As filed with the Securities and Exchange Commission on June 2, 1997
Registration No. 333 -20601
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
AMENDMENT NO. 2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Butterwings Entertainment Group, Inc.
(Name of Small Business Issuer in its charter)
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Illinois 5812 36-3903024
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
Douglas E. Van Scoy
2345 Pembroke Ave. 2345 Pembroke Ave. 2345 Pembroke Ave.
Hoffman Estates, Il 60195 Hoffman Estates, Il 60195 Hoffman Estates, Il 60195
(847) 925-1050 (847) 925-1050
(Address and telephone (Address of principal place of (Name, address,
number of principal business or intended principal and telephone number
executive offices) place of business) of agent for service)
Copies to:
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Thomas W. Hughes, Esq.
Maurice J. Bates, Esq. Lisa N. Tyson, Esq.
Maurice J. Bates, L.L.C. Winstead Sechrest & Minick, P.C
8214 Westchester 1201 Elm Street
Suite 500 5400 Renaissance Tower
Dallas, Tx 75225 Dallas, Tx 75270
Phone (214) 692-3566 Phone (214) 745-5400
Fax (214) 987-2091 Fax (214) 745-5390
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Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective. If this Form is filed to
register additional securities for an offering pursuant to Rule 462 (b) under
the Securities Act,
please check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ____________
If this Form is a post-effective amendment filed pursuant to Rule 462
(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier 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. 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, please check the following box. x
*Calculation of the Registration Fee appears on the next page.
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(Registration Statement cover page cont'd)
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered Offering Price per Unit Aggregate Offering Price Registration Fee
(1) (1)
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Units (2) 1,254,650 $6.50 $8,155,225 $ 2,471.28
Common Stock, $.01 par
value (3) 1,254,650 (3) (3) (3)
Redeemable Series A Common
Stock Purchase Warrants (3) 1,254,650 (3) (3) (3)
Common Stock, $.01 par
value (4) ( 5) 1,254,650 $7.80 $9,786,270 $2,965.53
Underwriters' Warrants (5) (6) 91,000 $.001 $91.00 $0.03
Units Underlying the
Underwriters' Warrants 91,000 $7.80 $702,000 $212.73
Common Stock, $.01 par
value (7) 91,000 (6) (6) (6)
Redeemable Series A Common
Stock Purchase Warrants(7) 91,000 (6) (6) (6)
Common Stock, $.01 par
value (5) (8) 91,000 $7.80 $867,360 $212.73
Total $5,862.30
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes 91,000 Units being offered by Selling Security Holders.
(3) Included in the Units. No additional registration fee is required.
(4) Issuable upon exercise of Redeemable Series A Common Stock Purchase
Warrants.
(5) Pursuant to Rule 416 there are also registered an indeterminate number of
shares of Common Stock, which may be issued pursuant to the anti-dilution
provisions applicable to the Redeemable Series A Common Stock Purchase
Warrants, the Underwriters' Warrants and the Redeemable Series A Common
Stock Purchase Warrants issuable under the Underwriters' Warrants.
(6) Underwriters' Warrants to purchase up to 91,000 Units, consisting of an
aggregate of 91,000 shares of Common Stock and 91,000 Redeemable Series A
Common Stock Purchase Warrants.
(7) Included in the Units Underlying the Underwriters' Warrants. No additional
registration fee is required.
(8) Issuable upon exercise of Redeemable Series A Common Stock Purchase
Warrants underlying the Underwriters' Units.
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Butterwings Entertainment Group, Inc.
Cross - Reference Sheet
showing location in the Prospectus of
Information Required by Items of Form SB-2
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Form SB-2 Item Number and Caption Location In Prospectus
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1. Front of Registration Statement and
Outside Front Cover of Prospectus................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus..................... Inside Front Cover Page;
Outside Back Cover Page;
Additional Information
3. Summary Information and Risk Factors....................................... Prospectus Summary; Risk
Factors
4. Use of Proceeds............................................................ Use of Proceeds
5. Determination of Offering Price............................................ Outside Front Cover Page; Risk
Factors; Underwriting
6. Dilution................................................................... Dilution
7. Selling Security Holders................................................... Selling Security Holders
8. Plan of Distribution....................................................... Outside Front Cover Page; Risk
Factors; Underwriting
9. Legal Proceedings.......................................................... Business and Properties--Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons................................................. Management--Directors
and Executive Officers
11. Security Ownership of Certain Beneficial
Owners and Management............................................... Principal Stockholders
12. Description of Securities.................................................. Description of Securities
13. Interest of Named Experts and Counsel...................................... Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities...................... Underwriting
15. Organization Within Last Five Years........................................ Certain Relationships and Related Transactions
16. Description of Business.................................................... Business and Properties
17. Management's Discussion and Analysis
or Plan of Operation................................................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
18. Description of Property.................................................... Business and Properties
19. Certain Relationships and Related
Transactions................................................. Certain Relationships and Related
Transactions
20. Market for Common Equity and Related
Stockholder Matters................................................. Description of Securities; Risk
Factors-Shares Eligible for Future Sale
21. Executive Compensation..................................................... Management--Executive Compensation
22. Financial Statements....................................................... Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.................. Not Applicable
24. Indemnification of Directors and Officers.................................. Management
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Subject to Completion, Dated June 2, 1997
PROSPECTUS
Butterwings Entertainment Group, Inc.
1,091,000 Units
Each Unit consisting of One Share of Common Stock and
One Redeemable Series A Common Stock Purchase Warrant
Of the 1,091,000 units offered hereby, 1,000,000 are being sold by
Butterwings Entertainment Group, Inc. (the "Company") and 91,000 are being sold
by certain security holders of the Company (the "Selling Security Holders").
Each unit (a "Unit") consists of one share of Common Stock (the "Common Stock")
, $.01 par value per share, and one Redeemable Series A Common Stock Purchase
Warrant (the "Series A Warrants") o f the Company. The Units, together with the
Common Stock and the Series A Warrants included in the Units, are sometimes
referred to collectively as the "Securities." The Common Stock and the Series A
Warrants included in the Units may not be separately traded until ____ 1997[six
months after the date of this prospectus] unless earlier separated upon three
days' prior written notice from National Securities Corporation (the
"Representative") to the Company at the discretion of the Representative. Each
Series A Warrant entitles the holder thereof to purchase one share of Common
Stock at an exercise price of 120% of the offering price per Unit, subject to
adjustment, at any time commencing on ____, 1998 [13 months after the closing of
this Prospectus] until ______, 2002, unless earlier redeemed. The Series A
Warrants are subject to redemption by the Company at a price of $0.05 per Series
A Warrant at any time commencing 13 months after the date of this Prospectus, on
thirty days prior written notice, provided that the closing sale price per share
for the Common Stock has equalled or exceeded 200% of the offering price per
Unit for twenty consecutive trading days within the thirty-day period
immediately preceeding such notice. See "Description of Securities" and
"Underwriting."
Prior to this Offering, there has been no public market for the
Securities, and there can be no assurance that an active market will develop. It
is currently anticipated that the initial public offering price of the Units
will be $6.50 per Unit. See "Underwriting" for information relating to the
factors to be considered in determining the initial public offering price. The
Company intends to apply for listing of the Units, the Common Stock and the
Series A Warrants on the Boston Stock Exchange subject to official notice of
issuance, under the symbols "ETS.U, "ETS" and "ETS.W" respectively and on the
NASDAQ Small Cap Market under the symbols "EATS.U", "EATS" and "EATS.W."
The Company's ability to continue as a going concern may be
dependent upon the successful completion of this offering.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION FROM THE PUBLIC OFFERING PRICE. PROSPECTIVE INVESTORS
SHOULD CAREFULLY CONSIDER THE SECTIONS ENTITLED "RISK FACTORS"BEGINNING ON PAGE
8 AND "DILUTION" CONCERNING THE COMPANY AND THIS OFFERING.
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.
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company (2) Security Holders
Per Unit (3)..... $ $ $ $
Total............ $ $ $ $
The Securities are being offered, subject to prior sale, when, as and if
delivered to and accepted by the Representative, and subject to approval of
certain legal matters by counsel and other conditions. The Representative
reserves the right to withdraw, cancel or modify the Offering without notice and
to reject any order, in whole or in part. It is expected that delivery of the
certificates representing the Securities will be made against payment therefor
at the offices of National Securities Corporation in Seattle, Washington on or
about _________.
National Securities Corporation
The date of this Prospectus is _______, 1997.
THIS LEGEND APPEARS ON THE LEFT SIDE MARGIN OF THE PROSPECTUS
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 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.
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(1) Does not include compensation in the form of a non-accountable expense
allowance equal to 2.5% of the gross proceeds of this Offering. The Company
has also agreed to sell to the Underwriters warrants (the "Underwriters'
Warrants") exercisable for four years commencing one year from the date
hereof to purchase 91,000 Units at 120% of the offering price per Unit. For
information concerning indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting estimated offering expenses of $550,000 payable by the
Company.
(3) The Company has granted to the Underwriters a 45-day option beginning on
the date of this Prospectus to purchase up to an aggregate of 163,650
additional Units at the Price to Public less the Underwriting Discount
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, the Underwriting Discounts and
Commissions, Proceeds to the Company will be $______, $______ and $______
respectively. See "Underwriting."
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i
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Prospectus Summary
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. The information herein, including share and per share data,
unless otherwise stated, gives effect to (i) a 21,640 -for-one split of the
Common Stock effected in October 1996, (ii) the issuance of 593,945 shares of
Common Stock pursuant to the Exchange Offer described elsewhere in this
Prospectus, (iii) the issuance of 254,008 shares of Common Stock upon the
automatic conversion of outstanding Convertible Preferred Stock described
elsewhere in this Prospectus, and (iv) the issuance of 91,000 shares of Common
Stock included in 91,000 Units to be issued to the Selling Security Holders,
concurrent with the effective date of this Prospectus. Unless otherwise
indicated, the information herein is presented on the basis that the
Underwriters' over-allotment option and the Underwriters' Warrants are not
exercised.
The Company
Butterwings Entertainment Group, Inc. ("Butterwings" or the "Company")
is engaged in the ownership,
operation and management of Mrs. Fields cookie stores (the "Mrs. Fields Cookie
Stores" or the "Cookie Stores") and franchised Hooters restaurants (the "Hooters
Restaurants" or the "Restaurants"). The Company currently owns, operates and
manages 13 Mrs. Fields Cookie Stores in Missouri, Michigan and Minnesota and
three Hooters Restaurants in Madison, Wisconsin and San Diego, California. The
Company has contracted to sell one Cookie Store in Minnesota, effective June 1,
1997. The Company will not open any new Hooters Restaurants and intends to sell
its existing locations.
The Company's Mrs. Fields Cookie Stores are franchised businesses which
offer and sell a variety of specially prepared food items including, but not
limited to, cookies, brownies, muffins and beverages. The Company's Hooters
Restaurants are franchised businesses which offer casual dining using a limited,
moderately priced menu that features chicken wings, seafood, salads and sandwich
type items. The Company develops and operates its Mrs. Fields Cookie Stores and
Hooters Restaurants pursuant to specified standards established by the
franchisors.
In December 1995, the Company purchased an existing Mrs. Fields Cookie
Store in Flint, Michigan from Mrs. Fields Development Corporation, the
franchisor of Mrs. Fields Cookie Stores (the "Mrs. Fields Franchisor") and in
January 1996, acquired from an affiliate of the Company six additional
franchised Mrs. Fields Cookie Stores. In October 1996, the Company acquired 100%
of the common stock of Cookie Crumbs, Inc. ("Cookie Crumbs"), which owns six
additional Mrs. Fields Cookie Stores. The Company intends to acquire an
unlimited number of new or existing Mrs. Fields Cookie Stores. The Company
opened its first Hooters Restaurant in Madison, Wisconsin in April 1994. The
Company opened three additional Hooters Restaurants, all in San Diego,
California, between October 1994 and May 1995, one of which was subsequently
closed.
The Company's objective is to develop or acquire a significant number of
franchised units to create economies of scale in management, personnel and
administration. To achieve this objective, the Company's strategy will be to (i)
capitalize on the brand name recognition and goodwill associated with the Mrs.
Fields name; (ii) expand the Company's Mrs. Fields operations through the
development of additional franchised units; and (iii) hire and train qualified
management personnel to assure compliance with its obligations, continuity of
management and efficiency of operations. Management of the Company will also
research other concepts to become part of the future strategy of the Company's
ongoing plans for expansion. The Company has had preliminary discussions with a
micro brewery chain with respect to its acquisition by the Company. No agreement
has been reached and there can be no assurance that the Company will be able to
consummate the transaction or that, if consummated, the micro brewery chain
would be profitable.
The Company was incorporated in Illinois as Butterwings, Inc., in July
1993 and adopted its present name by amendment to its Articles of Incorporation
in October 1996. The Company operates in California through its wholly-owned
subsidiary, Butterwings of California, Inc. ("Butterwings/California") and in
Wisconsin through its wholly-owned subsidiary, Butterwings of Wisconsin,
Inc.("Butterwings/Wisconsin"). The Company's Mrs. Fields Cookie Stores are owned
and operated by the Company and through Cookie Crumbs.
The Company's executive offices are at 2345 Pembroke Avenue, Hoffman
Estates, Illinois, 60195. The telephone number at that location is (847)
925-0925.
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2
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Cancellation of Debt; Conversion of Preferred Stock; Bridge Loan Financing
Exchange of 12% Notes for Stock. Pursuant to an exchange offer dated January
1997 (the "Exchange Offer"), the Company offered to exchange shares of its
Common Stock for $3,700,000 principal amount of the Company's 12% Notes due
April 2001 (the "Notes"), accrued interest on the Notes and a 20% premium over
the proposed initial public offering price of $6.50 per Unit for the Units in
this Offering. Holders of $2,872,500 principal amount (77.6%) of Notes accepted
the Exchange Offer. As a result, $2,872,500 principal amount of Notes and
$344,700 of interest accrued through March 31, 1997,will be canceled and 593,945
shares of Common Stock will be issued to the Note holders concurrently with the
issuance of Units to investors in this Offering. The $827,500 of Notes not
exchanged will remain outstanding. See "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Secured Promissory Notes."
Conversion of Preferred Stock: Prior to this Offering, the Company had
outstanding 15,685 shares of its Convertible Preferred Stock. The Convertible
Preferred Stock is automatically convertible into the Company's Common Stock
upon consummation of the first sale of the Company's Common Stock in an
underwritten
public offering pursuant to the Securities Act of 1933. As a result of this
Offering, the Company will issue
to the holders of the Convertible Preferred Stock 254,008 shares of Common Stock
concurrently with the
consummation of the Offering. This Prospectus assumes the conversion of the
Convertible Preferred Stock and
the issuance of 254,008 shares to the Convertible Preferred Stock holders. See
"Description of Securities - Convertible Preferred Stock."
Bridge Loan Notes and Warrants: From October through December 1996, the Company
issued $483,000 of bridge
loan notes (the "Bridge Loan Notes") to provide cash for normal operating
expenses and to pay professional
fees and expenses in connection with this Offering. The Bridge Loan Notes are
secured promissory notes
bearing interest at the LIBOR rate and are payable at the earlier of nine months
from the date of issuance or the closing of this Offering. As additional
consideration, the Bridge Loan Note holders (the "Bridge Loan holders") received
91,000 warrants to acquire, without additional cost, Units identical to the
Units offered
hereby at the time the registration statement of which this Prospectus is a part
becomes effective. Such
Units are being registered pursuant to this registration statement and are
included in the Units offered hereby. See Management's Discussion of Financial
Condition and Results of Operations - Bridge Financing," "Selling Security
Holders" and "Underwriting."
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3
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The Offering
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Securities Offered:
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By the Company.................. 1,000,000 Units, each Unit consisting of one share of Common Stock
and one Series A Warrant. See "Description of Securities."
