10.25 per share, was 323,263, 325,934, and 327,401, for the
52 weeks ended June 24, 1995, 26 weeks ended December 23, 1995 and 40 weeks
ended September 28, 1996, respectively.
F-22
<PAGE>
[INSIDE BACK COVER]
[MAP OF UNITED STATES INDICATING MARKET PENETRATION
AND OPPORTUNITY PER STATE, BASED UPON PERCENTAGE OF
NATURAL AND CONVENTIONAL SUPERMARKETS CARRYING COLEMAN
VERSUS TOTAL SUPERMARKETS IN STATE.]
<PAGE>
[TWO PAGE GATEFOLD UNDER BACK AND INSIDE BACK COVER]
[BACKGROUND PHOTO WITH CHART ON COLEMAN'S PRODUCTION
PROCESS. CHART INDICATES, FOR SEVEN DIFFERENT
CATEGORIES (CATTLE, FEEDING, RESIDUE SCREEN, STEAKS
AND ROAST, GROUND BEEF, PLANT SANITATION AND
TEMPERATURES), WHAT COLEMAN DOES AND WHY COLEMAN TAKES
SUCH STEPS.]
<PAGE>
[COLEMAN LOGO IN COLOR WITH MOUNTAINS AND CATTLE,
WITH WORDS, "THE BEGINNING."]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses (other than underwriting discounts
and commissions) of the issuance and distribution of the securities being
registered, including expenses incurred for the benefit of the Selling
Stockholders. All of such expenses will be paid by the Registrant.
<TABLE>
<S> <C>
SEC registration fee...................................... $ 7,416
NASD filing fee........................................... 2,651
Nasdaq listing Fee........................................ 21,762
Blue Sky filing fees and expenses......................... 3,000
Printing and engraving expenses........................... 110,000
Legal fees and expenses................................... 250,000
Accounting fees and expenses.............................. 65,000
Transfer agent and registrar fees......................... 10,000
Premium on directors and officers liability insurance..... 100,000
Miscellaneous............................................. 30,171
---------
Total................................................... $ 600,000
---------
---------
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") permits
indemnification of directors, officers, employees and agents of corporations
under certain conditions and subject to certain limitations. The Registrant's
Certificate of Incorporation and Bylaws include provisions to require the
Registrant to indemnify its directors and officers to the fullest extent
permitted by the DGCL, including circumstances in which indemnification is
otherwise discretionary. The Registrant has entered into indemnification
agreements with each of its directors and officers to effect such
indemnification obligations. In addition, the Registrant maintains directors'
and officers' liability coverage to insure its indemnification of its directors
and officers.
Section 10 of the Underwriting Agreement filed as Exhibit 1.1 hereto
provides for the indemnification by the Underwriters of the Registrant and its
directors and officers, and by the Registrant of the Underwriters, for certain
liabilities arising under the Securities Act of 1933, as amended (the "Act"), or
otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has issued unregistered
securities in the transactions described below. Securities issued in such
transactions were offered and sold in reliance upon the exemption from
registration under Section 4(2) of the Act, relating to sales by an issuer not
involving any public offering, or under Rule 701 under the Act. The sales of
securities were made without the use of an underwriter and the certificates
evidencing the shares bear a restrictive legend permitting the transfer thereof
only upon registration of the shares or an exemption under the Act. The prices
and number of shares set forth below have been adjusted to reflect a 2.85:1
split of the Company's Common Stock in September 1996.
(1) On August 7, 1996, the Registrant issued an aggregate of 5,691 shares of
Common Stock to Lee N. Arst in lieu of a $35,000 cash bonus.
II-1
<PAGE>
(2) Between September 16, 1993 and September 16, 1996, the Registrant issued
an aggregate of 556 shares of Common Stock to an employee, at a price of $1.3859
per share for aggregate consideration of $771, pursuant to the exercise of an
option granted under the Company's Amended and Restated Stock Option Plan.
(3) In May 1995, the Registrant issued 102,247 shares of Common Stock to Lee
N. Arst. The purchase price was approximately $1.3859 per share for an aggregate
consideration of $141,710.
(4) In May 1994, the Registrant issued an aggregate of 216,458 shares of
Common Stock to five sophisticated venture capital investors and two individual
investors. The purchase price was approximately $1.3859 per share, for an
aggregate consideration of $300,002, paid in cash.
(5) In October 1993, the Registrant issued an aggregate of 225,856 shares of
Series A Preferred Stock and 54,295 shares of Common Stock to five sophisticated
venture capital investors and two individual investors. The purchase price was
$1.00 per share of Series A Preferred Stock and approximately $1.3859 per share
of Common Stock, for an aggregate consideration of $301,107, paid in cash. The
Registrant also issued Warrants to purchase an aggregate of 82,470 shares of
Common Stock at an exercise price of approximately $1.3859 per share to the five
venture capital investors and one of the individual investors.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
+3.1 Amended and Restated Certificate of Incorporation of the Registrant.
+3.2 Amended and Restated Bylaws of the Registrant.
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Ireland, Stapleton, Pryor & Pascoe, P.C.*
+10.1 Amended and Restated Stock Option Plan.
+10.2 Omnibus Stock and Incentive Plan
+10.3 Form of Indemnification Agreement with directors and executive officers of the Registrant.
+10.4 Contract dated May 14, 1996, between Cervi Ranches, Inc. and Registrant (as successor by
merger to Coleman Natural Meats, Inc.).
+10.5 Western Food Center Lease Agreement dated July 11, 1989, between the Registrant (as successor
by merger to Coleman Natural Meats, Inc.) and Norwest Bank Denver, N.A. (f/k/a United Bank
of Denver, N.A.), together with Agreement to Amend and Extend Lease between said parties.
+10.6 Amended and Restated Registration and Preemptive Rights Agreement dated May 25, 1995, among
the Registrant, Melvin Coleman, Sr., Lee N. Arst and certain purchasers of the Registrant's
Common and Preferred Stock.
+10.7 Form of Employee Non-Disclosure Agreement used between the Registrant and certain employees.
+10.8 Form of Employee Non-Competition Agreement used between the Registrant and certain employees.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------------------------------
<C> <S>
+10.9 Letter Agreement dated October 27, 1995 and amended as of February 1, 1996 and June 7, 1996
between the Registrant (as successor by merger to Coleman Natural Meats, Inc.) and Norwest
Bank Colorado, N.A.
+10.10 Letter Agreement dated June 7, 1996 between the Registrant (as successor by merger to Coleman
Natural Meats, Inc.) and Norwest Bank Colorado, N.A.
+10.11 Security Agreement as to Inventory and Accounts dated June 7, 1996 between the Registrant (as
successor by merger to Coleman Natural Meats, Inc.) and Norwest Bank Colorado, N.A.
+10.12 Security Agreement as to Livestock dated June 7, 1996 by the Registrant (as successor by
merger to Coleman Natural Meats, Inc.) for the benefit of Norwest Bank Colorado, N.A.
+10.13 Security Agreement and Assignment of Hedging Account dated June 7, 1996 between the Registrant
(as successor by merger to Coleman Natural Meats, Inc.) for the benefit of Norwest Bank
Colorado, N.A.
+10.14 General Security Agreement dated June 7, 1996 between the Registrant (as successor by merger
to Coleman Natural Meats, Inc.) and Norwest Bank Colorado, N.A.
+10.15 Employment Agreement dated as of July 1, 1996, with Lee N. Arst.
+10.16 Forms of Carcass Beef Purchase Agreements.
10.17 Employee Stock Purchase Plan.
10.18 Letter of Credit for the benefit of U.S. Packer and Stockyards Administration, including
related Control Agreement dated October 15, 1996, Promissory Note dated October 11, 1996 and
General Security Agreement dated October 11, 1996.
**11 Statement re computation of earnings per share.
**23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Ireland, Stapleton, Pryor & Pascoe, P.C. (included in Exhibit 5.1)*.
+24.1 Power of Attorney (included in signature pages).
**27 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by subsequent amendment.
** Exhibit filed herewith is amended from initial exhibit filed on September 19,
1996.
+ Previously filed.
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable and therefore have been omitted or the
information required by the applicable schedule is included in the Notes to the
Consolidated Financial Statements.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or
II-3
<PAGE>
otherwise, the Registrant 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
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of 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 Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Denver,
Colorado, on this 24th day of October, 1996.
COLEMAN NATURAL PRODUCTS, INC.
By: /s/ LEE N. ARST
-----------------------------------
Lee N. Arst,
PRESIDENT
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- --------------------------------- ----------------------- --------------------
/s/ LEE N. ARST
- --------------------------------- Principal Executive October 24, 1996
Lee N. Arst Officer and Director
By: /s/ LEE N.
ARST Principal Financial
- --------------------------------- Officer and Principal October 24, 1996
*Richard P. Dutkiewicz Accounting Officer
By: /s/ LEE N.
ARST
- --------------------------------- Director October 24, 1996
*G. Melvin Coleman, Sr.
By: /s/ LEE N.
ARST
- --------------------------------- Director October 24, 1996
*Wayne B. Kingsley
By: /s/ LEE N.
ARST
- --------------------------------- Director October 24, 1996
*Barry M. Davis
By: /s/ LEE N.
ARST
- --------------------------------- Director October 24, 1996
*C. Mickey Skinner
*Lee N. Arst
Attorney-in-Fact
II-5
<PAGE>
SIGNATURES TITLE DATE
- --------------------------------- ----------------------- --------------------
- --------------------------------- Director
Howard Liszt
II-6
<PAGE>
COLEMAN NATURAL PRODUCTS, INC.
EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I - PURPOSE
1.1. PURPOSE. The Coleman Natural Products, Inc. Employee Stock Purchase
Plan is intended to provide a method whereby employees of Coleman Natural
Products, Inc. and its subsidiary corporations (hereinafter referred to, unless
the context otherwise requires, as the "Company") will have an opportunity to
acquire a proprietary interest in the Company through the purchase of shares of
the Common Stock of the Company. It is the intention of the Company to have the
Plan qualify as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the
Plan shall be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
ARTICLE II - DEFINITIONS
2.1. BASE PAY. "Base Pay" shall mean regular straight-time earnings,
including shift premiums, but excluding payments for overtime, bonuses and other
special payments, commissions and other marketing incentive payments.
2.2. COMMITTEE. "Committee" shall mean the individuals described in
Article XI.
2.3. EMPLOYEE. "Employee" means any person who is customarily employed on
a regular full-time or part-time basis by the Company and is regularly scheduled
to work more than 20 hours per week.
2.4. SUBSIDIARY CORPORATION. "Subsidiary Corporation" shall mean any
present or future corporation which (i) would be a "subsidiary corporation" of
Coleman Natural Products, Inc. as that term is defined in Section 424 of the
Code and (ii) is designated as a participant in the Plan by the Committee.
ARTICLE III - ELIGIBILITY AND PARTICIPATION
3.1. INITIAL ELIGIBILITY. Any employee who is employed by the Company on
the Offering Commencement Date (as defined below) shall be eligible to
participate in such Offering.
3.2. LEAVE OF ABSENCE. For purposes of participation in the Plan, a person
on leave of absence shall be deemed to be an employee for the first 90 days of
such leave of absence
<PAGE>
and such employee's employment shall be deemed to have terminated (for purposes
of this Plan only) at the close of business on the 90th day of such leave of
absence unless such employee shall have returned to regular full-time or
part-time employment (as the case may be) prior to the close of business on such
90th day. Termination by the Company of any employee's leave of absence, other
than termination of such leave of absence on return to full-time or part-time
employment, shall terminate an employee's employment for all purposes of the
Plan and shall terminate such employee's participation in the Plan and right to
exercise any option.
3.3. RESTRICTIONS ON PARTICIPATION. Notwithstanding any provisions of the
Plan to the contrary, no employee shall be granted an option to participate in
the Plan:
(a) If, immediately after the grant, such employee would own stock,
and/or hold outstanding options to purchase stock, possessing 5% or more of the
total combined voting power or value of all classes of stock of the Company (for
purposes of this paragraph, the rules of Section 424(d) of the Code shall apply
in determining stock ownership of any employee); or
(b) Which permits his rights to purchase stock under all employee
stock purchase plans of the Company to accrue at a rate which exceeds $25,000 in
fair market value of the Common Stock (determined at the time such option is
granted) for each calendar year in which such option is outstanding.
3.4. COMMENCEMENT OF PARTICIPATION. An eligible employee may become a
participant by completing an authorization for a payroll deduction on the form
provided by the Company and filing it with the office of the Treasurer of the
Company on or before the date set therefor by the Committee, which date shall be
prior to the Offering Commencement Date for the Offering (as such terms are
defined below). Payroll deductions for a participant shall commence on the
applicable Offering Commencement Date when his authorization for a payroll
deduction becomes effective and shall end when terminated in writing by the
participant (as provided in Article VIII) or when the Plan terminates.
ARTICLE IV - OFFERINGS
4.1. ANNUAL OFFERINGS. The Plan will be implemented by semiannual
offerings of the Company's Common Stock (the "Offerings") beginning on the 1st
day of January and the 1st day of July in each year, and terminating on the last
Saturday in June and the last Saturday in December of the same year,
respectively. The maximum number of shares issued under the Plan is 50,000,
subject to adjustment for stock splits, stock dividends, reclassifications and
the like.
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<PAGE>
As used in the Plan, "Offering Commencement Date" means the January 1 or
July 1 date, as the case may be, on which the particular Offering begins and
"Offering Termination Date" means the last Saturday in June or the last Saturday
in December date, as the case may be, on which the particular Offering
terminates. If an Offering period begins on a Saturday, Sunday or legal
holiday, then the first day of the Offering shall be the first business day
after that date. Since all Offering Termination Dates end on a Saturday, the
actual last day of each such Offering shall be the Friday prior to that date
(unless such Friday is a legal holiday, in which case it will be the last
business day prior to such legal holiday).
ARTICLE V - PAYROLL DEDUCTIONS
5.1. AMOUNT OF DEDUCTION. At the time a participant files his
authorization for payroll deduction, he shall elect to have deductions made from
his pay on each payday during the time he is a participant in an Offering at the
rate of 1, 2, 3, 4, 5, 6, 7, 8, 9 or 10% of his Base Pay in effect at the
Offering Commencement Date of such Offering. In the case of a part-time hourly
employee, such employee's Base Pay during an Offering shall be determined by
multiplying such employee's hourly rate of pay in effect on the Offering
Commencement Date by the number of regularly scheduled hours of work for such
employee during such Offering.
5.2. PARTICIPANT'S ACCOUNT. All payroll deductions made for a participant
shall be credited to his account under the Plan. A participant may not make any
separate cash payment into such account except when on leave of absence and then
only as provided in Section 5.4, below.
5.3. CHANGES IN PAYROLL DEDUCTIONS. A participant may discontinue his
participation in the Plan as provided in Article VIII, but no other change can
be made during an Offering, except that a participant may decrease the amount of
his payroll deductions for that Offering one (1) time during any Offering.
5.4. LEAVE OF ABSENCE. If a participant goes on a leave of absence, such
participant shall have the right to elect: (a) to withdraw the balance in his
account pursuant to Section 7.2, (b) to discontinue contributions to the Plan
but remain a participant in the Plan, or (c) remain a participant in the Plan
during such leave of absence, authorizing deductions to be made from payments by
the Company to the participant during such leave of absence provided he makes
cash payments to the Plan at the end of each payroll period sufficient to meet
such participant's authorized Plan deductions.
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<PAGE>
ARTICLE VI - GRANTING OF OPTION
6.1. NUMBER OF OPTION SHARES. On each Offering Commencement Date, a
participating employee shall be deemed to have been granted an option to
purchase a maximum number of shares of the Common Stock of the Company equal to
an amount determined as follows: an amount equal to (i) that percentage of the
employee's Base Pay which he has elected to have withheld (but not in any case
in excess of 10%) multiplied by (ii) the employee's Base Pay on the Offering
Commencement Date divided by (iii) 85% of the market value of the Common Stock
of the Company on the Offering Commencement Date or Offering Termination Date
(as determined pursuant to Section 6.2, below). The market value of the
Company's Common Stock shall be determined as provided in paragraphs (a) and (b)
of Section 6.2, below. An employee's Base Pay during the period of an Offering
shall be determined by multiplying his normal monthly rate of pay (as in effect
on the Offering Commencement Date) by 6, or the hourly rate by 1040, as the case
may be, provided that, in the case of a part time hourly employee, the
employee's Base Pay during the period of an Offering shall be determined by
multiplying such employee's hourly rate by the number of regularly scheduled
hours of work for such employee during such Offering period.
6.2. OPTION PRICE. The option price of Common Stock purchased with payroll
deductions made during an Offering for a participant therein shall be the lower
of:
(a) 85% of the last trading price of the Common Stock on the Offering
Commencement Date or the nearest prior business day on which trading occurred on
the NASDAQ National Market System; or
(b) 85% of the last trading price of the Common Stock on the Offering
Termination Date or the nearest prior business day on which trading occurred on
the NASDAQ National Market System.
If the Common Stock of the Company is not admitted to trading on the NASDAQ
National Market System on any of the aforesaid dates for which closing prices of
the Common Stock are to be determined, then reference shall be made to the fair
market value of the Common Stock on that date, as determined on such basis as
shall be established or specified for that purpose by the Board of Directors.
ARTICLE VII - EXERCISE OF OPTION
7.1. AUTOMATIC EXERCISE. Unless a participant gives written notice to the
Company as hereinafter provided, his option for the purchase of Common Stock
with payroll deductions made during any Offering will be deemed to have been
exercised automatically on the Offering Termination Date applicable to such
Offering, for the purchase of the number of
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<PAGE>
full shares of Common Stock which the accumulated payroll deductions in his
account at that time will purchase at the applicable option price (but not in
excess of the number of shares for which options have been granted to the
employee pursuant to Section 6.1), and any excess in his account at that time
will be returned to him.
7.2. WITHDRAWAL OF ACCOUNT. By written notice to the Plan Administrator,
at any time prior to the Offering Termination Date applicable to any Offering, a
participant may elect to withdraw all the accumulated payroll deductions in his
account at such time.
7.3. FRACTIONAL SHARES. Fractional shares will not be issued under the
Plan and any accumulated payroll deductions which would have been used to
purchase fractional shares will be held and applied toward the purchase of
shares by the participant in the next Offering, or if such participant has
elected not to participate in the next Offering, will be returned to any
employee promptly following the termination of the Offering during which such
deductions were made, without interest.
7.4. TRANSFERABILITY OF OPTION. During a participant's lifetime, an option
held by such participant shall be exercisable only by that participant.
7.5. DELIVERY OF STOCK. As promptly as practicable after the Offering
Termination Date of each Offering, the Company will deliver to each participant,
as appropriate, a certificate representing the shares of Common Stock purchased
upon exercise of his option.
ARTICLE VIII - WITHDRAWAL
8.1. IN GENERAL. As indicated in Section 7.2, a participant may withdraw
payroll deductions credited to his account under the Plan at any time by giving
written notice to the Plan Administrator. All of the participant's payroll
deductions credited to his account will be paid to him promptly after receipt of
his notice of withdrawal, and no further payroll deductions will be made from
his pay during such Offering. The Company may, at its option, treat any attempt
to borrow by an employee on the security of his accumulated payroll deductions
as an election, under Section 3.2, to withdraw such deductions.
8.2. EFFECT ON SUBSEQUENT PARTICIPATION. A participant's withdrawal from
any Offering will not have any effect upon his eligibility to participate in any
succeeding Offering or in any similar plan which may hereafter be adopted by the
Company.
8.3. TERMINATION OF EMPLOYMENT. Upon termination of the participant's
employment for any reason (but excluding retirement or death while in the employ
of the Company or during continuation of a leave of absence for a period beyond
90 days), the payroll deductions credited to his account will be returned to
him, or, in the case of his death
-5-
<PAGE>
subsequent to the termination of his employment, to the person or persons
entitled thereto under Section 12.1.
8.4. TERMINATION OF EMPLOYMENT DUE TO DEATH. Upon termination of the
participant's employment because of his death, his beneficiary (as defined in
Section 12.1) shall have the right to elect, by written notice given to the
Plan Administrator prior to the earlier of the Offering Termination Date or the
expiration of a period of sixty (60) days commencing with the date of the death
of the participant, either:
(a) To withdraw all of the payroll deductions credited to the
participant's account under the Plan, or
(b) To exercise the participant's option for the purchase of Common
Stock on the Offering Termination Date next following the date of the
participant's death for the purchase of the number of full shares of stock which
the accumulated payroll deductions in the participant's account at the date of
the participant's death will purchase at the applicable option price, and any
excess in such account will be returned to said beneficiary, without interest.