By the Selling Security Holders. 91,000 Units, each Unit consisting of one share of Common Stock and
one Series A Warrant. See "Selling Security Holders" and
"Description of Securities."
Series A Warrants................... Each Series A Warrant will entitle the holder thereof to purchase one
share of Common Stock at an exercise price of 120% of the offering
price per Unit in this Offering, commencing on _____________________,
1998 [thirteen months after closing of this Offering] until
_______________, 2002. The Series A Warrants may not be separately
traded until ________________, 1997 [six months after the date of
this Prospectus], unless earlier separated upon three days prior
written notice by the Representative to the Company, at the
discretion of the Representative. The Series A Warrants are
redeemable by the Company at $0.05 per Series A Warrant at any time
commencing thirteen months after the date of this Prospectus, on
thirty days prior written notice, provided that the closing sale
price per share for the Common Stock has equaled or exceeded 200% of
the Offering price per Unit for twenty consecutive trading days
within the thirty-day period immediately preceding such notice. See
"Description of Securities."
Common Stock to be Outstanding
after the Offering................. 4,091,000 shares (1)
Series A Warrants to be Outstanding
after the Offering................ 1,091,000 Series A Warrants (1)
Use of Proceeds..................... Development and acquisition of Mrs. Fields Cookie Stores, expansion
into other concepts, payment of past-due interest on the 12% Notes,
repayment of the Bridge Loan Notes and related interest , working
capital and general corporate purposes. See "Use of Proceeds."
Risk Factors........................ THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. See "Risk Factors."
Proposed Boston Stock Exchange Symbols
Units............................... ETS.U
Common Stock........................ ETS
Series A Warrants................... ETS.W
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4
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Proposed Nasdaq Small Cap Market Symbols
Units............................... EATS.U
Common Stock........................ EATS
Series A Warrants................... EATS.W
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(1) Excludes shares issuable upon the exercise of options and warrants
outstanding upon the date of this Prospectus or to be issued as follows: (i)
1,091,000 shares issuable upon the exercise of the Series A Warrants to be
sold in this Offering; (ii) up to 163,650 shares and 163,650 Series A
Warrants to purchase 163,650 shares subject to the Underwriters'
over-allotment option; (iii) 109,100 shares and 109,100 Series A Warrants to
purchase 109,100 shares subject to the Underwriters' Warrants; and (iv)
200,000 shares reserved for grant under the Company's 1996 Stock
Compensation Plan, 100,000 of which have been granted and are exercisable.
See "Management' and "Underwriting."
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5
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Summary Financial Information
The following table sets forth summary income statement data for the
fiscal years ended December 29, 1996, and December 31, 1995 and summary balance
sheet data at December 29, 1996 which have been derived from the Company's
consolidated financial statements audited by McGladrey & Pullen, LLP,
independent auditors, which have been included elsewhere herein. The summary
income statement data (unaudited) for the sixteen week periods ended April 20,
1997 and April 21, 1996 and the summary balance sheet data as of April 20, 1997
(unaudited) was derived from the Company's historical financial data for such
periods and are included elsewhere herein. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments ) have been made
which are considered necessary for the fair presentation of such information for
the interim periods presented. Results of operations for the interim periods are
not necessarily indicative of results to be expected for the full year. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and related Notes thereto appearing elsewhere in this
Prospectus.
Income Statement Data:
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Fiscal Years Ended 16 Weeks Ended
December 29, December 31, April 20, April 21,
1996 1995 1997 1996
---- ---- ---- ----
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Sales $8,551,033 $7,730,956 $2,428,091 $2,608,191
Operating expenses 8,317,394 7,398,898 2,407,024 2,531,780
General and administrative
expenses 996,200 566,918 333,355 151,718
Write off of franchise fee
options 145,000 -- -- --
Provisions for losses on
leased property 927,148 145,000 -- 427,148
Loss on impairment of
assets available for sale -- 159,474 775,000 --
Net (loss) (2,757,259) (1,153,674) (1,729,295) (716,160)
Net (loss) per common
share $(1.23) $(0.51) (0.76) (0.32)
Common shares outstanding (1) 2,250,736 2,250,736 2,266,121 2,246,121
Pro forma:
Net (loss) (2) $(1,177,360) -- (433,730) --
Net (loss)
per common share(2) $(.28) -- (0.10) --
Common shares
outstanding (2) 4,144,077 -- 4,144,077 --
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Balance Sheet Data:
December 29, April 20, 1997
1996 Actual As Adjusted (2)
---- ------- ---------------
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Current Assets $719,813 $1,126,497 $6,205,708
Total Assets 5,506,201 3,872,779 8,344,291
Total current liabilities 5,507,435 5,714,392 1,891,855
Total long-term debt 521,721 371,637 371,637
Redeemable Preferred Stock 1,690,000 1,690,000 1,690,000
Stockholders' equity
(deficit) $(2,212,955) $(3,903,250) $4,390,799
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6
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(1) Based on weighted average number of shares outstanding. See Note 1 to
Consolidated Financial Statements.
(2) To reflect (i) the sale of 1,000,000 Units (including 1,000,000 shares of
Common Stock) offered by the Company at a price of $6.50 per Unit,(ii) the
exchange of 77.6% of the Notes to Common Stock, (iii) the conversion of 100%
of the outstanding Convertible Preferred Stock, (iv) 91,000 shares of Common
Stock issued to the Selling Security Holders, and (v) and excludes the
results of operations related to the Hooters Restaurants and Cookie Store
Assets Available for Sale at April 20, 1997.
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7
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RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN ADDITION TO
THE OTHER INFORMATION SET FORTH IN THE PROSPECTUS BEFORE PURCHASING THE
SECURITIES OFFERED HEREBY.
Limited Operating History; Prior Losses; Going Concern
The Company has a limited operating history upon which investors may
evaluate the Company's performance. For the sixteen weeks ended April 20, 1997,
and April 21, 1996, the Company, on a consolidated basis, incurred net losses of
$1,729,295 and $716,160, respectively, from the operations of its Hooters
Restaurants and Mrs. Fields Cookie Stores. For the fiscal years ended December
29, 1996 and December 31, 1995 the Company, on a consolidated basis, incurred
net losses of $2,757,259 and $1,153,674 respectively from the operations of its
Hooters Restaurants and Mrs. Fields Cookie Stores. The Company will continue to
incur significant expenses associated with the development and operation of its
Mrs. Fields Cookie Stores, and the expansion into new concepts, a substantial
portion of which may be incurred before the realization of related revenues.
These expenditures, together with associated early operating expenses, may
result in operating losses until an adequate revenue base is established. There
can be no assurance that the Company will be able to operate profitability in
the future. The ability of the Company to continue as a going concern is
dependent upon, among other things, the successful completion of this Offering.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 20 to Consolidated Financial Statements for the Fiscal
Years Ended December 29, 1996 and December 31, 1995 (the "Consolidated Financial
Statements").
Risks of Restaurant Industry; Changes in Consumer Preferences, Economic
Conditions and Trends
The Company intends to sell its existing Hooters Restaurants. However,
as long as it continues to operate its existing restaurants, it will be subject
to the risks of the restaurant industry. The restaurant industry is generally
affected by changes in consumer preferences, national, regional and local
economic conditions and demographic trends. The performance of individual
restaurants may also be affected by factors such as traffic patterns and the
type, number and location of competing restaurants. Factors such as inflation,
increased food, labor and employee benefit costs and the availability of
experienced management and hourly employees may also adversely affect the
restaurant industry in general and the Company's restaurants in particular.
Moreover, by the nature of its business, the Company will be subject to
potential liability from serving contaminated or improperly prepared food and
such liability could adversely impact the Company's operations. See "Business -
Competition and Regulation."
Risks of Company's Businesses; Current and Future Profitability
The business of owning and operating Hooters Restaurants and Mrs. Fields
Cookie Stores involves a high degree of risk. The ultimate profitability of the
Company's business will depend upon numerous factors including, without
limitation, the profitability of the Hooters Restaurants, until sold, and Mrs.
Fields Cookie Stores owned and operated by the Company which in turn will depend
on many factors over which the Company will have no control. These factors
include changes in local, regional, or national economic conditions, changeable
tastes of consumers, food, labor and energy costs, the availability and cost of
suitable sites, fluctuating interest and insurance rates, state and local
regulations and licensing requirements, the continuing goodwill and reputation
associated with the Hooters Franchisor and Mrs. Fields Franchisor and the
ability of the Company to hire and retain qualified employees, including
competent managers for each restaurant and cookie store. The results of
operations for the sixteen week period ended April 20, 1997 and the year ended
December 29, 1996 for the Company's Mrs. Fields Cookie Stores have resulted in
operating losses of $341,116 and $881,655 respectively and the Company will be
dependent upon opening or acquiring new Mrs. Fields Cookie Stores and expanding
into new concepts to reach profitability. There can be no assurance that any new
sites selected will produce the minimum customer traffic for the Cookie Stores
to be economically successful or that the Company will be successful in
expanding into new concepts. Although the Company intends to sell its existing
Hooters Restaurants, there can be no assurance that it will be able to find a
ready buyer or that a price can be obtained which will not result in a loss on
its investment in the restaurants.
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Inability to Open New Hooters Restaurants
Pursuant to option addenda entered into between the Company and the
Hooters Franchisor, the Company paid the Hooters Franchisor $10,000 per
restaurant for options to open 13 new restaurants in Wisconsin and California.
Such option fees were to be credited against the $75,000 franchise fee payable
for each new restaurant. Butterwings/Wisconsin entered into a franchise
agreement dated October 31, 1993 and an option addendum thereto pursuant to
which Butterwings/Wisconsin was granted exclusive options to establish and
operate four additional Hooters Restaurants in the cities of Madison and
Milwaukee, Wisconsin by July 31, 1996. Butterwings/California also entered into
a franchise agreement dated October 31, 1993 and an option addendum thereto
pursuant to which Butterwings/California was granted the exclusive right to
operate a Hooters Restaurant in San Diego County and exclusive options to
establish and operate nine additional Hooters Restaurants in San Diego County,
two of which have been exercised. In October 1995, the option addendum was
modified at the request of the Company to reduce the option to establish and
operate Hooters Restaurants in San Diego County by three. Pursuant to such
option, the remaining four Hooters Restaurants in the territory were required to
be open by July 31, 1996.
The Company has been unable to complete the development of such
additional Hooters Restaurants within the time frames set forth in option
addenda to the Hooters franchise agreements and under the terms thereof, the
options have lapsed and the option fees paid by the Company may be retained by
the Hooters Franchisor. The Hooters Franchisor has advised the Company that it
does not intend to renew the options. Furthermore, the Hooters Franchisor has
not consented to this Offering and, under the terms of the franchise agreement
with the Hooters Franchisor, may have the right to terminate the Company's
operation of Hooters Restaurants.
Consequences of Inability to Open New Hooters Restaurants
Although the Hooters Franchisor has not given its consent to this
Offering and has advised the Company that it will not renew the Company's
options to open the restaurants subject to the option addenda, the Hooters
Franchisor has not advised the Company that it will terminate the Company's
Hooters franchises. The Company, however, does not plan to open any new Hooters
Restaurants and intends to sell its existing Hooters Restaurants. The Company
does not have a ready buyer for its Hooters Restaurants and there can be no
assurance that a buyer can be found in a reasonable time for a reasonable price.
The Company may incur continuing losses in the operation of its Hooters
Restaurants if it is unable to find a buyer and may incur a loss on the sale of
its existing Hooters Restaurants if it is able to consummate a sale.
Expansion of Mrs. Fields Cookie Stores and Other Businesses
Since the Company will not open additional Hooters Restaurants and
intends to sell its existing Hooters Restaurants, the Company will be dependent
on the operations of its existing and future Mrs. Fields Cookie Stores owned and
to be developed by the Company and expansion into other fields, including
entertainment and restaurant concepts in which the Company has not had any
management experience. The Company has had preliminary discussions with respect
to the possible acquisition of a micro brewery chain. However, there is no
definitive agreement for the acquisition of the micro brewery chain and no
assurance can be given that the acquisition can be or will be made. There are
currently no other acquisition or expansion plans under consideration at the
date of this Prospectus. The Company would probably not be able to continue as a
going concern if it were forced to rely upon its existing Mrs. Fields Cookie
Stores. Results for the sixteen week period ended April 20, 1997 and the fiscal
year ended December 29, 1996 resulted in operating losses of $341,116 and
$881,655, respectively. To continue as a going concern, the Company is dependent
upon the success of this Offering and the opening of new Mrs. Fields Cookie
Stores and expansion into other fields. There are no obstacles in opening new
Mrs. Fields Cookie Stores. See "Business and Properties-The Hooters
Restaurants--Restaurant Locations and Expansion Plans" and Note 20 to
Consolidated Financial Statements.
Risks of Planned Expansion
Successful expansion of the Company's operations will be largely
dependent upon a variety of factors, some of which are currently unknown or
beyond the Company's control, including (i) continuing customer acceptance of
the "Mrs. Fields" cookie store concept, (ii) the ability of the Company's
management to negotiate territories in which to expand the cookie stores, to
identify suitable sites and to negotiate leases at such sites, (iii) timely and
economic development and construction of Mrs. Fields Cookie Stores, (iv) the
hiring of skilled management and other personnel, (v) the ability of the
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Company's management to apply its policies and procedures to a much larger
number of cookie stores; (vi) the availability of adequate financing; (vii) the
general ability to successfully manage growth (including monitoring Cookie
Stores, controlling costs, and maintaining effective quality controls); (viii)
the ability of the Company to identify and expand into other areas; and (ix) the
general state of the economy. No market studies regarding the commercial
feasibility of expanding the Company's cookie stores have been conducted, nor
are any such studies planned. There can be no assurance that the Company will be
able to successfully open new cookie stores at the planned rate of expansion, or
at all. While the Company intends to pursue other concepts which are not planned
at the date hereof, there can be no assurance that any such new ventures will be
successful. See "Business and Properties - The Hooters Restaurants" and - "Mrs.
Fields Cookie Stores - Development Option."
Dependence on the Mrs. Fields Franchisor
The Company's success depends in part on the continued success of the
"Mrs. Fields" cookie store concept and on the ability of the franchisor to
identify and react to new trends in their respective industries (including the
development of innovative and popular menu items and pastry products) and to
develop and pursue appropriate marketing strategies in order to maintain and
enhance the name recognition, reputation and market perception of the "Mrs.
Fields" cookie stores. The Company believes that the experience, reputation,
financial strength and franchisee support of the Mrs. Fields Franchisor are
positive factors in the Company's prospects. Adverse publicity or economic
trends or business deterioration with respect to the Mrs. Fields Franchisor or
its failure to support its franchisees, including the Company, could have a
material adverse effect on the Company. However, the future results of
operations of the Mrs. Fields Franchisor and its other franchisees will not
alone assure the success of the Company, which will depend on the effectiveness
of the Company's management, current and future locations of the Company's
cookie stores and the results of operations of those businesses. The Company
plans to expand into new concepts not yet determined.
Requirements of Franchise Agreements; Franchise Fees, Royalties,
Advertising Costs
Although the Company will not open new Hooters Restaurants, it will
continue to be subject to the terms of the Hooters franchise agreement with
respect to its existing Hooters Restaurants as long as the Company continues to
operate these restaurants. The franchise agreements between the Company and the
Hooters Franchisor and the Mrs. Fields Franchisor require the Company to pay an
initial franchise fee with respect to each restaurant and cookie store opened,
to pay royalties based on gross sales of each restaurant and cookie store
location and to spend a percentage of the gross sales of each Restaurant and
Cookie Store on advertising, which may include contributions to national
marketing pools administered by the franchisor. Such amounts must be paid or
expended regardless of the profitability of the Company's restaurants and cookie
stores. As of the date of this Prospectus, the franchise agreement with the Mrs.
Fields Franchisor provides for an initial franchise fee of $15,000-$25,000 to
the Mrs. Fields Franchisor for each Mrs. Fields Cookie Store opened. Under the
applicable franchise agreements, the Company must pay royalties on gross sales
of 6% to the Hooters Franchisor and up to 6% to the Mrs. Fields Franchisor. The
Company currently contributes a percentage of gross sales for all of its Hooters
Restaurants and certain of its Mrs. Fields Cookie Stores to the national
marketing funds of the franchisors. In addition, the Company's franchise
agreements require the Company to operate its Hooters Restaurants and Mrs.
Fields Cookie Stores in accordance with the requirements and specifications
established by the franchisor relating to interior and exterior design, decor,
furnishings, menu selection, the preparation of food products, quality of
service and general operating procedures, advertising, maintenance of records
and protection of trademarks. Failure of the Company to satisfy such
requirements could result in the loss of the Company's franchise rights for some
or all of its cookie stores as well as the development of additional restaurants
or cookie stores.
Competition
The cookie and restaurant industries are highly competitive with respect
to price, service, food quality and location and are among the highest failure
rates of any industry. There are numerous well-established competitors, some of
which possess substantially greater financial, marketing, personnel and other
resources than the Company. These competitors include national, regional and
local restaurants and chains of restaurants and cookie and pastry retailers. The
Company will face competition in every market that it enters. In addition, other
cookie chains with greater financial resources than the Company and the Mrs.
Fields Franchisor have similar or competing operating concepts to that of the
Company. As a result of the competition the Company currently faces, and will
continue to face as it expands, there can be no assurance that the Company will
be able to operate profitably in the future. See "Business and Properties
Competition."
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Profitability Affected By Changes in Food Costs
The Company's profitability is affected in part by its ability to
anticipate and react to changes in food costs. Various factors beyond the
Company's control, including adverse weather conditions, may affect food costs.
While management has been able to anticipate and react to changing food costs to
date through its purchasing practices and menu price adjustment, there can be no
assurance that it will be able to do so in the future.
Trademarks and Service Marks
Both the "Hooters" and the "Mrs. Fields" service marks have significant
value and are important to the marketing of the Company's Hooters Restaurants
and Mrs. Fields Cookie Stores. Both the Hooters Franchisor and the Mrs. Fields
Franchisor have enforcement policies to investigate possible violations of their
service marks and if such violations are identified they take appropriate action
to preserve and protect their goodwill in their service marks. The Company is
obligated under its franchise agreements with the Hooters Franchisor and the
Mrs. Fields Franchisor to report any such violations to the franchisor. Under
the franchise agreement with the Hooters Franchisor, the Company is required to
cooperate fully with the Hooters Franchisor in defending or settling any such
litigation as determined exclusively by the Hooters Franchisor. Under the
franchise agreement with the Mrs. Fields Franchisor, the Company is required to
render assistance and execute such documents as may be necessary or advisable in
the opinion of the Mrs. Fields Franchisor's legal counsel to protect Mrs. Fields
interest in the trademark. The Mrs. Fields Franchisor is required to indemnify
the Company and to reimburse it for all damages for which it is held liable in
any proceeding arising out of the Company's authorized use of the Mrs. Fields
trademark and for all costs reasonably incurred in defending any claim against
the Company provided it has otherwise complied with the franchise agreement.
There can be no assurance that the Company, the Hooters Franchisor or the Mrs.
Fields Franchisor will be successful in enforcing their rights under their
service marks and preventing others from using such marks or a derivation of
same. The Company is unable to estimate the possible cost of participating in
any legal proceedings relating to the Hooters and Mrs. Fields service marks and
there can be no assurance that such proceedings would not have a substantial
adverse impact on the Company.
Long Term Leases; Restaurant and Cookie Store Closings
The Company leases the sites for its existing Hooters Restaurants and
Mrs. Fields Cookie Stores pursuant to long term, non-cancelable leases or
sub-leases. Future sites for Mrs. Fields Cookie Stores will likely be subject to
similar long term leases. If an existing or future site does not perform at a
profitable level, and the decision is made to close the location, the Company
may nevertheless be obligated to pay rent under the lease. In September 1996,
the Company closed a Hooters Restaurant in San Diego, California. As a result,
the Company surrendered to the landlord leasehold improvements and equipment at
the site and agreed to pay the landlord $4,750 per month through June 30, 2005.
In April 1995, the Company assumed a land lease for a Hooters Restaurant to be
opened in Oceanside, California. Subsequently, the Company decided not to
develop the property and in September 1996, sublet the property at substantially
the same rentals but under terms which could enable the subleasee to terminate
the lease in September 1998, resulting in the Company being liable for the
remaining lease payment of $311,000 through September 2003. See Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Restaurant Closing," "Business and Properties - The Hooters
Restaurants - Properties" and Notes 10 and 11 to Consolidated Financial
Statements.
Geographic Concentration of Restaurants and Cookie Stores; Uncertainty
of Market Acceptance
The Company currently operates three Hooters Restaurants, in Madison,
Wisconsin and San Diego,
California and 13 Mrs. Fields Cookie Stores, in the St. Louis, Missouri,
Minneapolis, Minnesota and Lansing/Flint, Michigan areas. The results of
operations may not be indicative of the market acceptance of a larger number of
locations, particularly as the Company expands its Mrs. Fields Cookie Stores
into areas with varied demographic characteristics. There can be no assurance of
the Company's ability to achieve consumer awareness and market acceptance. This
could require substantial efforts and expenditures by the Company, particularly
as the Company seeks to enter into new markets with its existing or new
concepts. Furthermore, since the Company currently operates only three
restaurants and 13 cookie stores, even one unsuccessful restaurant or new cookie
store could have a significant adverse impact on the Company's operations. The
Company intends to sell its Hooters Restaurants and has agreed to sell a low
income Cookie Store in Maplewood, Minnesota for $37,000, effective June 1, 1997.
See "Prospectus Summary-The Company" and "Business and Properties- Expansion
Strategy."
Risks Associated With Secured Promissory Notes
Holders of $2,872,500 of Notes accepted the Exchange Offer, and $827,500
principal amount of Notes remain outstanding. The Notes are secured by all of
the Company's assets, are in default with respect to the $99,300 of accrued and
unpaid interest due the Note holders as of March 31, 1997 who did not accept the
Exchange Offer. The Company will be required to make monthly interest payments
of approximately $8,275 until April 1998, and thereafter 36 equal monthly
payments of principal and interest of $27,485, until the notes are paid in full
. The Company intends to use a portion of the proceeds of this Offering to pay
past due interest and cure the default on the remaining outstanding Notes. The
ability of the Company to make timely future payments of principal and interest
will depend on the availability of funds from cash flow or other financing.
There can be no assurance that the Company will be able to make principal and
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interest payments on the Notes as such payments come due. Failure to make
principal and interest payments when due may cause an event of default under the
terms of the Notes, in which event the Note holders could accelerate payment of
principal and interest on the Notes and cause a foreclosure and sale of assets
sufficient to retire the indebtedness. The Company will be required to expense
in its financial statements when this Offering becomes effective, the previously
unamortized financing costs related to the Notes (estimated to be approximately
$211,000) and the 20% premium to the Note holders accepting the Exchange Offer
(estimated to be approximately $644,000). See "Cancellation of Debt; Conversion
of Preferred Stock; Bridge Loan Notes and Warrants," "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Associated With Bridge Loan Notes
The Company has allocated $500,308 of the net proceeds of this Offering
to retire the outstanding principal and interest on the Bridge Loan Notes. The
Bridge Loan Notes are subordinate to the Notes and if the Company is not able to
cure the default under the terms of the Notes it will be prohibited from
repaying the Bridge Loan Notes. In the event this Offering is not successful,
the Company would be required to seek alternate sources of financing,
renegotiate the terms of its debt obligations or seek protection from creditors
under the Federal Bankruptcy Code. The fair market value of the Common Stock
underlying the warrants issued to the Bridge Loan Holders (estimated to be
approximately $591,500) is being expensed in the Company's financial statements
over the period from when the Bridge Loan Note proceeds were received to March
31, 1997, the original expected date of this Offering. See "Cancellation of
Debt; Conversion of Preferred Stock; Bridge Loan Notes and Warrants," Use of
Proceeds" and Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Loss of Tax Loss Carry Forwards
As of December 29, 1996, the Company has net operating tax losses of
approximately $2,140,000 which have been or may be utilized by NEMC pursuant to
intercorporate tax allocation practices adopted by the Company and NEMC. Upon
the completion of this Offering, the Company will no longer be eligible for
inclusion in NEMC's consolidated tax return and NEMC will be relieved of any
previous obligation to pay the Company the tax benefit for any tax losses
utilized under the intercorporate tax allocation practices. However, at the
completion of this Offering, the Company will have approximately $1,330,000 of
tax loss carryforwards which can be utilized by the Company until their
expiration in 2011. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 7 to Consolidated Financial
Statements.
Risks Associated With Cookie Crumbs Preferred Stock
There are 16,900 shares of Cookie Crumbs Redeemable Preferred Stock
outstanding (the "Cookie Crumbs Preferred Stock") which require the payment of
annual regular cash dividends of $169,000 and non-cumulative, non-compounded
participating cash dividends not exceeding 8% of the face value of the Preferred
Stock outstanding, equal in the aggregate to 10% of an amount equal to net
income less regular cash dividends. Such Cookie Crumbs Preferred Stock dividends
rank senior to Cookie Crumbs common stock dividends and as at the date hereof
are current. Beginning in February 1998, the Cookie Crumbs Preferred Stock is
redeemable in whole or in part at the option of Cookie Crumbs at 103% of its
face value plus accrued and unpaid regular cash dividends and at the option of
the holders thereof during any fiscal year in which Cookie Crumbs has net income
in excess of regular dividend distributions, including cumulative unpaid regular
dividends, for an amount equal to the liquidation value. Such redemption
obligation of Cookie Crumbs is limited to 25% of its net income as adjusted for
the prior year. All dividends paid on the Cookie Crumbs Preferred stock and any
redemption of the Cookie Crumbs Preferred Stock at the election of Cookie Crumbs
or the Cookie Crumbs Preferred Stock holders will be paid to the Cookie Crumbs
Preferred Stock holders and not to investors in this Offering and by a like
amount will reduce Cookie Crumbs net income and cash flow available for Cookie
Crumbs operations. If Cookie Crumbs is unable to pay all or a portion of the
regular cash dividend payments on the Cookie Crumbs Preferred Stock, the Company
may be required to advance the amounts required. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Government Regulation
The restaurant and cookie businesses are subject to various federal,
state and local government regulations, including those relating to the sale of
food and, in the case of restaurants, to alcoholic beverages. While the Company
has not experienced any trouble in obtaining necessary government approvals to
date, difficulty or failure to retain or obtain required licenses or other
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regulatory approvals could have an adverse effect on the Company's current or
future operations or delay or prevent the opening of new Mrs. Fields Cookie
Stores. The Company will be subject in certain states to "dram shop" statutes,
which generally provide a person injured by an intoxicated person the right to
recover damages from an establishment that wrongfully served alcoholic beverages
to the intoxicated person. The Company currently operates restaurants in
Wisconsin and California, which have statutes similar to "dram shop" statutes.
The Company carries liquor liability coverage as part of its existing
comprehensive general liability insurance in all states in which it operates.
The Company has never been named as a defendant in a lawsuit involving "dram
shop" statutes. However, there can be no assurance that the Company will not be
named as a defendant in such a lawsuit in the future.
Effect of EEOC Decision on Hooters Restaurants
The Equal Employment Opportunity Commission (the "EEOC") issued a
finding in September 1994, that the Hooters Franchisor and all related entities,
including but not limited to Hooters, Inc., Hooters Management Corporation, all
franchisees and licensees of the Hooters Franchisor and any other entity
permitted to operate under the "Hooters" trademark, engaged in employment
discrimination for failing to recruit, hire or assign men into server, bartender
or host positions. In March 1996, the EEOC's general counsel advised that he
would not recommend that the EEOC file a lawsuit against Hooters and that this
procedure terminated the EEOC's consideration of litigation against Hooters. The
Company has been the subject of several charges of employment discrimination
and/or sexual harassment suits in the Milwaukee and San Diego regional offices
of the EEOC and the City of Madison, Wisconsin. Excluding the recent settlement
of a discrimination case for approximately $100,000, none of such charges have
been finally determined to result in damages, liabilities or penalties to the
Company although they may not be finally resolved. In the event that litigation
should be re-instituted by the EEOC or if the Company should not be successful
in defending administrative or court proceedings involving charges of
discrimination in hiring, the Company may be required to implement a gender
neutral hiring policy and to pay money damages to men who were previously
discriminated against by Hooters' hiring practices, the effect of which could
have a substantial adverse impact on the Company's business. See "Business and
Properties - Litigation" and Note 19 to Consolidated Financial Statements.
Possible Need for Additional Financing
The net proceeds of this Offering will be used to develop and acquire
cookie stores, expand into new concepts, pay the past-due interest on the 12%
Notes, retire the Bridge Loan Notes, and for working capital and general
corporate purposes. Management believes that the net proceeds will be sufficient
to satisfy the financial needs of the Company for approximately 12 to 18 months.
However, there can be no assurance that the net proceeds from this Offering,
together with cash generated from other sources, will be sufficient to maintain
operations or finance further development and it may be necessary to obtain
additional financing. The Company has no current arrangements for, or sources
of, additional financing, and there can be no assurance that any such financing
can be obtained on terms acceptable to the Company or at all. To the extent any
additional financing involves the sale of equity securities of the Company,
shareholders of the Company, including purchasers in this Offering, will realize
a reduction in their percentage ownership interest in the Company. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Uninsured Losses; Costs and Availability of Insurance
The policy of the Company is to arrange for or acquire comprehensive
casualty and liability insurance in amounts which the Company determines is
sufficient to cover reasonably foreseeable losses and which are required by its
franchise agreements. However, there are certain types of losses (generally of a
catastrophic nature, such as earthquakes, floods and wars) which are
uninsurable, and recent increases in the cost of insurance generally have
resulted in premium rates which make certain losses not economically insurable.
There can be no assurance that the costs of certain insurance coverage which the
Company would otherwise obtain will not increase further and result in the
Company being unable to obtain coverage for certain risks at rates which are
economic for the Company. If the Company suffered a loss for which it was not
insured, such loss could have a material adverse effect on the Company's
operations.
Reliance on Management
The Company will depend to a significant extent on the ability of
current management of the Company to oversee operations of its restaurants and
cookie stores. The success of the Company's business will be dependent upon
Messrs. Stephan S. Buckley, Kenneth B. Drost and Douglas E. Van Scoy, executive
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officers of the Company and its principal shareholder through New Era Management
Corporation. The Company does not have employment agreements with any executive
officer or employee of the Company. In the event the services of these
individuals should become unavailable to the Company for any reason, the Company
would be required to recruit other qualified personnel to manage and operate the
Company. There can be no assurance that the Company would be able to employ
qualified personnel on terms acceptable to it. See "Management."
Possible Conflicts of Interest With Management
Until October 1, 1996, the Company paid New Era Management Corporation
("NEMC") a company owned by the three officers and principal shareholders of the
Company, its actual cost for office space, accounting, administrative and
computer system services provided by NEMC. On October 1, 1996, the Company began
providing its own accounting, administrative and computer system services using
substantially the same personnel and equipment at approximately the same cost as
incurred in 1996, except for normal increases for cost of living and inflation.
From October 1, 1996 through March 31, 1997, the Company paid NEMC approximately
$5,400 per month for rent for its office space. The building was sold to an
unaffiliated third party and the Company will begin paying rent of approximately
$5,500 per month effective June 1, 1997. See "Business and
Properties-Properties," "Certain Relationships and Related Transactions" and
Note 8 to Consolidated Financial Statements.