In the event that no such written notice of election shall be duly received
by the Plan Administrator, the beneficiary shall automatically be deemed to have
elected, pursuant to paragraph (b), to exercise the participant's option.
8.5. TERMINATION OF EMPLOYMENT DUE TO RETIREMENT. Upon termination of the
participant's employment because of his retirement, the participant shall have
the right to elect, by written notice given to the Plan Administrator prior to
the earlier of the Offering Termination Date or the expiration of a period of
sixty (60) days commencing with the date of the retirement of the participant,
either:
(a) To withdraw all of the payroll deductions credited to the
participant's account under the Plan, or
(b) To exercise the participant's option for the purchase of Common
Stock on the Offering Termination Date next following the date of the
participant's retirement for the purchase of the number of full shares of stock
which the accumulated payroll deductions in the participant's account at the
date of the participant's retirement will purchase at the applicable option
price, and any excess in such account will be returned to the participant,
without interest.
In the event that no such written notice of election shall be duly received by
the Plan Administrator, the participant shall automatically be deemed to have
elected to withdraw all payroll deductions pursuant to paragraph (a), above.
-6-
<PAGE>
8.6. LEAVE OF ABSENCE. A participant on leave of absence shall, subject to
the election made by such participant pursuant to Section 5.4, continue to be a
participant in the Plan so long as such participant is on continuous leave of
absence. A participant who has been on leave of absence for more than 90 days
and who therefore is not an employee for the purpose of the Plan shall not be
entitled to participate in any offering commencing after the 90th day of such
leave of absence. Notwithstanding any other provisions of the Plan, unless a
participant on leave of absence returns to regular full time or part time
employment with the Company at the earlier of: (a) the termination of such leave
of absence, or (b) three months from the 90th day of such leave of absence, such
participant's participation in the Plan shall terminate on whichever of such
dates first occurs.
ARTICLE IX - INTEREST
9.1. NO PAYMENT OF INTEREST. No interest will be paid or allowed on any
money paid into the Plan or credited to the account of any participant employee.
ARTICLE X - STOCK
10.1. MAXIMUM SHARES. The maximum number of shares which shall be issued
under the Plan, subject to adjustment upon changes in capitalization of the
Company as provided in Section 12.4, shall be 50,000 shares. If the total
number of shares for which options are exercised on any Offering Termination
Date in accordance with Article VI exceeds the maximum number of shares for the
Plan, the Company shall make a pro rata allocation of the shares available for
delivery and distribution in as nearly a uniform manner as shall be practicable
and as it shall determine to be equitable, and the balance of payroll deductions
credited to the account of each participant under the Plan shall be returned to
him as promptly as possible.
10.2. PARTICIPANT'S INTEREST IN OPTION STOCK. The participant will have no
interest in the shares of Common Stock covered by his option until such option
has been exercised.
10.3. REGISTRATION OF STOCK. Stock to be delivered to a participant under
the Plan will be registered in the name of the participant, or, if the
participant so directs by written notice to the Plan Administrator prior to the
Offering Termination Date applicable thereto, in the names of the participant
and one such other person as may be designated by the participant, as joint
tenants with rights of survivorship or as tenants by the entireties, to the
extent permitted by applicable law.
10.4. RESTRICTIONS ON EXERCISE. The Board of Directors may, in its
discretion, require as conditions to the exercise of any option that the shares
of Common Stock reserved
-7-
<PAGE>
for issuance upon the exercise of the option shall have been duly listed, upon
official notice of issuance, upon a stock exchange, and that either:
(a) A Registration Statement under the Securities Act of 1933, as
amended, with respect to said shares shall be effective, or
(b) The participant shall have represented at the time of purchase,
in form and substance satisfactory to the Company, that it is his intention to
purchase the shares for investment and not for resale or distribution.
ARTICLE XI - ADMINISTRATION
11.1. APPOINTMENT OF COMMITTEE. The Compensation Committee of the Board of
Directors (the "Committee") shall administer the Plan. The Committee shall
consist of no fewer than two members of the Board of Directors, each of whom is
a "non-employee director," as that term is defined under Section 16(b) of the
Securities Exchange Act of 1934, and the rules and regulations promulgated
thereunder, as such statute or rules may be amended from time to time.
11.2. AUTHORITY OF COMMITTEE. The Committee shall have plenary authority
in its discretion to interpret and construe any and all provisions of the Plan,
to adopt rules and regulations for administering the Plan, and to make all other
determinations deemed necessary or advisable for administering the Plan, and the
Committee's determination on the foregoing matters shall be conclusive; provided
that any such actions or determinations by the Committee which (1) amend the
Plan, (2) increase the number of shares available for purchase under the Plan,
or (3) change the class of employees eligible to participate, must be ratified
by the Board of Directors.
11.3. ADMINISTRATION OF PLAN. The day to day functions of the Plan shall
be administered by a Plan Administrator who shall be appointed by the Committee.
All notices and authorizations under the Plan shall be directed to the attention
of the Plan Administrator.
ARTICLE XII - MISCELLANEOUS
12.1. DESIGNATION OF BENEFICIARY. A participant may file a written
designation of a beneficiary who is to receive any shares of Common Stock and/or
cash distributed under the Plan. Such designation of beneficiary may be changed
by the participant at any time by written notice to the Plan Administrator.
Upon the death of a participant and upon receipt by the Company of proof of
identity and existence at the participant's death of a beneficiary validly
designated by him under the Plan, the Company shall deliver such shares of
Common Stock and/or cash to such beneficiary. In the event of the death of a
participant and in the
-8-
<PAGE>
absence of a beneficiary validly designated under the Plan who is living at the
time of such participant's death, the Company shall deliver such shares of
Common Stock and/or cash to the executor or administrator of the estate of the
participant, or if no such executor or administrator has been appointed (to the
knowledge of the Company), the Company, in its discretion, may deliver such
shares of Common Stock and/or cash to the spouse or to any one or more
dependents of the participant as the Company may designate. No beneficiary
shall, prior to the death of the participant by whom he has been designated,
acquire any interest in the shares of Common Stock or cash credited to the
participant under the Plan.
12.2. TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares of Common Stock under the Plan may be assigned, transferred,
pledged, or otherwise disposed of in any way by the participant other than by
will or the laws of descent and distribution. Any such attempted assignment,
transfer, pledge or other disposition shall be without effect, except that the
Company may treat such act as an election to withdraw funds in accordance with
Section 7.2.
12.3. USE OF FUNDS. All payroll deductions received or held by the Company
under this Plan may be used by the Company for any corporate purpose and the
Company shall not be obligated to segregate such payroll deductions.
12.4. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) If, while any options are outstanding, the outstanding shares of
Common Stock of the Company have increased, decreased, changed into, or been
exchanged for a different number or kind of shares or securities of the Company
through reorganization, recapitalization, reclassification, stock split, reverse
stock split or similar transaction, appropriate and proportionate adjustments
may be made by the Committee in the number and/or kind of shares which are
subject to purchase under outstanding options and on the option exercise price
or prices applicable to such outstanding options. In addition, in any such
event, the number and/or kind of shares which may be offered in the Offerings
described in Article IV hereof shall also be proportionately adjusted. No
adjustments shall be made for stock dividends. For the purposes of this
paragraph, any distribution of shares to shareholders in an amount aggregating
20% or more of the outstanding shares shall be deemed a stock split and any
distributions of shares aggregating less than 20% of the outstanding shares
shall be deemed a stock dividend.
(b) Upon the dissolution or liquidation of the Company, or upon a
Change in Control (as defined below), the holder of each option then outstanding
(and for which payroll deductions have been made) under the Plan (as of the date
set by the Board of Directors for the purpose of determining eligibility under
this Section 12.4(b), which date shall be on or immediately prior to the date of
such dissolution, liquidation or Change in Control) will thereafter be entitled
to receive, for each share as to which such option may at that time be
exercised, as nearly as reasonably may be determined, the cash, securities
-9-
<PAGE>
and/or property which a holder of one share of the Common Stock was entitled to
receive upon and at the time of such dissolution, liquidation or Change in
Control; provided, this right shall not be applicable to the extent a
participant withdraws from participation prior to the date which the Board of
Directors sets for purposes of determining eligibility, as set forth above. The
Board of Directors shall take such steps in connection with such transactions as
the Board shall deem necessary to assure that the provisions of this Section
12.4 shall thereafter be applicable, as nearly as reasonably may be determined,
in relation to the said cash, securities and/or property as to which such holder
of such option might thereafter be entitled to receive. A "Change in Control"
of the Company shall be deemed to have occurred if the stockholders of the
Company approve a definitive agreement (a) to merge or consolidate the Company
with or into another entity in which the Company is not the continuing or
surviving corporation or pursuant to which all shares of the Company's Common
Stock would be converted into cash, securities, or other property of another
entity, other than a merger of the Company in which the holders of Common Stock
immediately prior to the merger have the same proportionate ownership of Common
Stock (or equivalent securities) of the surviving entity immediately after the
merger as immediately before, or (b) to sell or otherwise dispose of all or
substantially all of the assets of the Company.
12.5. AMENDMENT AND TERMINATION. The Board of Directors shall have
complete power and authority to terminate or amend the Plan; provided, however,
that the Board of Directors shall not, without the approval of the stockholders
of the Corporation (i) increase the maximum number of shares of Common Stock
which may be issued under any Offering (except pursuant to Section 12.4); or
(ii) amend the requirements as to the class of employees eligible to purchase
shares of Common Stock under the Plan. No termination, modification, or
amendment of the Plan may, without the consent of an employee then having an
option under the Plan to purchase shares of Common Stock, adversely affect the
rights of such employee under such option; provided that the Plan may be
terminated at any time by the Company's Board of Directors. Upon any
termination of the Plan, all payroll deductions not used to purchase shares of
Common Stock shall be refunded.
12.6. EFFECTIVE DATE. The Plan shall become effective as of January 1,
1997.
12.7. NO EMPLOYMENT RIGHTS. The Plan does not, directly or indirectly,
create any right for the benefit of any employee or class of employees to
purchase any shares under the Plan, or create in any employee or class of
employees any right with respect to continuation of employment by the Company,
and it shall not be deemed to interfere in any way with the Company's right to
terminate, or otherwise modify, an employee's employment at any time.
12.8. EFFECT OF PLAN. The provisions of the Plan shall, in accordance with
its terms, be binding upon, and inure to the benefit of, all successors of each
employee participating in the Plan, including, without limitation, such
employee's estate and the executors, administrators or trustees thereof, heirs
and legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such employee.