Company's Experience
The ownership and operation of franchised restaurants and cookie stores
is extremely complex and requires specialized management and marketing skills.
The executive management of the Company has limited experience in owning,
operating and managing franchised restaurants and cookie stores or businesses in
the food service industry. The executive officers intend to hire experienced
managers who will supervise the operations of the restaurants and cookie stores.
There can be no assurance, however, that the Company will be successful in
hiring and retaining such qualified personnel. See "Business-Hooters
Restaurants-Restaurant Operations and Management" and "Business and
Properties-The Cookie Stores-Store Operations."
No Dividends on Common Stock
Since inception, the Company has not paid, and it has no current plans
to pay, cash dividends on the Common Stock. The Company intends to retain all
earnings to support the Company's operations and future growth. The payment of
any future dividends will be determined by the Board of Directors based upon the
Company's earnings, financial condition and cash requirements, possible
restrictions in future financing agreements, if any, business conditions and
such other factors deemed relevant. The Notes contain restrictions on the
payment of dividends while they are outstanding. See "Dividend Policy."
Shares Eligible for Future Sale
Future sales of substantial amounts of Common Stock by the present
shareholders of the Company, or the potential for such sales without actual
sales, may have the effect of depressing the market price of the Common Stock.
Upon completion of the Offering, there will be 4,091,000 shares of Common Stock
outstanding (4,254,650 shares if the Underwriters' over-allotment option is
exercised). The 1,091,000 shares of Common Stock and 1,091,000 Series A Warrants
offered hereby will be freely tradable. The remaining 3,000,000 shares of Common
Stock are "restricted securities" as that term is defined in Rule 144 ("Rule
144") under the Securities Act of 1933 (the "Securities Act") and under certain
circumstances may be sold without registration pursuant to the provisions of
Rule 144. In general, under Rule 144, a person or persons whose shares are
aggregated, and who has satisfied a one-year holding period may, under certain
circumstances sell within any three-month period a number of restricted
securities which does not exceed the greater of one percent (1%) of the shares
outstanding or the average weekly trading volume during the four calendar weeks
preceding the notice of sale required by Rule 144. In addition, Rule 144
permits, under certain circumstances, the sale of restricted securities by a
person who is not an affiliate of the Company and has satisfied a two -year
holding period without any quantity limitations. All of the 1,947,603 shares
held by New Era Management Corporation ("NEMC"), the principal shareholder of
the Company, have been held for longer than two years. However, NEMC has agreed
with the Underwriters that it will not sell any of such shares to the public for
a period of twenty-four months from the date hereof without the prior written
consent of the Representative. The shares of Common Stock issued upon conversion
of the Convertible Preferred Stock and the exchange of the 12% Notes will not be
eligible for sale pursuant to Rule 144 for one year from the date hereof. The
Company has agreed with the holders of the shares of Common Stock to be issued
to the Note holders to register such shares upon the request of 50% of such
holders after one year from the date of this Prospectus. See "Underwriting."
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Immediate Substantial Dilution
The current shareholders of the Company have acquired their shares of
Common Stock at a cost per share substantially less than that at which the
Company intends to sell its Common Stock included in the Units offered hereby.
Therefore, investors purchasing Securities in this Offering will incur an
immediate and substantial dilution of approximately $5.71 per share or
approximately 88% in their ownership of the Company's Common Stock. See
"Dilution."
Arbitrary Determination of Offering Price
The public offering price for the Units offered hereby will be
determined by negotiation between the Company and the Representative and should
not be assumed to bear any relationship to the Company's asset value, net worth
or other generally accepted criteria of value. Recent history relating to the
market prices of newly public companies indicates that the market price of the
Securities following this Offering may be highly volatile. See "Underwriting."
Effect of Outstanding Series A Warrants and Underwriters' Warrants
Until the date five years following the date of this Prospectus, the
holders of the Series A Warrants and Underwriters' Warrants will have an
opportunity to profit from a rise in the market price of the Common Stock, with
a resulting dilution in the interests of the other shareholders. The Company is
required to register the Securities underlying the Underwriters' Warrants
commencing on the first anniversary date of the effectiveness of this Offering.
The Company is required to keep the registration statement registering the
Securities effective until the fifth anniversary of the effective date of the
Offering. The terms on which the Company might obtain additional financing
during that period may be adversely affected by the existence of the Series A
Warrants and the Underwriters' Warrants. The holders of the Series A Warrants
and the Underwriters' Warrants may exercise the Series A Warrants and
Underwriters' Warrants at a time when the Company might be able to obtain
additional capital through a new offering of securities on terms more favorable
than those provided herein. The Company has agreed to keep the registration
statement registering the Securities current and will file such post-effective
amendments and supplements as may be necessary to maintain the currency of the
registration statement during the period of its use. Such filings could involve
additional expense to the Company at a time when it could not afford such
expenditures and may adversely affect the terms upon which the Company may
obtain financing. See "Description of Securities" and `'Underwriting."
Risk of Redemption of Series A Warrants
Commencing (thirteen months from the date of this Prospectus), the
Company may redeem the Series A Warrants for $0.05 per Warrant, at any time
after the closing bid price of the Common Stock on the Boston Stock Exchange has
equaled or exceeded 200% of the initial offering price of the Units for twenty
consecutive trading days. Notice of redemption of the Series A Warrants could
force the holders thereof: (i) to exercise the Series A Warrants and pay the
exercise price at a time when it may be disadvantageous or difficult for the
holders to do so, (ii) to sell the Series A Warrants at the then current market
price when they might otherwise wish to hold the Series A Warrants, or (iii) to
accept the redemption price, which is likely to be less than the market value of
the Series A Warrants at the time of the redemption. See "Description of
Securities - Series A Warrants."
Investors May be Unable to Exercise Series A Warrants
For the life of the Series A Warrants, the Company will use its best
efforts to maintain an effective registration statement with the Securities and
Exchange Commission (the "Commission") relating to the shares of Common stock
issuable upon exercise of the Series A Warrants. If the Company is unable to
maintain a current registration statement, the Series A Warrant holders would be
unable to exercise the Series A Warrants and the Series A Warrants may become
valueless. Although in this Offering, the Underwriters have agreed to not
knowingly the sell Series A Warrants in any jurisdiction in which they are not
registered or otherwise qualified, a purchaser of the Series A Warrants may
relocate to a jurisdiction in which the shares of Common Stock underlying the
Series A Warrants are not so registered or qualified. In addition, a purchaser
of the Series A Warrants in the open market may reside in a jurisdiction in
which the shares of Common Stock underlying the Series A Warrants are not
registered or qualified. If the Company is unable or chooses not to register or
qualify or maintain the registration or qualification of the shares of Common
Stock underlying the Series A Warrants for sale in all of the states in which
the Series A Warrant holders reside, the Company would not permit such Series A
Warrants to be exercised and Series A Warrant holders in those states may have
no choice but either to sell their Series A Warrants or let them expire.
15
<PAGE>
Prospective investors and other interested persons who wish to know whether or
not shares of Common Stock may be issued upon the exercise of Series A Warrants
by Series A Warrant holders in a particular state should consult with the
securities department of the state in question or send a written inquiry to the
Company. See "Description of Securities - Series A Warrants."
No Public Market for Securities or Series A Warrants; Disclosure
Relating to Low-Priced Stocks
There is currently no public market for the Units, the Common Stock or
the Series A Warrants, and there can be no assurance that any trading market
will develop at the conclusion of this Offering. Therefore, investors in this
Offering may have difficulty selling their Securities, should they decide to do
so. In addition, if trading markets for the Securities do develop, there can be
no assurance that such markets will continue or that Securities purchased in
this Offering may be sold without incurring a loss. The Company has applied for
listing of the Securities on the Boston Stock Exchange and the NASDAQ Small-Cap
Market upon completion of this Offering. If, at any time, the Securities are not
listed on the Boston Stock Exchange and the NASDAQ Small-Cap Market, the
Company's Securities could become subject to the "penny stock rules" adopted
pursuant to Section 15 (g) of the Securities Exchange Act of 1934. The penny
stock rules apply, among other things, to companies (i) whose securities trade
at less than $5.00 per share, or (ii) which have tangible net worth of less than
$5,000,000 if operating less than three years ($2,000,000 if the company has
been operating for three or more years); or, (iii) average revenues of less than
$6,000,000 for the 3 most recently ended years. Such rules require, among other
things, that brokers who trade "penny stock" to persons other than "established
customers" complete certain documentation, make suitability inquiries of
investors and provide investors with certain information concerning trading in
the security, including a risk disclosure document and quote information. Many
brokers have decided not to trade "penny stock" because of the requirements of
the penny stock rules and, as a result, the number of broker-dealers willing to
act as market makers in such securities is limited. See "Underwriting."
Influence on Voting by Officers and Directors
NEMC, a company controlled by the Company's officers and directors,
currently beneficially owns 90.5% of the Company's outstanding Common Stock.
Upon completion of this Offering, such shareholder will continue to own
beneficially approximately 47.6 % of the Common Stock. As a result, the
Company's officers and directors will continue to be able to substantially
impact the vote on most matters submitted to shareholders, including the
election of directors. See "Principal Stockholders."
Possible Adverse effects of Authorization of Preferred Stock; Change of
Control
The Company's Articles of Incorporation, as amended, authorize the
issuance of up to 100,000 shares of preferred stock. The board of directors,
without further action by the stockholders, is authorized to issue shares of
preferred stock in one or more series and to fix and determine as to any series,
any and all of the relative rights and preferences of shares in each series,
including without limitation, preferences, limitations or relative rights with
respect to redemption rights, conversion rights, voting rights, dividend rights
and preferences on liquidation. The issuance of preferred stock with voting and
conversion rights could materially adversely affect the voting power of the
holders of the Common Stock and may have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plans
to issue any additional shares of preferred stock and the Convertible Preferred
Stock which is currently outstanding will be converted into Common Stock in
connection with this Offering. The Notes also contain a limitation on a change
in control of the Company. See "Description of Securities-Preferred Stock" and
"Management's Discussion of Financial Condition and Results of Operations -
Secured Promissory Notes."
16
<PAGE>
USE OF PROCEEDS
The net proceeds of this Offering are anticipated to be approximately
$5,300,000, after deducting the Underwriters' discount, non-accountable expense
allowance and estimated offering expenses ($6,257,353 if the Underwriters
over-allotment option is exercised in full), assuming, in each case, an initial
public offering price of $6.50 per Unit. No value has been assigned to the
Series A Warrants included in the Units. The Company will not receive any
proceeds from the Units sold by the Selling Security Holders but would receive
an additional $79,853 attributable to the Over-allotment Option on the Selling
Security Holders' Units if the Over-allotment Option is exercised in full. The
Company intends to use the net proceeds of this Offering as follows:
<TABLE>
<CAPTION>
Approximate Approximate
Amount Percent of
Gross Proceeds
<S> <C> <C>
Gross Proceeds $6,500,000
Underwriting discounts & commissions 650,000 10.0%
Offering expenses (1) 550,000 8.5
------------ ---
Net Proceeds $5,300,000 18.5%
Development and acquisition of cookie stores $4,200,000 64.6%
(2)
Repayment of Bridge Loan Notes, including 500,308 7.7
interest (3) 105,025 1.6
Payment of Interest on 12% Notes (4)
Working capital and general corporate purpose 494,667 7.6
------------ ---
Totals $5,300,000 100.0%
========== ======
</TABLE>
- --------------
(1) The Company has paid approximately $385,000 of such offering expenses
as of April 20, 1997.
(2) The Company intends to develop or acquire and operate additional Mrs.
Fields Cookie Stores at a cost per location of $200,000 to $300,000 per
cookie store and to expand into other concepts.
(3) Each Bridge Loan Note bears interest at the LIBOR rate and is payable
upon the earlier of nine (9) months from the date of issuance or closing of
the Offering. The proceeds of the debt were used for normal operating
expenses and to pay professional fees and expenses in connection with this
Offering.
(4) Represents accrued and unpaid interest throughApril 20, 1997, relating
to the Note holders who did not participate in the Exchange Offer.
The foregoing represents the best estimate by the Company of its use of
net proceeds based upon present planning and business conditions. The proposed
application of proceeds is subject to change as market and financial conditions
change. The Company, therefore, has reserved the right to vary its use of
proceeds in response to events which may arise and have not been anticipated.
Management has not definitively identified the uses of the net proceeds which
are allocated to working capital reserves. The net proceeds will ultimately be
applied as business opportunities present themselves.
Pending use, it is anticipated that the proceeds to the Company
resulting from this Offering will be primarily invested in short-term investment
grade obligations or bank certificates of deposit or other money market
instruments. It is anticipated that the net proceeds of this Offering will
satisfy the financial needs of the Company for 12 to 18 months following the
date of this Prospectus. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
17
<PAGE>
DIVIDEND POLICY
Since inception, the Company has not paid, and it has no current plans
to pay, cash dividends on the Common Stock. The Company intends to retain all
earnings to support the Company's operations and future growth. The payment of
any future dividends will be determined by the Board of Directors based upon the
Company's earnings, financial condition and cash requirements, possible
restrictions in future financing agreements, if any, business conditions and
such other factors deemed relevant. The Notes contain restrictions on the
payment of dividends. See "Risk Factors - No Dividends on Common Stock."
18
<PAGE>
DILUTION
As of April 20, 1997, the net tangible book value of the Company,
assuming the exchange of the Notes for Common Stock, the conversion of the
Convertible Preferred Stock and the issuance of Units to the Bridge Loan Note
holders, was ($2,463,424) or ($.80) per share of Common Stock. The net tangible
book value of the Company is the aggregate amount of its tangible assets less
its total liabilities. The net tangible book value per share represents the
tangible book value of the Company, less total liabilities of the Company,
divided by the number of shares of Common Stock outstanding. The number of
shares outstanding used to calculate the net tangible book value per share takes
into account the 2,152,047 shares currently held by the existing shareholders,
the 593,945 shares to be issued to the Note holders, the 254,008 shares to be
issued to the Convertible Preferred Stock holders and the 91,000 shares to be
issued to the Bridge Loan Note holders. After giving effect to the sale of
1,000,000 Units by the Company (comprised of 1,000,000 shares of Common Stock
and 1,000,000 Series A Warrants) at an assumed offering price per Unit of $6.50,
and the application of the estimated net proceeds therefrom, the pro forma net
tangible book value per share would increase from ($.80) to $.79. This
represents an immediate increase in net tangible book value of $1.59 per share
to current holders of Common Stock and an immediate dilution of $5.71 per share,
or 88%, to new investors, as illustrated in the following table.
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed public offering price per share $6.50
Net tangible book value per share before this $(.80)
Offering
Increase per share attributable to new investors $1.59
Adjusted net tangible book value per share after $.79
----
this Offering
Dilution per share to new investors $5.71
=====
Percentage dilution 88%
</TABLE>
The following table summarizes (i) the number of shares of Common Stock
purchased from the Company to date, the total consideration paid, and the
average price per share paid by the current Common Stock holders, assuming
conversion of the Convertible Preferred Stock into Common Stock, the exchange of
77.6% of the Notes for Common Stock and issuance of 91,000 Units to the Bridge
Loan holders, and (ii) the number of shares of Common Stock to be purchased from
the Company and the total consideration to be paid by the new investors
purchasing shares of Common Stock in this Offering at an assumed initial public
offering price of $6.50 per share before deduction of the estimated underwriting
discounts and commissions and offering expenses payable by the Company:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Current shareholders 3,091,000 75.6% $5,415,700 45.5% $1.75
New investors 1,000,000 24.4 6,500,000 54.5 $6.50
--------- ---- --------- ----
Total 4,091,000 100.0% $11,915,700 100.0%
========= ====== =========== =====
</TABLE>
- --------------
The foregoing table excludes the effect of the exercise of (i) the
Underwriters' over-allotment option, (ii) the Underwriters' Warrants and (iii)
shares reserved for issuance pursuant to the Company's 1996 Stock Compensation
Plan. To the extent that the foregoing options or warrants may be exercised,
there will be further share dilution to investors in this Offering. See "The
Offering," "Risk Factors," "Management-1996 Stock Compensation Plan" and
"Underwriting."
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of December
29, 1996, the unaudited capitalization of the Company as of April 20, 1997 and
the unaudited capitalization of the Company as of April 20, 1997, as adjusted to
give effect to (i) the sale of the 1,000,000 Units offered at a price of $6.50
per Unit and the application of the estimated net proceeds therefrom, (ii) the
conversion of 100% of the Company's Convertible Preferred Stock, (iii) the
exchange of 77.6% of the 12% Notes to Common Stock, and (iv) 91,000 shares of
Common Stock issued to the Bridge Loan Note holders.
<TABLE>
<CAPTION>
December 29, April 20, April 20,
1996 1997 1997
Actual Actual As Adjusted
------ ------ -----------
<S> <C> <C> <C>
Current liabilities:
Current maturities of
long-term debt $4,288,063 $4,255,987
---------- ----------
900,487
-------
Total current liabilities 5,507,435 5,714,392 1,891,855
--------- --------- ---------
Long-term debt:
Long-term debt less
current maturities plus
obligations relating to
closed stores (1) 521,721 371,637
------- -------
371,637
-------
Redeemable Preferred Stock (2) 1,690,000 1,690,000 1,690,000
--------- --------- ---------
Shareholders' equity (deficit):
Preferred Stock, no par value
27,500 shares authorized, 15,685
shares issued and outstanding and
no shares issued and outstanding,
as adjusted (3) 1,568,500 1,568,500 --
--------- --------- --
Common Stock, $.01 par value,
10,000,000 shares authorized,
2,152,047 shares issued and
outstanding and 4,091,000 shares
issued and outstanding, as adjusted (3) 21,520 21,250 40,910
------ ------
Capital in excess of par 1,564,979 1,564,979 12,274,729
--------- ---------
Unearned compensation expense (127,000) (88,000) (88,000)
--------- --------
Accumulated deficit (5,240,954)(6,970,249) (7,836,840)
Total stockholders' equity (deficit) (2,212,955)(3,903,250) 4,390,799
----------- ----------- ---------
Total capitalization $5,506,201 3,872,779 8,344,291
========== ========= =========
</TABLE>
- -----------------
(1) Includes long-term lease obligations related to store closing. See Note 11
to Consolidated Financial Statements.
(2) Issued by Cookie Crumbs which was acquired by the Company in October, 1996.
(3) Excludes shares issuable upon the exercise of options and warrants
outstanding upon the date of this Prospectus or to be issued as follows:
(i) 1,091,000 shares issuable upon the exercise of the Series A Warrants to
be sold in this Offering; (ii) up to 163,650 shares and 163,650 Series A
Warrants to purchase 163,650 shares subject to the Underwriters'
over-allotment option; (iii) 109,100 shares and 109,100 Series A Warrants
to purchase 109,100 shares subject to the Underwriters' Warrants; and (iv)
200,000 shares reserved for issuance under the Company's 1996 Stock
Compensation Plan. See "Management" and "Underwriting."
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the Sixteen Week Period Ended April 20, 1997 Compared
to the Sixteen Week Period Ended April 21, 1996
At April 20, 1997 thirteen Mrs. Fields Cookie Stores were owned by the
Company. During 1996, one cookie store was built and became operational in July
and one cookie store was sold in October, 1996.
During the sixteen week period ended April 20, 1997, three Hooters
Restaurants were open for the entire period. During the corresponding period in
1996, four restaurants operated for the entire period.
The Company reported a net loss of $1,729,295 for the sixteen week
period ended April 20, 1997 and a net loss of $716,160 for the corresponding
period in 1996. Significant factors influencing the results of operations
include:
Sales were $2,428,091 for the sixteen weeks ended April 20, 1997 compared
to $2,608,191 for the corresponding period in 1996. This decrease of
$180,100 reflects a $216,255 increase in sales from the cookie stores
primarily because of a low volume store that was open in 1996 and
subsequently closed in October 1996 and a high volume store which began
operations in June 1996. This increase was offset by a decline in sales of
$396,355 from the restaurants. Same store sales for the three restaurants
declined $155,970 while the remaining decrease reflects the restaurant which
was closed in September 1996.
Cost of products sold was $693,645 for the sixteen weeks ended April 20,
1997 compared to $714,052 for the corresponding period in 1996. Cost of
products sold is directly related to sales and overall was approximately 29%
of sales in 1997 and 27% of sales in 1996. Comparing the 1997 period to the
1996 period, the cookie store percentage increased to 24% from 21% while the
restaurant percentage increased to 32% from 31%. These increases reflect
increased product costs that could not be passed on through higher sales
prices.
Salaries and benefits were $734,208 (approximately 30% of sales) for the
sixteen weeks ended April 20, 1997 compared to $764,106 (approximately 29%
of sales) for the corresponding period in 1996. For these same periods,
cookie store percentages were 29% compared to 27% and restaurant percentages
were 32% compared to 31%. These increases reflect increased salaries that
were not absorbed through higher sales volumes.
Other operating costs were $817,008 for the sixteen weeks ended April 20,
1997 compared to $886,784 for the corresponding period in 1996 reflecting a
decrease of $69,776. Other operating costs include promotions, advertising,
office supplies, utilities, restaurant supplies, outside services, rent,
insurance, and royalties. The decrease in other operating costs reflects
approximately $122,000 from the closing of a restaurant in September 1996,
partially offset by various other costs and expenses with a net increase of
approximately $52,000.
General and administrative expenses were $333,355 for the sixteen weeks
ended April 20, 1997 compared to $151,718 for the corresponding period in
1996. This increase of $181,637 is primarily due to compensation paid
officers of approximately $60,000 (none in the comparable 1996 period),
stock option compensation expenses of $39,000, increased salaries and
benefits for other corporate staff of approximately $35,000, increased legal
fees of approximately $17,000, and various other costs and expenses with a
net increase of approximately $31,000.
Provisions for losses on leased property of $427,148, in 1996 represents
management's estimate of an impairment loss related to a restaurant location
which was closed in September, 1996. See Note 11 to the Consolidated
Financial Statements.
Management has decided to sell the Company's Hooters Restaurants since
expansion of the Hooters concept by the Company no longer is a viable
21
<PAGE>
alternative. Accordingly, preliminary discussions with potential buyers have
occurred recently. As a result, an allowance of $700,000 has been provided
in the sixteen week period ended April 20, 1997 to record the investment in
these restaurants at net realizable value. In addition, the Company has
entered into an agreement to sell a cookie store located in Minnesota as of
June 1, 1997 for $37,000. The carrying value of the assets of this store at
April 20, 1997 was $112,000. Accordingly, a loss on impairment of assets
held for sale of $75,000 has been recognized in the Consolidated Statement
of Operations for the sixteen week period ending April 20, 1997. Further,
the net realizable value of these assets has been recorded as assets
available for sale at April 20, 1997.
Amortization of finance costs increased $434,646 in the sixteen weeks ended
April 20, 1997 compared to the comparable period in 1996. This increase is
due to the amortization of the bridge loan financing costs and commissions.
See Note 2 to Consolidated Financial Statements.
Financial Condition at April 20, 1997 as Compared to December 29, 1996
Cash decreased $401,536 to $132,536 from $534,072 at December 29, 1996.
As reflected in the Consolidated Statements of Cash Flows, this decrease is
primarily attributable to $250,952 used in operating activities, $17,654 used in
investing activities and $132,930 used in financing activities. Cash flows used
in investing activities consisted primarily of capital expenditures for the
corporate office. Cash flows used in financing activities were primarily for
costs and expenses related to this Offering.
Inventory decreased $81,465 to $37,182 from $118,647 at December 29,
1996. This decrease is primarily due to the reclassification of inventory to
assets available for sale which is related to the Hooters Restaurants which
management intends to sell.
Assets available for sale at April 20, 1997 of $888,488 represents the
net realizable value of the Hooters Restaurants held for sale of $851,488 and
the Minnesota cookie store of $37,000 which will be sold June 1, 1997.
Leasehold improvements decreased $1,072,533 to $826,285 from $1,898,818
at December 29, 1996. This decrease is primarily attributable to the
reclassification to assets available for sale due to management's intention to
sell the Hooter Restaurants and the Minnesota cookie store to be sold June 1,
1997.
Equipment decreased $625,275 to $409,293 from $1,034,568 at December 29,
1996. This decrease is primarily due to the reclassification to assets available
for sale due to management's intention to sell the Hooters Restaurants and the
Minnesota cookie store to be sold June 1, 1997.
Initial public offering expenses increased $144,140 to $384,548 at April
20, 1997 from $240,408 at December 29, 1996. This increase is due to costs and
expenses related to this Offering.
Franchise costs, net of accumulated amortization decreased $228,130 to
$269,529 at April 20, 1997 from $497,659 at December 29, 1996. This decrease is
primarily due to the reclassification of franchise fees to assets available for
sale due to management's intention to sell the Hooters Restaurants, and the
Minnesota cookie store to be sold June 1, 1997.
Bridge loan financing costs, net of accumulated amortization, decreased
to zero at April 20, 1997 from $434,646 at December 29, 1996. This decrease is
due to the completion of the bridge loan financing amortization in the sixteen
week period ended April 20, 1997.
Capital lease obligations related to assets available for sale increased
to $97,368 at April 20, 1997 from $0 at December 29, 1996. This classification
reflects management's intention to sell the Hooters Restaurants.
Due to parent increased $76,288 to $210,757 at April 20, 1997 as
compared to $134,469 at December 29, 1996. These amounts represent amounts due
to the parent primarily for operating needs.
Accounts payable decreased $83,956 to $306,193 at April 20, 1997 as
compared to $390,149 at December 29, 1996. This decrease is primarily due to
normal operating requirements.
22
<PAGE>
Accrued liabilities increased $149,333 to $844,087 at April 20, 1997 as
compared to $694,754 at December 29, 1996. This increase is due primarily to
1997 accrued interest on the Notes.
Long-term debt, less current maturities decreased $93,084 at April 20,
1997 from December 29, 1996, primarily due to the reclassification of capital
lease obligations related to assets available for sale.
Store closing expense declined $57,000 from December 29, 1996 as a
result of lease payments made on a Hooters Restaurant closed in September 1996.
Unearned compensation expense decreased $39,000 to $88,000 at April 20,
1997 from $127,000 at December 29, 1996. This decrease represents the portion of
stock option compensation, which has been earned. See Note 17 to the
Consolidated Financial Statements.
The Company's accumulated deficit was $6,970,249 at April 20, 1997
compared to $5,240,954 at December 29,1996. The increase is attributable to the
$1,729,295 net loss incurred during the sixteen week period ended April 20,
1997.
Results of Operations for the Fiscal Year Ended December 29, 1996 Compared to
the Fiscal Year Ended December 31, 1995
At December 29, 1996, thirteen Mrs. Fields Cookie Stores were owned by
the Company. Five cookie stores were purchased in June 1995, six additional
cookie stores were purchased in October, 1995, and two more purchased in
December, 1995. During 1996, a cookie store was built and became operational in
July and one cookie store was sold in October 1996.
During the year ended December 29, 1996 three Hooters Restaurants were
open for the entire period and one restaurant was open a little over eight
months until it was closed in September 1996. During the corresponding period in
1995, three restaurants operated for the entire period and one restaurant was
opened in May and operated for approximately eight months.
The Company reported a net loss of $2,757,259 for the year ended December
29, 1996 and a net loss of $1,153,674 for the year ended December 31, 1995.
Significant factors influencing the results of operations include:
Sales were $8,551,033 for the fiscal year ended December 29, 1996 compared
to $7,730,956 for the corresponding period in 1995. This increase of
$820,077 reflects a $2,452,825 increase in sales from the Mrs Fields Cookie
Stores, primarily because the cookie stores were open a full year in 1996,
and a decline in sales of $1,632,748 from the Hooters Restaurants. Same
store sales for the restaurants declined $1,403,437 which management
believes was primarily due to a lack of funds to adequately promote and
advertise the restaurants. Management intends to utilize approximately
$75,000-$100,000 of the net proceeds of this Offering designated as working
capital for advertising and promotion of the restaurants to increase sales.
Cost of products sold was $2,454,078 for the fiscal year ended December 29,
1996 compared to $2,316,341 for the corresponding period in 1995. Cost of
products sold is directly related to sales (approximately 29% of sales in
1996 and 30% of sales in 1995). Cost of products sold for the cookie stores
increased $606,958 in 1996 while cost of products sold for the restaurants
declined $469,221 from 1995 reflecting decreased sales. As a percent of
sales, costs of products sold for the cookie stores are approximately 25%
compared to 31% for the restaurants.
Salaries and benefits were $2,472,022 (approximately 29% of sales) for the
fiscal year ended December 29, 1996 compared to $2,147,595 (approximately
28% of sales) for the corresponding period in 1995. This includes salaries
and wages for all restaurant and cookie store employees. This increase is
primarily due to the cookie stores being in operation for a full year in
1996 compared to a partial year in 1995.
Other operating costs were $2,911,454 for the fiscal year ended December
29, 1996 compared to $2,525,486 for the corresponding period in 1995
reflecting an increase of $385,968. Other operating costs include
promotions, advertising, office supplies, utilities, restaurant supplies,
23
<PAGE>
outside services, rent, insurance, and royalties. Other operating costs from
the cookie stores increased $999,499 in 1996 while other operating costs for
the restaurants declined $613,531 in 1996. The decline in other operating
costs for the restaurants was not in proportion to the sales decline due to
the fixed nature of many of the items included in other operating costs.
Depreciation and amortization increased $223,698 in the fiscal year ended
December 29, 1996, compared to the comparable period in 1995. This increase
is primarily due to the cookie stores being in operation a full year in
1996.
Pre-opening costs declined from $153,334 in the fiscal year ended December
29, 1995 to zero in the comparable period of 1996. The new location added in
1996 did not result in pre-opening costs.
General and administrative expenses were $996,200 for the fiscal year ended
December 29, 1996 compared to $566,918 for the corresponding period in 1995.
General and administrative expenses, which consist of accounting related
costs, professional fees, travel, etc. increased primarily as a result of
the Company's infrastructure needed to support restaurant and cookie store
operations, legal fees and settlement of a lawsuit aggregating $145,000, and
$73,000 of compensation costs relating to stock options and contributed
services of officers.
Franchise fee options of $145,000 were written off in the fiscal year ended
December 29, 1996. This was done due to the uncertainty regarding the
Company's rights to develop additional Hooters restaurants.
Provision for losses on leased property of $927,148 represents management's
estimate of the additional loss ($50,000) to be incurred on leased property
which the Company no longer plans to develop and closing expenses of
$877,148 related to a restaurant location which was closed in September,
1996. See Notes 10 and 11 to Consolidated Financial Statements.
Loss on impairment of asset is attributable to the cookie store that was
sold in October 1996.
Amortization of finance costs increased $206,831 in the fiscal year ended
December 29, 1996 compared to the comparable period in 1995. This increase
is primarily due to the amortization of the bridge loan financing costs and
commissions.
Financial Condition at December 29, 1996 as Compared to December 31, 1995
Cash decreased $240,085 to $534,072 from $774,157 at December 31, 1995.
As reflected in the Consolidated Statements of Cash Flows, this decrease is
primarily attributable to $580,195 used in operating activities and $204,300
used in investing activities partially offset by $544,410 provided by financing
activities. Investing activity consisted primarily of capital expenditures for
the construction of cookie stores. Cash flows from financing activities were
generated by the issuance of preferred stock, proceeds from the bridge loans,
and proceeds from the sale of Common Stock.