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<PAGE>
12.9. GOVERNING LAW. The law of the State of Delaware will govern all
matters relating to this Plan except to the extent it is superseded by the laws
of the United States.
As approved by the Board of Directors on October 17, 1996 and by the
stockholders on October 21, 1996.
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<TABLE>
<C> <S>
[LOGO] Application
Irrevocable Clean Sight
Letter of Credit
- -----------------------------------------------------------------------------------
NORWEST BANK COLORADO NATIONAL ASSOCIATION BANK REFERENCE NO.
-------------------------------
(HEREAFTER REFERRED TO AS "BANK")
INSTRUCTIONS FOR COMPLETION OF APPLICATION
(MUST BE TYPED)
1. ADVISE THROUGH (NAME OF FOREIGN BANK, IF APPLICABLE) UNDER "ACCOMPANIED BY" #2 SIMPLE STATEMENT - EXAMPLE: "AMOUNT
2. DATE AND PLACE OF EXPIRY - VALIDITY OF THE LETTER OF CREDIT DRAWN REPRESENTS FUNDS DUE AND OWING AS PER AGREEMENT DATED
3. APPLICANT NAME AND ADDRESS XX XX 19XX" OR "A DEFAULT HAS OCCURRED UNDER THAT CERTAIN AGREEMENT
4. BENEFICIARY NAME AND ADDRESS BETWEEN (BENEFICIARY) AND (APPLICANT)"
5. CURRENCY AND AMOUNT (I.E. USD, DEM, ETC.)
UNDER #3 SPECIAL CONDITIONS - THESE ARE ADDITIONAL TERMS TO THE
CREDIT NOT ALREADY INDICATED UNDER #2. EXAMPLE: AUTOMATIC RENEWAL,
ETC.
1._____________________________________ ------------------------------------------------------------
_______________________________________ 2. Date of Expiry Place of Expiry (3 p.m. Mountain Time)
_______________________________________ (YY MM DD)
_______________________________________ 11-29-96
------------------------------------------------------------
PLEASE OPEN THE FOLLOWING IRREVOCABLE CREDIT BY / / BY MAIL / / BY TELETRANSMISSION
- -----------------------------------------------------------------------------------------------------------------------------
3. APPLICANT--FULL NAME & ADDRESS 4. BENEFICIARY-FULL NAME & ADDRESS
Coleman Natural Products, Inc. Commissioner of Agriculture
5140 Race Ct., Suite 4 State of Colorado as Trustee for the Packer
Denver, CO 80216 and Stockyards Administration
307 Livestock Exchange Bldg.
Denver, CO 80216-2140
- -----------------------------------------------------------------------------------------------------------------------------
5. CURRENCY AMOUNT
U.S. Currency $235,000.00
- -----------------------------------------------------------------------------------------------------------------------------
DRAFTS AT SIGHT DRAWN ON NORWEST BANK COLORADO, NATIONAL ASSOCIATION
-----------------------------------------
ACCOMPANIED BY:
1. THIS LETTER OF CREDIT ISSUED PER ATTACHED FORMAT.
2. A STATEMENT PURPORTEDLY SIGNED BY THE BENEFICIARY STATING THAT:
3. SPECIAL CONDITIONS:
Coleman Natural Products, Inc. is the successor in interest to Coleman Natural Meats, Inc.
This application will replace the Letter of Credit dated 10-27-95 #S800716.
- -----------------------------------------------------------------------------------------------------------------------------
THE OPENING OF THIS CREDIT IS SUBJECT TO THE TERMS AND CONDITIONS AS SET FORTH IN THE LETTER OF CREDIT AGREEMENT APPEARING ON
THE FOLLOWING PAGES.
- -----------------------------------------------------------------------------------------------------------------------------
99-10-28 (REV. 4/92)
</TABLE>
<PAGE>
In consideration the "Bank" issuing, at the request of the undersigned, its
Standby Letter of Credit in accordance with the terms of the Application on
the reverse hereof (the "Credit"), we, the undersigned, agree as follows:
1. THE OBLIGATION: As to all drafts, acceptances or other instruments or
demands under the Credit: (a) in the case of each sight draft, instrument, or
demand ("draft"), to reimburse the Bank at its banking house on demand, the
amount paid on such draft, or, if requested by the Bank, to pay to it in
advance the amount required to pay such draft; and (b) to pay to the Bank, at
its banking house the amount of each acceptance, on demand but in any event
not later than maturity, or, if such acceptance is not payable at its banking
house, then on demand but in any event in time to reach the place of payment
in the course of the mails not later than one business day prior to maturity.
Unless otherwise specified on the face hereof, if any such draft or
acceptance is payable in currency other than United States currency, the
amounts payable shall be the equivalent in United States currency of the
amounts payable in such other currency, at the rate of exchange current at
the time of transmission for cable transfer to the place of payment, or, if
there is no such rate at such time, then at such rate as the Bank may
designate. Any unpaid amount which may become due and payable to the Bank
under this Agreement may be charged by it, in its sole discretion, against
any funds then held by it for our account, without prior notice to us.
2. APPLICABLE FEES: We will pay to the Bank upon its acceptance of this
application a Credit fee of $ and annually, commencing one year
from the date of this application, a standby fee in the percentage amount
stated on the face hereof. We also agree to pay to the Bank interest at the
rate of % per year over the large business prime rate charged by the Bank
as adjusted the day after any change in such rate on such amounts as the Bank
may pay under the Credit and to reimburse the Bank for all additional charges
and expenses paid or incurred by it in connection with the Credit.
3. ACCEPTANCE OR PAYMENT OF DRAFT: Notwithstanding any term in the Credit,
the Bank may accept or pay any draft dated on or before the expiration of any
time limit expressed in the Credit regardless of when drawn and whether or
when negotiated, provided that the other required documents and certificates
are dated on or prior to the expiration date of the Credit.
4. EXTENSION OR MODIFICATION: In the event of any increase in the amount of
the Credit, or the extension (for one or more periods) of the maturity or
time for presentation of drafts, acceptances, certificates or documents, or
any other modification of the terms of the Credit, at the request of any of
us with or without notice to the others, this Agreement, and the Bank's
rights hereunder, shall continue unimpaired and shall be binding upon us with
respect to any action taken by the Bank in accordance with such extension,
increase or other modification.
5. LIABILITY OF BANK: The users of the Credit shall be deemed our agents and
we agree that their acts and omissions shall not result in any liability of
the Bank to us. The Bank shall not be responsible for: the occurrence or
nonoccurrence of any event, or the existence or nonexistence of any
circumstance, recited in any certificate presented in support of a draft; the
validity, sufficiency, or genuineness of documents or certificates, even if
such documents or certificates should in fact prove to be in any or all
respects invalid, insufficient, fraudulent or forged; delay in giving or
failure to give any notice; compliance with or circumstances resulting from
any laws, customs or regulations which may be effective in countries of
negotiation or payment of the Credit; failure of any draft at negotiation, or
failure of any person to note the amount of any draft on the reverse of the
Credit or to surrender or take up the Credit, each of which provisions, if
contained in the Credit itself, it is agreed may be waived by the Bank
without our agreement; errors, omissions, interruptions or delays in
transmission or delivery of any messages, by mail, cable, telegraph, radio or
otherwise; nor shall the Bank be responsible for any act, error, negligence,
delay, fraud, deviation from instructions or default, omission, insolvency or
failure in the business of any party having or purporting to have, any
relationship to any of our obligations which may be paid by a draft, or for
any refusal by the Bank or any of its correspondents to pay or honor drafts
drawn under the Credit because of any applicable law, decree or edict, legal
or illegal, of any governmental agency now or hereafter in force, or for any
other matter beyond the Bank's control. None of the foregoing shall affect,
impair, or prevent the vesting of any of the Bank's rights or powers
hereunder, or our obligations hereunder. In addition to the foregoing, any
action taken or failure to act or omission by the Bank under or in connection
with the Credit or the relative drafts, documents or certificates, if taken
in good faith, shall be binding on us and shall not result in any liability
of the Bank to us. We will indemnify the Bank and hold it harmless from and
against each and every claim, demand, action or suit, together with
attorneys' fees and expenses therein, which may arise against the Bank, by
reason of any action taken pursuant to this Agreement.
6. THE SECURITY: As security for any and all of our obligations and
liabilities hereunder and also for any and all of our other obligations and
liabilities to the Bank, however created, arising or evidenced, whether joint
or several, direct or indirect, absolute or contingent, or now or hereafter
existing, or due or to become due (hereinafter called the "Liabilities"), we
agree at any time and from time to time, if the Bank shall feel insecure, to
deliver, convey, transfer, and assign to the Bank, on demand, as security for
any and all Liabilities, property of a value and character satisfactory to
the Bank. Each of us further agrees that all property belonging to us or any
of us, or in which we or any of us may have an interest, of every nature
whatsoever, now or at any time hereafter delivered, acquired, conveyed,
transferred, assigned, or paid to the Bank, or coming into its possession or
into the possession of anyone for the Bank in any manner whatsoever, whether
expressly as security for any of the Liabilities or for safe-keeping or
otherwise, and all items received for collection or transmission and the
proceeds thereof, whether or not such property is in whole or in part
released to us on trust receipt or otherwise under any instrument whereby the
Bank retains a security interest, are hereby pledged as security for all
Liabilities. All such goods, instruments, documents and other property
hereinabove referred to, together with any and all other property in which the
Bank is granted a security interest by us hereunder or under any other
instrument, are hereinafter collectively referred to as the "Collateral".
All or any of the Collateral may be dealt with, held, and disposed of by the
Bank as hereinafter provided; and receipt by the Bank, at any time, of other
security, including cash, shall not be deemed a waiver of any of its rights
or powers herein mentioned. If the Bank delivers to us any of the Collateral
prior to its receipt of reimbursement for drafts or acceptances as herein
provided, we agree to execute and deliver to the Bank, at its request, trust
receipts or other security instruments and financing statements complying
with the requirements of applicable law, in such form as may be required by
the Bank, and to pay all filing fees in connection therewith. If notice is
required by law of any sale or other disposition of Collateral, five days
written notice shall be deemed reasonable.