Accounts receivable decreased $67,599 to $3,137 at December 29, 1996 as
compared to $70,736 at December 31, 1995. This decrease is primarily due to a
$57,257 receivable from the Mrs. Fields Franchisor at December 31, 1995, which
was repaid in January 1996.
Inventory decreased $20,958 to $118,647 from $139,605 at December 31,
1995. This decrease is primarily due to the closing of one Hooters Restaurant.
Assets available for sale at December 31, 1995 represents one Mrs.
Fields Cookie Store which was sold in October 1996. See Note 13 to the
Consolidated Financial Statements.
Leasehold improvements increased $126,871 to $1,898,818 from $1,771,947
at December 31, 1995. This increase is primarily attributable to costs of
$137,000 for a cookie store that opened in June 1996, $47,000 for a cookie store
that was remodeled in April, 1996 partially offset by the write-off of assets
related to the restaurant closed in 1996 of $70,000.
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Equipment decreased $141,052 to $1,034,568 from $1,175,620 at December
31, 1995. This decrease is primarily due to the write off of assets of $189,000
related to the restaurant closing in September 1996 partially offset by $31,000
of new equipment for the cookie store that began operations in June 1996.
Initial public offering expenses increased to $240,408 at December 29,
1996 from zero at December 31, 1995. This increase is due to costs and expenses
related to this Offering.
Franchise costs, net of accumulated amortization decreased $248,926 to
$497,659 from $746,585 at December 31, 1995. This decrease is primarily due to
write offs of franchise fee options on undeveloped locations of $145,000, assets
of $75,000 written off due to the 1996 restaurant closing, and 1996 amortization
of $28,926.
Finance costs net of accumulated amortization decreased $72,494 to
$309,740 at December 29, 1996 from $382,234 at December 31, 1995 due to
amortization of offering costs related to 12% Notes sold in 1994.
Goodwill, net of accumulated amortization decreased $60,430 to $839,242
from $899,672 at December 31, 1995. This decrease is due to 1996 amortization.
Bridge loan financing costs, net of accumulated amortization increased
to $434,646 at December 29, 1996 from zero at December 31, 1995. This increase
is due to bridge loan financing costs incurred during 1996 of $591,500 and
commissions of $49,977 offset by amortization of $206,831. See Note 2 to the
Consolidated Financial Statements.
Current maturities of long-term debt increased $4,228,489 from $59,574
at December 31, 1995 primarily due to the $3,700,000 of Notes and the Bridge
Loan Note financing of $483,000. The entire amount of the Notes has been
classified as current due to suspension of interest payments in 1996 and the
Bridge Loan Notes are repayable the earlier of this Offering becoming effective
or nine months from date of issuance. See Notes 2 and 18 to Consolidated
Financial Statements.
Due to parent increased $91,463 to $134,469 at December 29, 1996 as
compared to $43,006 at December 31, 1995. These amounts represent amounts due to
NEMC for ongoing rent and accounting services. See Note 8 to Consolidated
Financial Statements.
Accounts payable decreased $71,223 to $390,149 at December 29, 1996 as
compared to $461,372 at December 31, 1995. This decrease is primarily due to a
payable of $66,876 for sales tax at the restaurants at December 31, 1995 which
was paid in the first quarter of 1996.
Accrued liabilities increased $310,957 to $694,754 at December 29, 1996
as compared to $383,797 at December 31, 1995. This increase reflects the closing
of a restaurant in September 1996, whereby the Company recorded a provision to
provide for the settlement with the landlord and all costs associated with the
closing of the site. The current portion of $157,000 is included in accrued
liabilities and the remaining store closing expenses of $393,000 represents the
long-term portion of the settlement. Accrued liabilities at December 29, 1996
also reflects legal fees and settlement of a lawsuit of approximately $100,000.
See Notes 11 and 19 to Consolidated Financial Statements.
As of December 29, 1996, $1,690,000 of Cookie Crumb's Preferred Stock
had been raised through a private placement. See Note 3 to Consolidated
Financial Statements.
As of December 29, 1996, $1,568,500 had been raised through a private
placement of the Company's Convertible Preferred Stock compared to $1,266,000 at
December 31, 1995. See Note 4 to Consolidated Financial Statements.
Capital in excess of par increased $969,456 to $1,564,979 at December
29, 1996 as compared to $595,523 at December 31, 1995. This increase is due to
$127,956 from the sale of 204,444 shares of Common Stock (see Note 16 to the
Consolidated Financial Statements), $150,000 of stock options granted in
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November 1996, $100,000 of contributed services, and $591,500 of bridge loan
warrants. See Notes 2,14 and 17 to Consolidated Financial Statements.
Unearned compensation expense increased $127,000 at December 29, 1996
from zero at December 31, 1995. This amount represents the portion of stock
option compensation which has not been earned. At December 29, 1996, two periods
of compensation expense ($23,000) had been earned. See Note 17 to Consolidated
Financial Statements.
The Company's accumulated deficit was $5,240,954 at December 29, 1996
compared to $2,463,295 at December 31, 1995. The increase is primarily
attributable to the $2,757,259 net loss incurred.
Results of Operations for the Fiscal Year Ended December 31, 1995 Compared to
the Fiscal Year Ended December 25, 1994
At December 31, 1995 thirteen Mrs. Fields Cookie Stores were owned by
the Company. Five cookie stores were purchased in June, 1995, six additional
cookie stores were purchased in October, 1995, and two more purchased in
December, 1995. There were no cookie stores open in 1994.
During the fiscal year ended December 31, 1995, three Hooters
Restaurants operated for the entire period and one restaurant was opened in May
and operated for approximately eight months. During 1994, one Hooters Restaurant
was open for eight months, another Hooters Restaurant was open three months, and
a third Hooters Restaurant was open for half a month.
The Company reported a net loss of $1,153,674 for the fiscal year ended
December 31, 1995 and a net loss of $830,663 for the fiscal year ended December
25, 1994. Significant factors influencing the results of operations include:
Sales were $7,730,956 for the fiscal year ended December 31, 1995 compared
to $2,501,273 for the corresponding period in 1994. This increase of
$5,229,683 reflects a full year of operations for three Hooters Restaurants
and a fourth open for half a year. In addition, four cookie stores were open
for six months, one cookie store was open for four months, six were open for
two and one-half months and two more cookie stores were open for one-half
month.
Cost of products sold was $2,316,341 for the fiscal year ended December 31,
1995 compared to $771,374 for the corresponding period in 1994. Cost of
products sold is directly related to sales (approximately 30% of sales in
1995 and 31% of sales in 1994). This increase is due to additional cost of
goods sold of $330,968 for the cookie stores opened in 1995 while cost of
products sold for the restaurants increased $1,213,999 from 1994 reflecting
increased sales. As a percent of sales, costs of products sold for the
cookie stores are approximately 37% compared to 31% for the restaurants.
Salaries and benefits were $2,147,595 (approximately 28% of sales) for the
fiscal year ended December 31, 1995 compared to $615,021(approximately 25%
of sales) for the corresponding period in 1994. These amounts include
salaries and wages for all restaurant and cookie store employees. This
increase is primarily due to the cookie stores being opened in 1995 and a
full year of operations for three Hooters Restaurants and one-half year for
one Hooters Restaurant in 1995 compared to a partial year in 1994 for only
three Hooters Restaurants.
Other operating costs were $2,525,486 for the fiscal year ended December
31, 1995 compared to $726,459 for the corresponding period in 1994
reflecting an increase of $1,799,027. Other operating costs include
promotions, advertising, office supplies, utilities, restaurant supplies,
outside services, rent, insurance, and royalties.
Depreciation and amortization increased $206,809 in the fiscal year ended
December 31, 1995, compared to the comparable period in 1994. This increase
reflects thirteen cookie stores being in operation for a partial year
compared to no cookie stores in operation in 1994. Also causing the increase
is a full year of operations for three Hooters Restaurants and one-half a
year of operation for one Hooters Restaurant in 1995 as compared to 1994
with three Hooters Restaurants open for a partial year in 1994.
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Pre-opening costs decreased $398,468 to $153,334 in 1995 compared to
$551,802 for 1994. Pre-opening costs are costs incurred in connection with
the opening of new restaurants and are expensed as incurred. These costs
include payroll, hiring and training expenses, advertising and all other non
capitalized costs incurred prior to the opening. The 1995 pre-opening costs
related to the opening of one restaurant. The 1994 pre-opening costs related
to the opening of three restaurants.
General and administrative expenses were $566,918 for the year ended
December 31, 1995 compared to $264,361 for the corresponding period in 1994.
General and administrative expenses, which consist of accounting related
costs, professional fees, travel, etc. increased as a result of the
Company's infrastructure needed to support additional restaurant and cookie
store operations.
Provision for losses on leased property of $145,000 represents management's
estimate of the loss to be incurred on leased property, which the Company no
longer plans to develop. See Note 10 to Consolidated Financial Statements.
Loss on impairment of asset in 1995 is attributable to the cookie store
that was sold in October 1996. See Note 13 to Consolidated Financial
Statements.
Amortization of finance costs increased to $72,493 in 1995 compared to
$49,226 for 1994. These costs represent the costs related to the issuance of
the senior notes. These costs are amortized to expense on a straight-line
method over a seven year period coinciding with the life of the Notes. The
1995 expense represents amortization for the entire year while the 1994
expense represents amortization from the date of issuance of the Notes
(April 1994).
Financial Condition at December 31, 1995 as Compared to December 25, 1994
Cash decreased $417,771 to $774,157 from $1,191,928 at December 25,
1994. As reflected in the Statements of Cash Flows, this decrease is primarily
attributable to $161,193 used in operating activities and $2,749,896 used in
investing activities partially offset by $2,493,318 provided by financing
activities. Investing activity consisted primarily of capital expenditures for
the construction of one Hooters Restaurant and the acquisition of 13 Mrs. Fields
Cookie Stores. Cash flows from financing activities were generated primarily by
the issuance of Convertible Preferred Stock.
The Company received $100,000 during 1995 from a landlord for tenant
improvements. As a result, the receivable from lessor was zero at December 31,
1995.
Accounts receivable increased $61,172 to $70,736 at December 31, 1995 as
compared to $9,564 at December 25, 1994. This increase is primarily due to a
receivable from the Mrs. Fields Franchisor associated with sales from the Flint
Mrs. Fields Cookie Store. Flint sales were deposited in the Mrs. Fields
Franchisor's bank account after the Company purchased the store and before they
had opened their own bank account.
Inventory decreased $41,526 to $139,605 from $181,131 at December 25,
1994. The decrease reflects management's effort to reduce inventory.
Prepaid expenses increased $53,683 to $55,823 at December 31, 1995 as
compared to $2,140 at December 25, 1994. This increase is primarily due to
prepaid insurance and prepaid rents associated with the Hooters Restaurants.
Assets available for sale at December 31, 1995 represents one Mrs.
Fields Cookie Store which was sold in October 1996. See Note 13 to Consolidated
Financial Statements.
The difference in the number of restaurants and cookie stores open at
the end of each year accounts for the increases in leasehold improvements and
equipment partially offset by the allowance for loss of $145,000 for an
undeveloped leased property which the Company no longer plans to develop.
Leasehold improvements increased $764,532 during 1995 to $1,771,947 at December
31, 1995 as compared to $1,007,415 at December 25, 1994. Equipment increased
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<PAGE>
$572,056 to $1,175,620 at December 31, 1995 compared to $603,564 at December 24,
1994. See Note 10 to Consolidated Financial Statements.
Franchise costs, net of accumulated amortization increased $340,448 to
$746,585 from $406,137 at December 25, 1994. The increase is primarily due to
franchise fees paid in 1995 partially offset by amortization.
Finance costs net of accumulated amortization decreased $72,493 to
$382,234 at December 31, 1995 from $454,727 at December 25, 1994 due to
amortization of offering costs related to the Notes sold in 1994.
Goodwill, increased to $899,672 at December 31, 1995 from zero at
December 25, 1994. The Company has classified as goodwill the cost in excess of
fair value of the net assets of the cookie stores acquired in 1995.
Current maturities of long-term debt increased $36,231 from December 25,
1994 primarily due to an equipment lease related to the cookie stores acquired
in 1995.
Accounts payable increased $119,567 to $461,372 at December 31, 1995 as
compared to $341,805 at December 25, 1994. This increase is primarily due to
payables related to additional restaurant and cookie store locations.
Accrued liabilities increased $216,215 to $383,797 at December 31, 1995
as compared to $167,582 at December 25, 1994. This increase is primarily due to
liabilities related to additional restaurant and cookie store locations and the
Convertible Preferred Stock offering.
As of December 31, 1995, $1,665,000 had been raised through a private
placement of Cookie Crumb's Preferred Stock. See Note 3 to the Consolidated
Financial Statements.
As of December 31, 1995, $1,266,000 had been raised through a private
placement of the Company's Convertible Preferred Stock. See Note 4 to the
Consolidated Financial Statements.
Capital in excess of par increased $67,163 to $595,523 at December 31,
1995 as compared to $528,360 at December 25, 1994. This increase is primarily
due to $50,000 of contributed services. See Note 14 to the Consolidated
Financial Statements.
The Company's accumulated deficit was $2,463,295 at December 31, 1995
compared to $880,663 at December 25, 1994. The increase is primarily
attributable to the $1,153,674 net loss incurred, issuance costs of $200,998
related to Cookie Crumb's Preferred Stock and costs of $212,960 related to the
sale of 12,660 shares of the Company's Convertible Preferred Stock.
Liquidity and Capital Resources
The following is a summary of the Company's cash flows for the sixteen
week period ended April 20, 1997 and for the fiscal years ended December 29,
1996 and December 31, 1995.
16 Weeks
Ended April 20, December 29, December 31,
1997 1996 1995
---- ---- ----
Net cash (used in) operating
activities (250,950) $(580,1950) $(161,193)
Net cash (used in ) investing
activities (17,654) (204,300) (2,749,896)
Net cash (used in ) provided by
activities (132,932) 544,410
--------- -------
2,493,318
---------
Net (decrease) in cash $(401,536) $(240,085) $ (417,771)
========== ========== ===========
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The Company's cash position decreased $401,536 during the sixteen week
period ended April 20, 1997, due to cash used in operating activities of
$250,950, $17,654 used in investing activities and $132,932 used in financing
activities. Cash flows used in investing activities consisted primarily of
capital expenditures for corporate activities. Cash flows used in financing
activities were primarily for costs and expenses related to this Offering.
The Company's cash position decreased $240,085 during the fiscal year
ended December 29,1996 due to cash used in operating activities of $580,195 and
cash used in investing activities of $204,300 partially offset by cash provided
by financing activities of $544,410. Investing activity consisted primarily of
capital expenditures and construction of an additional cookie store. Cash flows
from financing activities were generated by the issuance of the Convertible
Preferred Stock, proceeds from the sale of Common Stock and proceeds from the
Bridge Loan Notes financing partially offset by the payments of long-term debt,
commissions and offering expenses.
The Company's cash position decreased $417,771 during the fiscal year
ended December 31, 1995 due to cash used in operating activities of $161,193 and
cash used in investing activities of $2,749,896 partially offset by cash
provided by financing activities of $2,493,318. Investing activity consisted
primarily of capital expenditures of $2,199,548 for the purchase of Mrs. Fields
Cookie Stores and the opening of a Hooters Restaurant, partially offset by the
receipt of $100,000 from a landlord as reimbursement for leasehold improvements
in the prior year. Cash flows from financing activities were generated primarily
from the issuance of preferred stock.
Future operations will be impacted by management's ability to improve
sales at existing locations and to add new Mrs. Fields Cookie Stores or new
concepts which maximize sales opportunities. The Company is investigating ways
to improve operating results through additional advertising and promotions and
attracting higher skilled employees. With respect to existing locations, it may
be necessary to close those locations that do not generate sufficient cash flows
as was done for one location in October 1996. If additional locations are
closed, the assets will be written down and potential liabilities could result
from long term lease payments. The Company intends to sell its existing Hooters
Restaurants and has agreed to sell one Cookie Store in Maplewood, Minnesota.
Assuming management is successful in selling additional Common Stock, there can
be no assurance that the profitability of existing locations can be improved
and/or that profitable new cookie store locations can be obtained or new
profitable concepts identified and acquired.
The Company can operate with minimal or negative working capital. The
Company does not have significant accounts receivable or inventory and receives
several weeks of trade credit based on negotiated terms in purchasing food,
beverage and supplies. The majority of the Company's assets, principally
leaseholds, equipment, franchise fees, and other costs associated with the
opening of new sites, are long term in nature. The Company considers its
operating losses to be related to its initial startup and expansion into new
markets and believes that as the Company gains experience in each of its markets
and locations' operating losses will be diminished. Accordingly, the Company
considers its measurement of liquidity to be in terms of cash flow available for
operating activities and expansion.
The Company has financed its capital expenditures and operating cash
deficiencies primarily with the issue of secured promissory notes, the issue of
preferred stock, allowances received from landlords for restaurant remodeling
costs, and capitalized lease obligations. The Company has leased all of its
restaurant and cookie store locations. The Company's capital requirements relate
principally to the development and acquisition of new locations and, to a lesser
extent, the operations of existing locations.
Restaurant Closing
During the third quarter of 1996, the Company closed a Hooters
Restaurant and entered into an agreement to vacate the lease. Under the terms of
the agreement, the Company surrendered to the landlord all leasehold
improvements and equipment housed at the site and will pay the landlord $4,750
per month from August 1, 1996 through June 30, 2005. The Company accrued
$427,148 in the first quarter of 1996 and $450,000 in the second quarter of 1996
to provide $327,148 for the write-off of the net book value of the equipment,
building improvements, and franchise fee, $42,000 for miscellaneous expenses
associated with closing the store and vacating the lease and $508,000 for future
payments to the landlord.
Proposed Sale of Remaining Hooters Restaurants
Recently, management has determined to sell the Company's Hooters
Restaurants since expansion of the Hooters concept is no longer a viable
alternative. Accordingly, the Company has had preliminary discussions with
potential buyers. As a result, an allowance of $700,000 has been provided in the
sixteen week period ended April 20, 1997 to record investment in these
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restaurants at net realizable value. Further, net realizable value of these
assets has been recorded as Assets available for sale at April 20, 1997 on the
Consolidated Balance Sheet at April 20, 1997.
Sale of Cookie Store
The Company has entered into an agreement to sell its Mrs. Fields Cookie
Store in Maplewood, Minnesota as of June 1, 1997 for $37,000. The carrying value
of the assets at this store at April 20, 1997 were approximately $112,000.
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Accordingly, a loss on impairment of assets available for sale of approximately
$75,000 has been recognized in the Statement of Operations for the sixteen week
period ended April 20, 1997.
Stock Split
In October 1996, the Company effected a 21,640 to 1 Common Stock split.
Sale of Common Stock
During August 1996, the Company issued 204,444 shares of Common Stock to
an independent investor for $130,000 to meet its needs. Such sale occurred prior
to any underwriting commitments in connection with the Company's initial public
offering and was the best price obtainable.
Acquisition of Cookie Crumbs, Inc.
In October 1996, the Company acquired for a nominal amount 100% of the
outstanding common stock of Cookie Crumbs, an Illinois corporation wholly owned
by an officer of the Company and an officer and owner of NEMC. Cookie Crumbs
operates six franchised Mrs. Fields Cookie Stores in Missouri and Michigan.
Since its inception in May 1995, Cookie Crumbs has financed its capital
requirements, which have consisted primarily of the acquisition of six
franchised Mrs. Fields Cookie Stores for approximately $1,300,000 from cash
flows provided from operations and by the issuance of participating redeemable
preferred stock (the "Cookie Crumbs Preferred Stock") for $1,488,252 net of
expenses.
The Cookie Crumbs Preferred Stock has no voting rights and a face value
of $1,690,000. Holders of the shares are entitled to receive, to the extent
declared by the board of directors of Cookie Crumbs, cumulative, non-compounded
10% (regular) dividends and non-cumulative participating dividends not to exceed
8%, equal in the aggregate to 10% of an amount equal to net income less regular
dividends. The Cookie Crumbs Preferred Stock dividends, both regular and
participating, rank senior to common stock dividends. As of the date of
acquisition there are no regular dividends in arrears.
Beginning in February 1998, the shares of Cookie Crumbs Preferred Stock
are redeemable in whole or in part at the option of Cookie Crumbs for an amount
equal to 103% of the face value of the shares plus all accrued and unpaid
dividends ("Liquidation Value"). Similarly, the shares are redeemable beginning
in February 1998, at the option of the shareholders during any fiscal year in
which Cookie Crumbs has net income in excess of required dividend distributions,
including cumulative unpaid regular dividends, for an amount equal to the
Liquidation Value thereof; provided, however, that Cookie Crumbs' obligation for
redemption shall be limited to 25% of its net income (adjusted as aforesaid) for
its prior year.
As of April 20, 1997, Cookie Crumbs had a stockholder's deficit of
$802,415. Accordingly, the Company will be unable to avail itself of the assets
and earnings (if any) of Cookie Crumbs through a common stock dividend until the
stockholder's deficit is alleviated by the accumulation of Cookie Crumbs
earnings and all preferred stock regular dividend arrearages are paid. Further,
if Cookie Crumbs' future earnings are inadequate, the Company may be required to
advance funds for working capital and capital improvement needs.
Secured Promissory Notes
The Notes were issued in May 1994 and mature in April 2001, bear
interest at the rate of 12% annually, are collateralized by all of the assets of
the Company, are entitled to receive 5% of the pre-tax profits of the Company
and may be prepaid at any time at 103% of face value. The Notes rank senior to
all existing and future unsecured indebtedness of the Company but provide that
the Company may issue additional debt instruments for the purpose of opening
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<PAGE>
additional Hooters Restaurants which debt will rank equal to the Notes. However,
no additional Hooters Restaurants will be opened. The Notes contain certain
restrictions on the payment of dividends, transactions with affiliates, the
creation of liens on Company assets senior to the Note holders' security,
interest, executive compensation and changes in control of the Company. The
Company is prohibited from entering into a merger, consolidation or sale of
substantially all of its assets unless any such sale of assets results in the
proceeds being reinvested in the development of additional Hooters Restaurants,
which will not occur, or in partial payment of the Notes.
On May 1, 1996 payment of interest on the Notes was suspended and at
March 31, 1997, accrued and unpaid interest on the Notes was $444,000. In March
1997, the Exchange Offer was accepted by holders of $2,872,500 principal amount
of Notes. As a result thereof, $2,872,500 principal amount of Notes and $344,700
of accrued interest will be canceled upon consummation of this Offering and the
issuance of 593,945 shares of Common Stock to the Note holders who accepted the
Exchange Offer. The balance of $99,300 of unpaid interest on the Notes, plus
additional interest accrued through the consummation of this Offering, will be
paid to the remaining Note holders upon approval of the Board of Directors from
the net proceeds of this Offering to cure the default under the Notes. The
$827,500 of Notes not exchanged will remain outstanding. The Company will be
required to make monthly interest payments at an annual rate of approximately
$99,300 until April 1998 and thereafter 36 equal monthly payments of principal
and interest of $8,275 until the Notes are paid in full. The ability of the
Company to make timely future principal and interest payments will depend on the
availability of funds from cash flow or other financing. There can be no
assurance that the Company will be able to make payments on the Notes as such
payments come due. Failure to make payments when due may cause an event of
default under the terms of the Notes, in which event the Note holders could
accelerate payment of principal and interest on the Notes and cause a
foreclosure and sale of assets sufficient to retire the indebtedness. See
"Cancellation of Debt; Conversion of Preferred stock; Bridge Loan Financing" and
Note 2 to Consolidated Financial Statements.
Exchange and repayment of the Notes will relieve the Company of future
annual interest payments of approximately $344,700, principal of $2,872,500, and
additional interest based upon pretax profits. Generally accepted accounting
principles require the Company to expense the previously unamortized finance
costs related to the Notes (estimated to be approximately $211,000) and the 20%
premium to the Note holders accepting the Exchange Offer (estimated to be
$644,000). Accordingly, these amounts will be expensed in the Company's
financial statements in the period in which this Offering is consummated.
Bridge Financing
From October 1996 through December 1996, the Company issued an aggregate
of $483,000 in Bridge Loan Notes to finance working capital needs and costs
associated with this Offering. The Bridge Loan Notes bear interest at the LIBOR
rate and are due upon the earlier of nine months from issuance or the close of
this Offering. The Company will utilize a portion of the net proceeds of this
Offering to repay the Bridge Loan Notes. See "Use of Proceeds."
The Company issued, as additional consideration to the Bridge Loan
lenders, warrants to acquire 91,000 shares of the Company's Common Stock to be
exercised and sold in conjunction with this Offering. In accordance with
generally accepted accounting principles, the fair market value of the stock
(estimated to be $591,500) will be expensed over the period from when the Bridge
Loan Note proceeds were received to March 31, 1997 the original estimated date
of this Offering. See "Selling Security Holders."
Net Operating Loss Carry Forwards
The Company's results are included in NEMC's consolidated tax return.
Intercorporate tax allocation practices adopted by the Company and NEMC provide
that the tax benefit of the Company's losses are reflected in the Company's
financial statements and will be paid to the Company by NEMC under the following
conditions: (a) NEMC has received the benefit of such losses on a consolidated
basis, (b) the Company would otherwise be entitled to such benefits if the
Company were filing a separate tax return, and (c) the Company remains in the
consolidated tax group of NEMC.
As of December 29, 1996, the Company has generated net operating tax
losses of approximately $2,140,000, which have been or may be utilized by NEMC
pursuant to intercorporate tax allocation practices adopted by the Company and
NEMC. As a result of this Offering, the Company will lose the benefit of the
$2,140,000 of tax losses because the Company will no longer be eligible for
inclusion in NEMC's consolidated tax return. However, following the completion
of this Offering, the Company will have approximately $1,330,000 of tax losses
which it may utilize until their expiration in 2011.
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Going Concern
The ability of the Company to continue as a going concern is dependent
on several factors. The successful completion of this Offering is expected to
position the Company to continue as a going concern and to pursue its business
strategies which include the sale of its existing Hooters Restaurants, the
development of additional Mrs. Fields Cookie Stores and the expansion into new
fields, including new restaurant and entertainment concepts. See "Risk
Factors-Expansion of Mrs. Fields Cookies Stores and Other New Businesses" and"
Business and Properties - General." As discussed above, the Company is currently
in default of the provisions of the Notes and unable to service the Notes in
accordance with the original terms. Further, the Bridge Loan Notes are
subordinate to the Notes. If this Offering is unsuccessful, the Company will
remain in default on the Notes and, in accordance with the default provisions,
will be prohibited from repaying the Bridge Loan Notes. In the event this
Offering is unsuccessful, the Company will seek alternate sources of equity or
attempt to refinance or renegotiate its debt obligations or it may be required
to seek protection from creditors under the Federal Bankruptcy Code.
Future Liquidity and Capital Requirements
Management anticipates that upon the completion of this Offering, cash
flows from operating activities will improve significantly due to: (i) a
substantial decrease in interest expense as a result of the Exchange Offer, (ii)
improved results from a planned increase in advertising and promotional activity
in certain markets, (iii) the addition of new Cookie Store locations, (iv) the
sale of locations whose operating results do not generate adequate returns,
including the sale of the existing Hooters Restaurants, and (v) the development
and expansion into other entertainment and restaurant concepts.
The Company will utilize a portion of the net proceeds of this Offering
to continue expansion of the Company's operations. The Company plans to expend
approximately $4.2 million to add additional Cookie Store franchise locations,
existing or new, as well as other concepts over the next three years. The
Company currently has no commitments for future capital expenditures. Additional
development and expansion will be financed through cash flow from operations and
other forms of financing such as the sale of additional equity (including,
potentially, Common Stock issued in connection with the Underwriter's Warrants
and the Series A Warrants offered hereby), debt securities, capital leases, and
other credit facilities. There can be no assurances that such financing will be
available on terms acceptable or favorable to the Company. See "Use of
Proceeds," "Business and Properties-Restaurant Economics--Development of the
Cookie Stores," and "Litigation."
Seasonality and Quarterly Results
The Company's Mrs. Fields Cookie Stores are located in regional shopping
malls and accordingly generally experience higher revenues and profits during
peak shopping months in the fourth quarter. The Company's Hooters Restaurants
are highly impacted by regional differences in weather, promotional activity and
tourist and convention traffic. The first quarter includes 16 weeks of
operations, compared with 12 weeks for each of the last three quarters.
Consequently, quarter-to-quarter comparisons of the Company's results of
operations may not be meaningful, and results for any quarter are not
necessarily indicative of the actual results for a full fiscal year.
Impact of Inflation
The primary inflationary factors affecting the Company's operations
include food and beverage and labor costs. A large number of the Company's
personnel are paid at the federally established minimum wage level and,
accordingly, changes in such wage level affect the Company's labor costs. The
minimum wage was increased effective October 1, 1996. The Company estimates that
at the current level of operations the increase will increase wages $10,000 in
1996 and $30,000 in 1997. Although food and beverage price increases may offset
the effect of the minimum wage, there can be no assurance that this will be the
case. In addition, most of the Company's leases require the Company to pay
taxes, repairs, and utilities, costs which are subject to inflationary
pressures. The Company believes recent low inflation in its principal market
areas have contributed to stable food, beverage, and labor costs in recent
years. There is no assurance that low inflation will continue or that the
Company will have the ability to control costs in the future.
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BUSINESS AND PROPERTIES
General
The Company is engaged in the ownership, operation and management of
Mrs. Fields Cookie Stores and franchised Hooters Restaurants. The Company
currently owns, operates and manages 13 Mrs. Fields Cookie Stores in Missouri,
Michigan and Minnesota and three Hooters Restaurants in Madison, Wisconsin and
San Diego, California. The Company has contracted to sell one low income Cookie
Store in Minnesota, effective June 1, 1997. The Company will not open any new
Hooters Restaurants and intends to sell its existing Hooters locations.
The Company's Mrs. Fields Cookie Stores are franchised businesses which
offer and sell a variety of specially prepared food items including, but not
limited to, cookies, brownies, muffins and beverages. The Company's Hooters
Restaurants are franchised businesses which offer casual dining using a limited,
moderately priced menu that features chicken wings, seafood, salads and sandwich
type items. The Company operates its Cookie Stores and Restaurants pursuant to
specified standards established by the franchisors. The Company believes that
the uniform operating standards of the franchisors facilitate the efficiency of
the Company's Mrs. Fields Cookie Stores and Hooters Restaurants and afford the
Company significant benefits, including the brand-name recognition and goodwill
associated with the franchisors.
The Company purchased an existing Mrs. Fields Cookie Store in Flint,
Michigan in December 1995, from the Mrs. Fields Franchisor and in January 1996,
acquired from an affiliate of the Company six additional franchised Mrs. Fields
Cookie Stores. In October 1996, the Company acquired 100% of the common stock of
Cookie Crumbs which owns six additional Mrs. Fields Cookie Stores. Under its
existing agreements with the Mrs. Fields Franchisor, the Company intends to
acquire an unlimited number of new or existing Mrs. Fields Cookie Stores. The
Company opened its first Hooters Restaurant in Madison, Wisconsin in April 1994.