7. EVENTS OF DEFAULT: The occurrence of any one or more of the following
events or existence of one or more of the following conditions, with respect
to ourselves (or any endorsers or guarantors of our Liabilities) shall
constitute an event of default under this agreement (hereinafter referred to
as an "Event of Default"): (a) Failure to pay when due any of the Liabilities
(whether due on the date provided for therein or by acceleration or
otherwise); (b) Failure to pay to the Bank in advance the amount required to
pay each sight draft, instrument or demand under the Credit, if requested by
the Bank to make such payment; (c) Failure to deliver, convey, transfer and
assign to the Bank, on demand, as security for any and all Liabilities,
additional Collateral of a value and character satisfactory to the Bank; (d)
any representation or warranty made in writing to Bank herein or in
connection with the granting of the Credit, or any certificate, statement or
report made in compliance with this agreement or any of the Liabilities by us
(or any endorser or any guarantor of any of the Liabilities) shall prove at
any time to have been incorrect in any material respect when made, or we (or
any endorser or any guarantor of the Liabilities) shall fail to perform or
observe any covenant or agreement contained in this agreement or any document
or instrument executed in connection herewith; (e) there shall occur a
default or event of default under the terms of any promissory note, security
agreement or any other document executed in connection herewith or in
connection with any of the Liabilities; (f) (i) we (or any endorser or any
guarantor of the Liabilities) shall make an assignment for the benefit of
creditors, file a petition in bankruptcy, be adjudicated insolvent or
bankrupt or admit in writing the inability to pay debts as they mature; or
(ii) we (or any endorser or any guarantor of the Liabilities) petition or
apply to any tribunal for the appointment of a receiver or any trustee or
similar officer for us (or any endorser or any guarantor of the Liabilities)
or a substantial part of the assets of us (or any endorser or any guarantor
of the Liabilities), or (iii) we (or any endorser or any guarantor of the
Liabilities) shall commence any proceeding under any bankruptcy,
reorganization, arrangement, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction, whether now or hereafter in effect or if
there shall have been filed any such petition or application; or any such
proceeding shall have been commenced against us (or any endorser or any
guarantor of the Liabilities), that remains undismissed for a period of
thirty days or more; or we (or any endorser or any guarantor of the
Liabilities) by any act or omission, shall indicate our or their consent to,
approval of or acquiescense in any such petition, application or proceeding,
or the appointment of a receiver of or any trustee or similar officer for us
(or any endorser or any guarantor of the Liabilities) or any substantial
part of any of the properties of us (or any endorser or any guarantor of the
Liabilities); or (iv) we (or any endorser or any guarantor of the Liabilities)
shall suffer any such receivership or trusteeship to continue undischarged
for a period of thirty days or more; or (v) any judgment, writ, warrant of
attachment or execution of similar process shall be issued or levied against
a substantial part of the property of us (or any endorser or any guarantor of
the Liabilities) and such judgment, writ or similar process shall not be
released, vacated or fully bonded within sixty days after its issue or levy
(g) a lien or other encumbrance shall be filed against the Collateral and the
same shall not have been removed or we shall not have posted adequate
security therefor within ten days after the filing thereof; or (h) this
agreement or any promissory note, any guarantee, any security agreement or
other document executed in connection herewith shall at any time for any
reason cease to be in full force and effect or shall be declared to be null
and void, or the validity or enforceability thereof shall be contested by us
(or any endorser or any guarantor of the Liabilities), or we (or any endorser
or any guarantor of the Liabilities) shall deny that we or they have any or
further liability or obligation hereunder or thereunder.
<PAGE>
8. REMEDIES OF BANK: Upon the occurrence of any Event of Default and at the
time thereafter, at the option of the Bank, the Liabilities including all
accrued interest and other amounts payable hereunder (including amounts which
the Bank may require to be paid in advance under paragraph 4
hereof for amounts which are due or may become due under the Credit), shall
become immediately due and payable without presentment, demand, protest or
other notice of any kind all of which are expressly waived by us (and any
endorser or guarantor of the Liabilities). The Bank may proceed with every
remedy available at law or equity or provided for herein or in any document
executed in connection herewith or in connection with any of the Liabilities,
and all expenses incurred by the Bank in connection with any remedy shall be
deemed indebtedness of us to the Bank and a part of the Liabilities. The Bank
may apply the proceeds from any Collateral or from any other source against
any of the Liabilities (including amounts which the Bank may require to be
paid in advance under paragraph 1 hereof for amounts which are due or may
become due under the Credit) as and in any order it sees fit. Without
limiting the foregoing, the Bank shall have the remedies of a secured party
under the Uniform Commercial Code as then in effect in Colorado, including
without limitation the right (i) to take possession of any of the Collateral
not then in its possession and (ii) to have us assemble such Collateral and
make it available to the Bank at a place to be designated by the Bank which
is reasonably convenient to both parties. To take possession the Bank may
enter upon any premises and remove the Collateral therefrom. If notice is
required by law, five days' prior written notice of the time and place of any
public sale or of the time after which any private sale or any other intended
disposition thereof is to be made shall be reasonable notice to us. No such
notice is necessary if the Collateral is perishable, threatens to decline
speedily in value, or is of a type customarily sold on a recognized market.
If the Bank in good faith believes that the Securities Act of 1933 or any
other state or federal law prohibits or restricts the customary manner of sale
or distribution of any of the Collateral, the Bank may sell such Collateral
privately or in any other manner deemed advisable by the Bank at such price
or prices as the Bank determines in its sole discretion. We recognize that
such prohibition or restriction may cause the Collateral to have less value
than it otherwise would have and that, consequently, such sale or disposition
by the Bank may result in a lower sales price than if the sale were otherwise
held. As a supplementary or additional remedy, the Bank shall also be
entitled, without notice or demand and to the extent permitted by law: (i) to
exercise or continue to exercise all of the rights granted to the Bank
hereunder or (ii) to have a receiver appointed to take charge of all or any
part of the Collateral, exercising all of the rights granted to the Bank
hereunder.
9. SUBROGATION: Upon our failure or that of any endorsers or guarantors of
our obligations under this Agreement to pay when due any of the Liabilities,
we agree: (a) that the Bank shall be subrogated to all of our rights, powers,
privileges and remedies against any party having or purporting to have any
relationship whatsoever to any of our obligations which may be paid by a
draft, to the extent that the Bank has not been reimbursed for all amounts
paid by it on drafts and all other expenses incurred by it under the Credit,
together with all expenses, including without limitation, attorneys' fees,
incurred in exercising its subrogation right hereunder; (b) to execute and
deliver to the Bank, at its request and without further consideration in any
form, all documents deemed useful by the Bank in exercising its subrogation
right hereunder, including without limitation assignments of causes of
action; (c) to provide the Bank, at its request and without further
consideration in any form, all assistance and cooperation which it deems
useful in exercising its subrogation right hereunder, including without
limitation making ourselves, our officers, agents and employees, and our
business records, available to the Bank at such locations and for such times
as it requests; (d) that the Bank's exercise of its subrogation right
hereunder shall not constitute a waiver by the Bank of any of its other
rights under this Agreement, including without limitation its right to
enforce any of the Liabilities against us, our endorsers or our guarantors;
and (e) that the Bank may settle or compromise any of our rights, powers,
privileges and remedies to which it is subrogated hereunder in its sole
discretion, without our consent.
10. COMPLIANCE WITH LAW OR REGULATION: We agree that no transactions under
the Credit will be made or undertaken in violation of the laws of the United
States or any other jurisdiction governing the Credit or the regulations of
any governmental agency.
11. WAIVER OF RIGHTS: No delay by the Bank in exercising any of its rights
hereunder shall constitute a waiver of any such rights. The bank will not be
deemed to have waived any of its rights hereunder, unless its authorized
officer shall have signed such waiver in writing. No such waiver, unless
expressly stated therein, shall be effective as to any transaction which
occurs subsequent to the date of such waiver, nor as to any continuance of a
breach after such waiver. No such waiver shall impair any of the rights of
the Bank other than those rights expressly waived.
12. PROPERTY DEFINED: The word "property" as used in this Agreement includes
goods, merchandise, securities, funds, intangibles, and any and all other
forms of property, whether real, personal or mixed, and any right or
interest therein.
13. JOINT AND SEVERAL LIABILITY: If this Agreement is signed by one
individual, the terms "we", "our", "us", shall be read throughout as "I",
"the undersigned", "my", "me", as the case may be. If this Agreement is
signed by two or more parties, it shall be joint and several agreement of
such parties, and all parties signing this Agreement shall be jointly and
severally liable for all liabilities. Each of us shall be deemed to be the
agent of all the others of us, and the Bank may increase the amount of the
Credit or otherwise act at the request of any one or more of us, return or
turn over the Collateral and any other property to any one or more of us, and
give notice or notices, whether or not required to be given, to any one or
more of us, all as the Bank may elect and without notice to any others of us.
All of our agreements and obligations hereunder shall inure to the benefit
of the Bank's successors, correspondents, agents, representatives and the
employees of each.
14. PARAGRAPH HEADINGS: The paragraph headings are for convenience only and
shall not affect the construction hereof.
15. APPLICABLE LAW: This agreement has been made and delivered in Colorado and
shall be construed in accordance with and governed by the laws of the State
of Colorado. Wherever possible each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid
under such law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
DATED, this 17th day of October, 1996.
By Lee N. Arst Pres/CEO
--------------------------------------------
Signature Title
By Richard P. Dutkiewicz Vice President & CFO
--------------------------------------------
Signature Title
<PAGE>
AUTHORIZATION OF CORRESPONDENT BANK
We request that you issue your letter of credit as our agent pursuant to
the application on the reverse side hereof subject to the terms and
conditions set forth in the Letter of Credit Agreement, enclosed herewith, or
previously submitted and signed by the applicant.
In consideration of the issuance of the Letter of Credit as our agent we
agree to reimburse you on demand and authorize you to charge any accounts we
may have with you for any and all amounts for which you are liable
thereunder plus your commissions and charges. As security for the total of
this Letter of Credit and your obligations thereunder and for the performance
of any and all of our obligations hereunder, you are given a lien upon and/or
right of set-off in respect of any and all property or money held for,
belonging to or in said accounts now or at any time with you. We agree to
set aside and hold in trust for you any and all funds and property lodged
with us for the fulfillment of the obligations under the Letter of Credit.
Dated, the ______ day of -------------------------------
Name of Bank
__________________ . 1996
-------------------------------
Authorized Signature
- --------------------------------------------------------------------------------
OUTSTANDING L/CS $ APPROVED BY:
(STANDBY,
COMMERCIAL BAS:)
------------------------------------------------------------------------------
AMOUNT OF L/C $ GR AT: PPC#
B (/ / US / / FOREIGN
A RATE:)
N ------------------------------------------------------------------------------
K TOTAL LOANS $ LOAN CLOSER:
U
S ------------------------------------------------------------------------------
E TOTAL $ FEES: ISSUANCE:
O
N ------------------------------------------------------------------------------
L AUTHORIZED LINE NEGOTIATION % $
Y
------------------------------------------------------------------------------
EXPIRATION OF LINE MINIMUM:
------------------------------------------------------------------------------
REPAYMENT MATURITY METHOD OF PAYMENT
- --------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
[LOGO] Norwest Bank Colorado, N.A.
Denver
1740 Broadway
Denver, Colorado 80274
303/861-8811
CONTROL AGREEMENT WITH A SECURITIES INTERMEDIARY
To: Norwest Investment Services, Inc. (the "Securities Intermediary")
1700 Broadway
Denver, CO 80274
Attention: Brenda Fredrickson
Re: Coleman Natural Products, Inc. (the "Pledgor")
5140 Race Ct., Suite 4
Denver, CO 80216
Taxpayer I.D. No. 840886892
The Securities Intermediary's Account No. 01487883 (the "Account")
Investment Property Pledged: ( ) All Investment Property in the Account, or
(X) Investment Property in the Account listed on Attachment A to this
Agreement (if the entire Account is pledged, "Investment Property" (X) will
include ( ) will not include reinvested interest, dividends, and capital gains
per existing instructions from Pledgor.
Dear Sir or Madam:
This is to advise you that the interest of the Pledgor in the Investment
Property described above and credited or to be credited to the above
referenced Account has been pledged to Norwest Bank Colorado, National
Association (the "Bank"), pursuant to the terms of a collateral pledge
agreement or security agreement securing certain obligations of the Pledgor
to the Bank.
Pledgor has advised the Bank that there currently is not in effect any
pledge by the Pledgor of the Investment Property to any party other than the
Bank.
Accordingly, the Bank and the Pledgor agree to the following terms
relating to the control of the Investment Property and jointly request that
the Securities Intermediary agrees (1) to register this pledge on its books
and control the Investment Property on behalf of and at the direction of the
Bank; (2) to permit no person or entity, including the Pledgor, to withdraw,
redeem, sell, exchange, substitute or otherwise dispose of the Investment
Property, or any proceeds thereof, until the Bank has released its pledge in
writing; (3) not to register on its books any other pledge of the Investment
Property until the Bank has released its pledge in writing; and (4) to either
redeem and delivery the proceeds of the Investment Property to the Bank or
transfer the Investment Property to the Bank upon demand and without further
notice or consent from the Pledgor.
This Control Agreement with a Securities Intermediary (the "Agreement")
establishes the Bank as a registered pledgee in control of the Investment
Property, with all rights and privileges granted to a registered pledgee or
purchaser under Articles 8 and 9 of the Uniform Commercial Code
Page l of 2
<PAGE>
in the state where the Bank is located. The Securities Intermediary agrees
to subordinate any security interest it may have in the Investment Property
to the Bank's security interest in such property. The Securities
Intermediary also understands that the Bank may from time to time partially
release Investment Property or any proceeds of Investment Property pursuant
to the terms of the collateral pledge agreement or security agreement, and
that any such partial release shall not result in a release of the remainder
of the Investment Property pledged to and controlled by the Bank pursuant to
this Agreement.
Please confirm your consent and agreement to the terms of this Agreement
by executing three originals of this Agreement as soon as possible and
returning two originals to the Bank at the address and to the attention of
the individual indicated below.
NORWEST BANK COLORADO, NATIONAL ASSOCIATION
By /s/ DARYL MOELLENBERG
---------------------------- Dated 10/15/96
Daryl Moellenberg --------
Vice President
PLEDGOR
Pledgor hereby directs and authorizes the Securities Intermediary to execute
this Agreement for Pledgor.
/s/ Lee N. Arst
---------------------------- Dated 10/15/96
Pledgor --------
/s/ Richard P. Dutkiewicz
---------------------------- Dated 10/15/96
Pledgor --------
THE SECURITIES INTERMEDIARY
AGREED to this _____ day of ___________ 199_. Also attached is a copy of
the Resolution of the Securities Intermediary authorizing the undersigned to
execute this Agreement on behalf of the Securities Intermediary.
----------------------------
By: ----------------------------
Its:----------------------------
Page 2 of 2
<PAGE>
ATTACHMENT A
This is attached to and made a part of a Control Agreement with a Securities
Intermediary and further describes the security.
A Treasury Bill in the amount of $335,000, CUSIP #9127942Q6, held by Norwest
Investment Services, Inc. in safekeeping account #01487883 and all additions,
substitutions and replacements thereof.
COLEMAN NATURAL PRODUCTS, INC.
By: /s/ Lee N. Arst
----------------------------
Title: Pres / CEO
----------------------------
By: /s/ Richard P. Dutkiewicz
----------------------------
Title: Vice President & CFO
----------------------------
<PAGE>
360 DAY PROMISSORY NOTE
- --------------------------------------------------------------------------------
NORWEST BANK COLORADO, NATIONAL ASSOCIATION
- --------------------------------------------------------------------------------
Bank's Address, City, State & Zip Code
1740 BROADWAY, DENVER, CO 80274
- --------------------------------------------------------------------------------
FOR BANK USE ONLY Face Amount Rate (% per year) Note Date Maturity Date
- -------------------------
Customer No. Loan No.
1010159010 0-0008039904 $235,000.00 ** % 10/11/1996 DEMAND
- --------------------------------------------------------------------------------
Maker Home Phone Business Phone
Coleman Natural Products, Inc. 303-297-9393
- --------------------------------------------------------------------------------
Street Address, City, State, Zip Code
5140 Race Ct., Suite 4 Denver, CO 80216
- --------------------------------------------------------------------------------
Security
Treasury Bill
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The captions in the boxes above, and the names, dates, amounts and other
information therein, are defined terms and are hereby incorporated in the
note provisions below. Maker promises to pay to the order of Bank at
Bank's address the Face Amount with interest on the unpaid balance of the
Face Amount from the Note Date at the Rate indicated above (based upon a
year of 360 days and computed for the actual number of days elapsed).
Principal and interest shall be payable as follows:
Interest shall be payable monthly on the lst day of each month beginning
11/01/1996. The balance of principal plus accrued interest shall be
payable on demand. If no demand is made, balance of principal plus
accrued interest shall be payable at maturity of 5-1-97.
**The interest rate shall be at an annual rate one-half of one percentage
point above the Norwest Bank Colorado, National Association Prime Rate,
effective the same day of its change. Prime Rate shall mean the interest
rate charged by Norwest Bank Colorado, National Association as announced
or published by the Norwest Bank Colorado from time to time as its Prime
Rate, and may not be the lowest interest rate charged by the Bank.
This promissory note represents the indebtedness under the letter of
credit issued pursuant to that certain Application of Clean Sight Letter
of Credit dated 10/27/1995, in the amount of $235,000.00 on behalf of
Coleman Natural Meats, Inc. in favor of the Commissioner of Agriculture.
Overdue principal and (to the extent legally enforceable) overdue
interest, whether caused by acceleration of maturity or otherwise, shall bear
interest at a rate four percentage points above the rate in effect at the time
such principal or interest becomes due.
At the option of the holder of this note (the "holder") the unpaid balance
of this note plus accrued interest and all other obligations of Maker to the
holder, direct or indirect, absolute or contingent, now existing or hereafter
arising, shall become immediately due and payable without notice or demand if
(a) any payment required by this note is not made when due, or (b) a default
or event of default occurs under any loan or security agreement or instrument
executed as security for or in connection with this note, or (c) the holder
at any time in good faith believes that the prospect of any payment required
by this note is impaired, whether or not such belief is caused by any act or
failure to act of any Maker or of any endorser, guarantor or accommodation
party of or on this note (hereafter collectively referred to as "any other
signer").
Maker and any other signer (1) waive presentment, notice of dishonor and
protest, (2) assent to any extension of time with respect to any payment due
under this note, to any substitution or release of collateral and to the
addition or release of any party, and (3) agree that Bank may apply, as Bank
elects, any payment received after default to any portion of Maker's
obligations hereunder. No waiver of any payment or other right under this
note shall operate as a waiver of any other payment or right. Maker and any
other signer shall pay all reasonable costs of collection, including
attorneys' fees, paid or incurred by the holder in enforcing this note on
default.
This note (a) is secured by the Security indicated above, if any, and (b)
shall be construed under and governed by the laws of Colorado. If there is
more than one Maker, all of the provisions of this note shall apply to each
and any of them.
THE ARBITRATION TERMS AND CONDITIONS ON THE BACK OF THIS PAGE ARE A PART OF
AND INCORPORATED INTO THIS NOTE.
Coleman Natural Products, Inc.
- -------------------------------
FOR BANK USE ONLY By: /s/ Lee N. Arst
- ------------------------------- -----------------------------
Single L.O.C. Title: Pres CEO
Jackie Murphy
Daryl Moellenberg By: /s/ Richard P. Dutkiewicz
-----------------------------
- ------------------------------- Title: Vice President & CFO
<PAGE>
ARBITRATION
1. Agreement to Arbitrate: Subject to the provisions of the next paragraph
below, Bank and Maker agree to submit to binding arbitration any and all
claims, disputes and controversies between or among them, whether in tort,
contract or otherwise (and their respective employees, officers, directors,
attorneys, and other agents) arising out of or relating to in any way to the
loan and related loan documents which are the subject of this note and its
negotiation, execution, collateralization, administration, repayment,
modification, extension, substitution, formation, inducement, collection,
enforcement, default or termination.
Nothing in the preceding paragraph, nor the exercise of any right to
arbitrate thereunder, shall limit the right of any party hereto (1) to
foreclose against any real or personal property collateral by the exercise of
the power of sale under a deed of trust, mortgage, or other security
agreement, or instrument, or applicable law; (2) to exercise self-help
remedies such as setoff or repossession; or (3) to obtain provisional or
ancillary remedies such as replevin, injunctive relief, attachment, or
appointment of a receiver from a court having jurisdiction, before, during or
after the pendency of any arbitration proceeding. The institution and
maintenance of any action for such judicial relief, or pursuit to provisional
or ancillary remedies, or exercise of self-help remedies shall not constitute
a waiver of the right or obligation of any party to submit any claim or
dispute to arbitration, including those claims or disputes arising from
exercise of any such judicial relief, or pursuit of provisional or ancillary
remedies, or exercise of self-help remedies.
2. Selection of Arbitrator. If the amount in dispute is $500,000.00 or
more, arbitration hereunder shall be before a three-person panel of neutral
arbitrators, consisting of one person from each of the following categories:
(1) an attorney who has practiced in the area of commercial law in the State
of Colorado for at least eight (8) years or a retired judge at the district
court or appellate court level from the State of Colorado; (2) a person with
at least eight (8) years experience in commercial lending; and (3) a person
with at least eight (8) years experience in the wholesale meat industry. The
parties to the dispute or their representatives shall obtain from AAA a list
of persons meeting the criteria outlined above and the parties shall select
the person in the manner established by the AAA.
If the amount in dispute is less than $500,000.00, the arbitration
shall be conducted before one arbitrator who shall be an attorney who has
practiced in the area of commercial law for at least eight (8) years or a
retired judge at the District Court or an appellate court level. The parties
to the dispute or their representatives shall obtain from AAA a list of the
persons meeting the criteria outlined above and the parties shall select the
person in the manner established by the AAA.
3. Governing Laws and Rules: Such arbitration shall proceed in the State of
Colorado in the city or county (if the Bank is not located in a city) wherein
the Bank is located, shall be governed by Colorado law, including all
applicable statutes of limitations, and shall be conducted in accordance with
the Commercial Arbitration Rules of the American Arbitration Association
("AAA"). Judgement upon the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction.
4. Discovery: In any arbitration hereunder: (1) the arbitrator(s) shall
decide (by documents only or with a hearing, at the arbitrators' discretion)
any pre-hearing motions which are substantially similar to pre-hearing
motions to dismiss for failure to state a claim or motions for summary
adjudication; (2) discovery shall be permitted, but shall be limited as
provided in Rule 26.1 (c) of the Colorado Rules of Civil Procedure, and shall
be subject to the scheduling by the arbitrator(s), and any discovery disputes
shall be subject to final determination by the arbitrator(s); and (3) the
arbitrator(s) shall award costs and expenses of the arbitration proceeding in
accordance with the provisions of the loan agreement, promissory note and/or
other loan documents.
<PAGE>
GENERAL SECURITY AGREEMENT
(Including Pledge of Securities by Borrower)
1. Debtor (name and address(1)):
COLEMAN NATURAL PRODUCTS, INC.
5140 Race Ct., Suite 4
DENVER, CO 80216
2. Bank: NORWEST BANK COLORADO, NATIONAL ASSOCIATION
1740 BROADWAY
DENVER, CO 80274
3. Collateral: Treasury Bill in the amount of $335,000.00,
CUSIP #9127942Q6, held by Norwest Investment Services,
Inc. in safekeeping account #01487883 and all additions,
substitutions, and replacements thereof.
and all money, securities and other instruments, documents, chattel paper,
accounts, contract rights, general intangibles, credits, claims, demands and
any other property, rights and interests of Debtor which shall at any time
come into the possession, custody or control of Bank for any purpose and in
any manner. Bank shall be deemed in possession of any of the Collateral in
transit to Bank.
4. Obligations: (a) All indebtedness evidenced and created by the following
described promissory note (the "Note") payable to the order of Bank, and all
renewals, extensions and amendments thereof:
Date: October 11, 1996
Amount: $235,000.00 Plus Interest
Maturity Date: May 01, 1997
Maker (if other than Debtor):
(b) future advances made by Bank to Debtor, plus interest thereon; (c) all
expenditures made or incurred by Bank pursuant to the provisions of the Note
and this agreement; and (d) all other obligations of Debtor to Bank, direct
or indirect, absolute or contingent, now existing or hereafter arising.
Other:
THE TERMS AND CONDITIONS ON THE REVERSE SIDE ARE A PART OF THIS AGREEMENT.
Dated: October 11, 1996
COLEMAN NATURAL PRODUCTS, INC.
By: /s/ Lee N. Arst
----------------------------------
Title: President/CEO
By: /s/ Richard P. Dutkiewicz
----------------------------------
Title: Vice President/CFO
ADDITIONAL TERMS AND CONDITIONS
5. SECURITY INTEREST. To secure payment and performance of the Obligations,
Debtor hereby grants to Bank a security interest in the Collateral and in its
products and accessions.
6. WARRANTIES AND REPRESENTATIONS. Debtor warrants and represents to Bank:
(a) Debtor has title to the Collateral free and clear of all liens, security
interests, restrictions, setoffs, adverse claims, assessments, defaults,
prepayments, defenses and conditions precedent except as disclosed thereon or
to Bank; (b) the Collateral is enforceable in accordance with its terms, is
genuine and complies with applicable laws concerning form, content and manner
of preparation and execution, and all persons appearing to be obligated
thereon have authority and capacity to contract and are bound as they appear
to be; (c) no financing statement covering any of the Collateral is on file
in any public office other than those: (i) which reflect the security
interest created by this agreement or (ii) to which Bank has specifically
consented; (d) if Debtor is a corporation, its certificate or articles of
incorporation and bylaws do not prohibit any term or condition of this
agreement; (e) the execution and delivery of this agreement will not violate
any law or agreement governing Debtor or to which Debtor is a party; and (f)
all information and statements on the front page of this agreement are true
and correct.
(1) If any of the Collateral is accounts or general intangibles, give also,
if different, the address of Debtor's chief executive office.
<PAGE>
7. COVENANTS OF DEBTOR. Unless and until Bank consents in writing to
another course of action, Debtor covenants and agrees: (a) Bank will also
have a security interest in all securities and other property, rights or
interests of any description at any time issued or issuable as an addition
to, in substitution or exchange for or with respect to the Collateral,
including without limitation shares issued as dividends or as the result of
any reclassification, split-up or other corporate reorganization. Debtor
will hold in trust for and deliver promptly to Bank, in the exact form
received, all such securities or other property that comes into the
possession, custody or control of Debtor. Upon demand Debtor will execute,
assign and endorse all proxies, applications, acceptances, stock powers,
chattel paper, documents, instruments and other evidences of payment or
writings constituting or relating to any of the Collateral or such other
property. All assignments and endorsements by Debtor will be in such form
and substance as may be satisfactory to Bank and Debtor hereby waives
presentment, notice of dishonor, protest, demand and all other notices with
respect thereto. (b) If Bank at any time deems the Collateral unsatisfactory,
upon demand Debtor will furnish such additional collateral or make such
payment upon the Obligations as Bank may* request. (c) Debtor will not sell or
assign any of the Collateral, will keep it free of liens, security interests
and adverse claims other than the security Interests contemplated by (c) or
paragraph 6; will promptly notify Bank of any event of default as defined in
paragraph 9; will defend the Collateral against the claims and demands of all
persons, and will pay promptly all taxes and assessments with respect to the
Collateral. (d) At its option Bank may discharge taxes, liens, security
interests and other claims against the Collateral and may pay for the
maintenance, preservation and protection thereof, including costs and
expenses incidental to any actions undertaken by Bank pursuant to paragraph 8.
Debtor will reimburse Bank on demand for any payments so made. Any such
payments by Bank shall become part of the Obligations, bearing interest at
the same rate as the Note. (e) Debtor will from time to time execute
financing statements and other documents in form satisfactory to Bank (and
pay the cost of filing or recording them in whatever public offices the Bank
deems necessary) and perform such other acts as Bank may request to perfect
and maintain a valid security interest in the Collateral.
*reasonably
8. RIGHTS OF BANK. (a) Bank shall be deemed to have exercised reasonable
care In the custody and preservation of the Collateral if it takes such
action for that purpose as Debtor shall request, but failure to honor any
such request shall not of itself be deemed a failure to exercise reasonable
care. Bank shall not be required to take any steps necessary to preserve any
rights in the Collateral against prior parties nor to protect, preserve or
maintain any security interest given to secure the Collateral. (b) In its
discretion and without notice Bank may take any one or more of the following
actions (and Bank is hereby irrevocably appointed Debtor's attorney-in-fact
to accomplish this), without liability except to account for property
actually received by it: (i) transfer to or register in its name or the name
of its nominee any of the Collateral, with or without indication of the
security interest herein created, and whether or not so transferred or
registered, receive the income, dividends and other distributions thereon and
hold them or apply them to the Obligations in any order of priority; (ii)
insure any of the Collateral; (iii) exchange any of the Collateral for other
property upon a reorganization, recapitalization or other readjustment and,
in connection therewith, deposit any of the Collateral with any committee or
depository upon such terms as Bank may determine, (iv) in its names or in the
name of Debtor demand, sue for, collect or receive any money or property at any
time payable or receivable on account of or in exchange for any of the
Collateral and, in connection therewith, endorse notes, checks, drafts, money
orders, documents of title or other evidences of payment, shipment or storage
in the name of Debtor; (v) make any compromise or settlement deemed advisable
with respect to any of the Collateral; (vi) renew, extend, or otherwise change
the terms and conditions of any of the Collateral or the Obligations*;
(vii) release any Collateral or any property given as security for any of the
Obligations, and (viii) add or release any guarantor, endorser, surety or other
party to any of the Collateral or the Obligations. (c) Bank shall be under no
duty to exercise or to withhold the exercise of any of the rights, powers,
privileges and options expressly or implicitly granted to bank in this
agreement, and shall not be responsible for any failure to do so or delay in
so doing.
*Upon written request of Debtor
9. THE EVENTS OF DEFAULT ARE SET FORTH IN THE LOAN AGREEMENT.
10. REMEDIES. (a) Upon the occurrence of any event of default and at any
time thereafter Bank shall have, in addition to all other rights and
remedies, the remedies of a secured party under the Uniform Commercial Code
("UCC") as then in effect in Colorado, regardless of whether the UCC applies
to the security transactions covered by this agreement, Including without
limitation the right to accelerate the maturity of the Obligations, without
notice or demand, and to take possession of the Collateral and any proceeds
thereof wherever located. Debtor shall make the Collateral available to Bank
at a place to be designated by Bank that is reasonably convenient for both
parties. If notice is required, Bank shall give to Debtor at least five days'
prior written notice of the time and place of any public sale of the
Collateral or of the time after which any private sale or any other Intended
disposition is to be made. (b) if Bank in good faith believes that the
Securities Act of 1933 or any other state or federal law prohibits or
restricts the customary manner of sale or distribution of any of the
Collateral, Bank may sell such Collateral privately or in any other manner
deemed advisable by Bank at such price or prices as Bank determines in its
sole discretion. Debtor recognizes that such prohibition or restriction may
cause the Collateral to have less value than it otherwise would have and
that, consequently, such sale or disposition by Bank may result in a lower
sales price than if the sale were otherwise held. (c) As a supplementary or
additional remedy, Bank shall also be entitled, without notice or demand and
to the extent permitted by law: (i) to exercise or continue to exercise all of
the rights granted to Bank in paragraph 8 or (ii) to have a receiver appointed
to take charge of all or any part of the Collateral, exercising all of the
rights granted to Bank in paragraph 8. (d) Bank may also cause any of the
Collateral to be transferred to or registered in its name or the name of its
nominee and, whether or not transferred or registered, may exercise or cause
to be exercised all voting powers with respect to such Collateral as if the
absolute owner thereof. For this purpose Bank Is hereby irrevocably appointed
Debtor's attorney-in-fact. (e) To the extent allowed by law, Debtor shall pay
Bank all expenses of retaking, holding, preparing for sale, selling and the
like, Including reasonable attorneys'fees and legal expenses, and such costs
shall be paid out of the proceeds of disposition of the Collateral. Such
proceeds may be applied to the Obligations in any order of priority determined
by Bank.
11. GENERAL. (a) The terms "Debtor," "Bank," "Collateral," "Obligations" and
"Note" are defined In paragraphs 1, 2, 3 and 4. Where Debtor and the obligor
on the Obligations are not the same, the term "Debtor" herein means the owner
of the Collateral in any provision dealing with the Collateral, the obligor
in any provision dealing with the Obligations, and both where the context so
requires. (b) No default shall be waived by Bank except in writing and no
waiver of any payment or other right under this agreement shall operate as a
waiver of any other payment or right. (c) Bank may assign, transfer or
deliver any of the Collateral to any transferee of any of the Obligations,
and thereafter shall be fully discharged from all responsibility with respect
to such Collateral. The transferee shall be vested with all the powers and
rights of Bank hereunder with respect to such Collateral, but Bank shall
retain all rights and powers hereunder with respect to any of the Collateral
remaining. (d) If there is more than one Debtor, all the terms and conditions
of this agreement shall apply to each and any of them. (e) Without affecting
any obligations of Debtor under this agreement Bank without notice or demand
may renew or extend any of the Obligations; release any Collateral, and add
or release any guarantor, endorser, surety or other party to any of the
Obligations. (f) Any consent, notice and other communication required or
contemplated by this agreement shall be in writing and it shall be deemed
given three (3) days after being mailed if mailed, postage prepaid, to Debtor
at the address given on the reverse side hereof or at such other address given
by notice as herein provided. (g) A carbon, photographic or other reproduction
of this agreement or a financing statement shall be sufficient as a financing
statement. (h) Debtor hereby expressly grants Bank a power of attorney, and
appoints and constitutes Bank as Debtor's agent, for the purposes and with the
power to sign on behalf of Debtor in Debtor's name, one or more financing
statements covering any of the Collateral described herein or in any other
Bank security agreement executed by Debtor. (i) Debtor hereby authorized each
city, county, state or federal government to release to Bank all information
which Bank may request pertaining to any sales, use or other taxes imposed by
such government entity, other than personal or corporate income tax. The state
may retain a copy of this agreement. (j) This agreement shall be construed under
and governed by the laws of Colorado. (k) All of the rights of Bank under
this agreement shall be cumulative and shall inure to the benefit of its
successors and assigns. All obligations of Debtor hereunder shall be binding
upon the heirs, legal representatives, successors and assigns of Debtor.
This Agreement is subject to Arbitration in accordance with the Loan Agreement.
****** See Exhibit A which is attached hereto and incorporated herein.
<PAGE>
EXHIBIT A
This Exhibit is attached and made a part of the General Security Agreement
for Inventory and Accounts between Coleman Natural Products, Inc. (Borrower)
and Norwest Bank Colorado, National Association (Bank) and further describes
the changes in the General Security Agreement.
COLEMAN NATURAL PRODUCTS, INC.
By: /s/ Lee N. Arst
-------------------------------
Title: President/CEO
---------------------------
By: /s/ Richard P. Dutkiewicz
-------------------------------
Title: Vice President/CEO
---------------------------
<PAGE>
EXHIBIT 11
COLEMAN NATURAL PRODUCTS, INC.
Calculation of Earnings Per Share of Common Stock
(Unaudited)
<TABLE>
52 weeks 52 weeks 52 weeks 26 weeks 39 weeks 40 weeks
ended ended ended ended ended ended
June 26, June 25, June 24, December 23, September 23, September 28,
1993 1994 1995 1995 1995 1996
--------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Primary earnings (loss) per common share:
Net income (loss) 289,556 (1,024,591) 504,634 1,087,395 715,792 1,080,815
Accretion of preferred stock (67,466) (52,294) (27,376) - (9,139) -
Cash dividends paid on preferred stock - - (150,676) (151,126) (226,183) (228,550)
In-kind dividends paid on preferred stock - - - (15,034) - (80,180)
--------- ---------- --------- --------- --------- ---------
Net income attributable to common stock 222,090 (1,076,885) 326,582 921,235 480,470 772,085
--------- ---------- --------- --------- --------- ---------
Common and common equivalent shares outstanding:
Historical common shares outstanding
at beginning of period 1,278,650 1,278,650 1,549,403 1,549,403 1,549,403 1,651,649
Effect of common stock and common stock
equivalents issued within one year prior
to initial public offering 135,302 135,302 135,302 110,522 135,283 45,837
Weighted average common equivalent shares issued - - - 122,725 12,672 321,878
Weighted average common shares issued - 63,580 - 28,652 - 1,520
--------- ---------- --------- --------- --------- ---------
Weighted average common and common
equivalent shares outstanding 1,413,952 1,477,532 1,684,705 1,811,302 1,697,358 2,020,884
--------- ---------- --------- --------- --------- ---------
--------- ---------- --------- --------- --------- ---------
Primary earnings (loss) per common share .16 (.73) .19 .51 .28 .38
</TABLE>
(1) Common Stock and Common Stock equivalents issued within one year prior to
initial public offering.
Number
of Shares Price/Share Net Proceeds
--------- ----------- ------------
Options - 1/26/96 2,500 7.05 17,625
Options - 3/8/96 600 9.58 5,748
Options - 5/1/96 600 9.58 5,748
Options - 8/7/96 22,750 17.53 398,808
Options - 8/7/96 1,000 19.29 19,290
Options - 9/16/96 2,000 27.08 54,162
Common Stock issued - 11/2/95 35,876 3.95 141,710
Common Stock issued - 8/7/96 1,997 17.53 35,007
Common Stock issued - 9/4/96 195 3.95 770
Common Stock issued - 9/18/96 3,260 4.35 14,181
Common Stock issued - 9/18/96 499 4.95 2,470
-------- -------
71,277 695,519
-------
-------
Effect of Stock Split 2.85
--------
203,139
--------
--------
Equivalent shares issued within one year prior to initial
public offering 203,139
Assumed treasury shares repurchased ($695,519/$10.25) (67,856)
-------
Increase in shares outstanding for earnings per share
calculation 135,283
-------
-------
<PAGE>
EXHIBIT 11 (continued)
COLEMAN NATURAL PRODUCTS, INC.
Calculation of Proforma Earnings Per Share of Common Stock
(Unaudited)
<TABLE>
<CAPTION>
52 weeks 26 weeks 40 weeks
ended ended ended
June 24, December 23, September 28,
1995 1995 1996
---------- ------------- -------------
<S> <C> <C> <C>
Pro forma weighted average common and common equivalent shares
outstanding:
Historical weighted average common and common equivalent shares
outstanding........................................................ 1,684,705 1,811,302 2,020,884
Number of shares whose proceeds would be necessary to redeem
mandatorily redeemable preferred stock using an assumed offering
price of $10.25 per share.......................................... 323,263 325,934 327,401
---------- ------------- -------------
Pro forma weighted average common and common equivalent shares
outstanding........................................................ 2,007,968 2,137,236 2,348,285
---------- ------------- -------------
---------- ------------- -------------
Pro forma net income per share (2)..................................... $ .25 $ .51 $ .46
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
(2) The unaudited pro forma earnings per share data has been provided to
disclose the pro forma effect of the redemption of all of the mandatorily
redeemable preferred stock with a portion of the proceeds of the proposed
public offering. The pro forma per share data gives effect to the number of
shares whose proceeds would be necessary to redeem mandatorily redeemable
preferred stock using an assumed offering price of $10.25 per share, and
also gives effect to the elimination of the dividend requirements and
accretion of the mandatorily redeemable preferred stock.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
COLEMAN NATURAL PRODUCTS, INC.:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.
KPMG Peat Marwick LLP
Denver, Colorado
October 22, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE TRANSITION PERIOD ENDED DECEMBER 23,
1995 AND THE AUDITED FINANCIAL STATEMENTS FOR THE 40 WEEK INTERIM PERIOD ENDED
SEPTEMBER 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-23-1995 DEC-28-1996
<PERIOD-START> JUN-25-1995 DEC-24-1995
<PERIOD-END> DEC-23-1995 SEP-28-1996
<CASH> 22 63
<SECURITIES> 0 0
<RECEIVABLES> 3,419 3,240
<ALLOWANCES> 20 88
<INVENTORY> 992 1,222
<CURRENT-ASSETS> 5,293 5,155
<PP&E> 1,423 1,718
<DEPRECIATION> 766 897
<TOTAL-ASSETS> 6,030 6,308
<CURRENT-LIABILITIES> 2,755 2,052
<BONDS> 0 0
3,356 3,401
0 0
<COMMON> 2 2
<OTHER-SE> (83) 853
<TOTAL-LIABILITY-AND-EQUITY> 6,030 6,308
<SALES> 28,791 40,618
<TOTAL-REVENUES> 28,791 40,618
<CGS> 26,095 35,190
<TOTAL-COSTS> 26,095 35,190
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 6 66
<INTEREST-EXPENSE> 119 62
<INCOME-PRETAX> 442 1,640
<INCOME-TAX> (645) 559
<INCOME-CONTINUING> 1,087 1,081
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,087 1,081
<EPS-PRIMARY> .51 .38
<EPS-DILUTED> .51 .38
</TABLE>