The Company opened three additional Hooters Restaurants, all in San Diego,
California, between September 1994 and May 1995, one of which was subsequently
closed.
The Company's objective is to develop or acquire a significant number of
franchised units in the Mrs. Fields concept and to create economies of scale in
management, personnel and administration. To achieve this objective, the
Company's strategy will be to (i) capitalize on the brand-name recognition and
goodwill associated with the "Mrs. Fields" name; (ii) expand the Company's Mrs.
Fields operations through the development of additional franchised units; and
(iii) hire and train qualified management personnel to assure compliance with
its franchise obligations, continuity of management and efficiency of
operations. Management will also research other concepts which will become part
of the future strategy of the Company's ongoing plans for expansion, including
entertainment and other restaurant concepts. In this connection, the Company has
had preliminary discussions with a micro brewery chain with respect to its
acquisition by the Company. No agreement has been reached and there can be no
assurance that the Company will be able to consummate the transaction or that,
if consummated, the micro brewery chain would be profitable. The Company's
management has no experience in these areas of business and there can be no
assurance that it will be successful if it is able to acquire the micro brewery
chain or any other new business.
THE MRS. FIELDS COOKIE STORES
The Company's Mrs. Fields Cookie Stores are franchised businesses, which
offer and sell a variety of specially prepared food items including, but not
limited to, cookies, brownies, muffins and beverages. The Company's Mrs. Fields
Cookies Stores feature (i) a distinctive exterior and interior store design;
(ii) trade dress, decor and color scheme; (iii) uniform standards,
specifications and procedures for operations; (iv) procedures for quality
control; training and ongoing operational assistance; and (v) advertising and
promotional programs. Each store location contains approximately 800 square feet
with red and white decor. Food items range in price from between $1.50 and
$4.00. Each store is typically open every day with hours depending on the
particular location. Each store generally has limited seating capacity and
employs between two and three full-time employees and between four and five
part-time employees.
The Mrs. Fields Franchisor
The Mrs. Fields Franchisor does not directly own or operate any Mrs.
Fields cookies stores and began franchising businesses of the type operated by
the Company in January 1991. Mrs. Fields Cookies ("MFC") or an affiliate of the
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Mrs. Fields Franchisor, has operated Mrs. Fields cookie stores since 1977. As of
October 1, 1996, MFC owned a total of 978 Mrs. Fields cookies stores. Mrs.
Fields, Inc. ("MFI"), the sole shareholder of the Mrs. Fields Franchisor, has
entered into various agreements licensing third parties to market the Products
(as defined below) and other products and services using the Marks (as defined
below).
The Mrs. Fields Franchisor owns certain Marks (defined below) used in
connection with the licensing and franchising of specialty retail dessert and
snack food outlets developed by MFI and its affiliates, which offer and sell a
variety of specially prepared food items, such as, but not limited to, cookies,
brownies, muffins and beverages (the "Products"). These dessert and snack food
outlets are known as "Mrs. Fields Cookies Stores" and include stores operated in
a cookie cart or kiosk format. The Mrs. Fields Franchisor grants franchises to
certain qualified persons ("Mrs. Fields Franchisees") for the establishment and
operation of Mrs. Fields Cookies Stores. In connection with these activities,
the Mrs. Fields Franchisor authorizes Mrs. Fields Franchisees to use the
distinctive business formats, systems, methods, procedures, designs, layouts and
specifications (all of which may be improved, further developed or otherwise
modified from time to time) under which Mrs. Fields Cookies Stores operate (the
"System"), as well as certain trade names, trade and service marks, slogans and
commercial symbols, including the trade and service marks "Mrs. Fields" and
"Mrs. Fields Cookies" with which Mrs. Fields Cookies Stores are associated (the
"Marks"). The Mrs. Fields Franchisor offers and sells to qualified persons a
franchise to own and operate a Mrs. Fields cookie store.
Persons interested in acquiring a franchise for a cookie store and the
assets of an existing Mrs. Fields cookie store typically will sign a reservation
letter, reserving the right to purchase the assets of a specific store for a
particular price and agreeing to pay the Mrs. Fields Franchisor a processing fee
of $1,000 per store. Persons interested in acquiring a franchise for a new store
typically will sign a reservation letter agreeing to pay the Mrs. Fields
Franchisor a processing fee of $1,000 per store.
Material Terms of the Franchise Agreement
The Company or Cookie Crumbs is required to enter into a franchise
agreement with the Mrs. Fields Franchisor with respect to each new cookie store
opened or purchased. Under the franchise agreements, the franchisee is granted a
non-exclusive license to operate a Mrs. Fields Cookie Store at a specified
location previously approved by the Mrs. Fields Franchisor. The license is
granted for an initial term of seven years and, provided the franchisee is not
in default, is renewable for two successive five year terms upon 180 days notice
of intent to renew. The franchisee must obtain all leases, licenses and permits
with respect to the prospective cookie store site and construct and develop the
cookie store in accordance with specifications and plans as to exterior and
interior design, images, layout, signs, color and furnishings provided by the
Mrs. Fields Franchisor. The Mrs. Fields Franchisor provides training to the
franchisee and its store managers prior to opening a new cookie store. The
franchisee must allocate $5,000 for a grand opening advertising and promotion
program for a period of seven days, commencing within 30 days after the opening
of the cookie store. Each cookie store is required to be operated in accordance
with mandatory and suggested specifications, standards and operating procedures
set forth in a confidential operations manual provided by the Mrs. Fields
Franchisor. A non-recurring franchise fee, which may vary from $15,000 to
$25,000, must be paid at the time of execution of the franchise agreement. In
addition, the franchisee must pay a royalty fee of 6% of monthly gross revenues
and furnish monthly bookkeeping and accounting records to the franchisor on
forms prescribed by the franchisor. The franchisor has the right to inspect and
audit the business records, bookkeeping and accounting records at any reasonable
time without notice. The franchisee is required to contribute to a national
marketing fund a percentage of gross revenues (not in excess of 4% during and
after 1997 with respect to existing stores) to promote the goodwill and public
image of Mrs. Fields Cookies Stores. The franchisee is granted a license to use
the Mrs. Fields trade marks and service marks and is authorized to use
confidential information proprietary to the Mrs. Fields Franchisor. The
franchisee must agree to maintain the confidentiality of the confidential
information and not to otherwise use or disclose it to others. The franchisee
must notify the Mrs. Fields Franchsor of any apparent infringement of any trade
or service mark and assist the Mrs. Fields Franchisor in protecting and
maintaining its interest in the trade marks or service marks. The Mrs. Fields
Franchisor agrees to indemnify and reimburse the franchisee for damages for
which the franchisee is held liable in any proceeding arising out of its
authorized use of the trade marks or service marks and for all costs and
expenses reasonably incurred in defending any claim or proceeding in which the
franchisee is named a party, provided it has timely notified the franchisor of
the claim and otherwise complied with the franchise agreement.
The franchisee is prohibited from having an interest in a competitive
business within one mile of the franchised location and from recruiting any
employee, who within the preceding six month period was employed by the Mrs.
Fields Franchisor or any other Mrs. Fields retail outlet. A transfer of
ownership in a Mrs. Fields Cookie Store is subject to the approval of the Mrs.
Fields Franchisor which may not be unreasonably withheld. Because this Offering
may be considered a change in control of the existing Mrs. Fields Cookie Stores
34
<PAGE>
owned by the Company, the Company has obtained the written consent of the Mrs.
Fields Franchisor to this Offering. The franchisor has the right of first
refusal to purchase, with respect to any proposed transfer, any interest in the
franchise agreement or the franchisee at the purchase price contained in any
bona fide offer. The franchise agreement may be terminated by either party upon
the default of the other party which is continuing and not cured within 60 days
of notice of default. In the case of the franchisee's default, the franchisor
may purchase the cookie store assets at the greater of the book value of such
assets or two times the cookie store's cash flow for the two most recently
completed years. The franchise agreement provides for indemnification of the
franchisor against claims, actions, damages, and expenses arising out of a
breach of the agreement, damages to persons injured in the cookie store, product
liability claims or defective manufacturing of Mrs. Fields products by the
franchisor, or the activities of the franchisee, its officers, directors,
employees, agents or contractors. The Mrs. Fields Franchisor is granted a
security interest in the improvements, fixtures, inventory, goods, appliances
and equipment owned by the franchisee and located at the cookie store.
Development of the Cookie Stores
Under the terms of the franchise agreement, the Mrs. Fields Franchisor
provides advice to the Company in locating potential sites for its future Mrs.
Fields Cookie Stores. The final site selection will be subject to the approval
of the Mrs. Fields Franchisor. According to estimates provided by the Mrs.
Fields Franchisor, the initial investment for a cookie store franchise,
including the initial franchise fee, working capital, leasehold improvements,
signs, fixtures, equipment, insurance, inventory and training, but exclusive of
real estate costs, ranges from $161,000 to $270,000, however, the Mrs. Fields
Franchisor cautions that it is not possible to provide an accurate estimate due
to the many variables involved in that the costs may be significantly higher in
the event the assets of an existing cookie store are acquired from the Mrs.
Fields Franchisor.
35
<PAGE>
The following is a breakdown of the estimated costs on a per store basis:
Initial Franchise Fee.................................. $15,000 - $25,000
Real Estate............................................ Not Determinable Due
to Variables
Fixed Assets, Construction Remodeling,
Leasehold Improvements, Fixtures
and Equipment........................... $125,000 -$200,000
Investment Required to Commence
Operations including opening inventory......... $10,000 - $15,000
Security Deposits and Prepaid Expenses................. $1,000 - $10,000
Working Capital........................................ $10,000 - $20,000
Total Estimated Initial Investment..................... $161,000 - $270,000
Development Option
In August 1995, Cookie Crumbs, a wholly-owned subsidiary of the Company,
acquired from the Mrs. Fields Franchisor certain exclusive rights for the
development of five Mrs. Fields Cookie Stores in the state of New Mexico for
$100,000, of which $25,000 was designated to be for the purchase of the
territorial rights as determined by the Mrs. Fields Franchisor and $75,000 was
designated to be for the development fees for the five Cookie Stores. In the
event the Company exercises the development rights granted to Cookie Crumbs, the
Company will enter into an area development agreement with the Mrs. Fields
Franchisor, or alternatively, obtain an assignment of the area development
agreement entered into by Cookie Crumbs. See "Certain Relationships and Related
Transactions."
Store Operations
Each of the Company's Mrs. Fields Cookie Stores are operated under the
supervision of managers who are employees of the Company. Each of the Company's
Cookie Store managers is required to have experience in the business of managing
Mrs. Fields Cookie Stores or similar businesses. In addition, certain management
personnel of the Company are required to attend a management training program
sponsored by the Mrs. Fields Franchisor at a designated Company owned Cookie
Store. The training program is designed to enable management personnel to train
new individuals who the Company expects to manage its Mrs. Fields Cookie Stores.
Each Cookie Store has customized computer software and programs. This
software is provided by the Company to maintain a variety of sales data.
The Cookie Stores are supported by the same accounting systems as the
Company uses in connection with the operation of its Hooters Restaurants. See "
- - The Hooters Restaurants - Administrative and Accounting Systems."
Employees
In connection with its Mrs. Fields Cookie Stores, the Company employs
approximately 165 persons, of which 20 are full time and 145 are part-time.
Competition
Generally, the specialty retail cookie market is a developed market. The
Company's Mrs. Fields Cookie Stores offer a variety of specially prepared food
items, including, but not limited to cookies, brownies, muffins and beverages.
The Company competes with bakeries, other specialty retail cookie stores,
convenience stores, and other facilities owned from time to time by the Mrs.
Fields Franchisor, its affiliates, or others and which offer specialty retail
desserts and snack foods. In addition, the Company competes with other stores
and outlets selling the Products under the Marks or other trademarks or service
marks, as well as other items (such as refrigerated ready-to-cook cookie dough
sold through various retail outlets), owned and operated, from time to time, by
36
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MFI, the Mrs. Fields Franchisor or their affiliates or by franchisees or
licensees of MFI, the franchisor or their affiliates, including, without
limitation, Mrs. Fields Cookies Stores (including cookie carts and kiosks), Mrs.
Fields Bakery Stores, Jessica's cookie stores, Famous Chocolate Chip Cookie
Company stores, and in-store retail bakery outlets located in grocery, fast
food, convenience or other stores (such stores and outlets being referred to
generally as "Mrs. Fields Outlets"). The Company also competes with other
individuals and entities in the search for suitable store locations and
operators and employees.
Products, Inventory and Equipment
The recipes, formulations, and specifications for all Products are trade
secrets belonging exclusively to the Mrs. Fields Franchisor. The Mrs. Fields
Franchisor has licensed Van Den Bergh Foods Company ("Van Den Bergh") to
manufacture ready-to-bake dough products and other ready-to-complete Product
mixes following the Mrs. Fields Franchisor's secret recipes, formulations, and
specifications. These products are then sold to Blue Line Distribution ("Blue
Line") under license from the Mrs. Fields Franchisor, for sale and distribution
by Blue Line to Mrs. Fields Cookies Stores and other Mrs. Fields outlets. The
Company purchases all of its Products, with the exception of special Mrs. Fields
coffee blends discussed below, from Blue Line.
Blue Line sells the products described above to all Mrs. Fields Outlets,
and the price charged by Blue Line is the same regardless of whether the
purchaser is a Mrs. Fields Franchisee, one of the Mrs. Fields Franchisor's
affiliates or the Mrs. Fields Franchisor. However, the purchase prices charged
include an estimate for direct costs of manufacture by Van Den Bergh.
The Mrs. Fields Franchisor has licensed Seattle's Best Coffee
("Seattle's") to prepare whole bean and ground roasted coffee and cold coffee
concentrates according to the secret recipes and formulations of the Mrs. Fields
Franchisor. Franchisees must purchase all of their coffee products from
Seattle's or from Blue Line.
The Mrs. Fields Franchisor will not approve anyone other than Van Den
Bergh, Seattle's, or Blue Line to manufacture or supply Products unless the Mrs.
Fields Franchisor terminates its relationship with one of those entities. In
that case, the Mrs. Fields Franchisor has advised the Company that it would
negotiate the terms and conditions for another supplier to manufacture the Mrs.
Fields Products.
The Company purchases all soft goods, such as napkins, paper cups,
cookie tins, and similar items which are a part of the Mrs. Fields System and
which utilize trademarks from Blue Line since Blue Line is the only supplier
licensed to distribute such supplies using the Mrs. Fields Franchisor's
trademarks.
THE HOOTERS RESTAURANTS
The Hooters Franchisor
The first Hooters restaurant was opened in Clearwater, Florida in
October 1983 by Hooters, Inc. ("Hooters Florida"). Hooters Florida operates ten
Hooters restaurants in Florida and Illinois. Hooters Florida owns certain
trademarks, service marks and other property, including the name. Pursuant to an
exclusive license agreement dated July 21, 1984 and subsequently amended with
Hooters Florida, the Hooters Franchisor has obtained the right to use on a
perpetual basis certain trademarks, service marks and other property in
connection with the operations of the Hooters restaurants and the "Hooters
System". The "Hooters System" features a distinctive exterior and interior
restaurant design, trade dress, decor and color scheme; uniform standards,
specifications and procedures for operations, procedures for quality control;
training and ongoing operational assistance, and advertising and promotional
programs.
The Hooters Franchisor began franchising the sale of Hooters restaurants
in 1988. As of October 1996, there were 183 operating Hooters restaurants, of
which 126 are operated by franchisees and 57 are operated by the Hooters
Franchisor. During the three year period ended December 31, 1996, 6 franchises
were reacquired by the Hooters Franchisor and were canceled or terminated by the
Hooters Franchisor.
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Material Terms of the Hooters Franchise Agreement
Each existing Hooters Restaurant is subject to a franchise agreement
with the Hooters Franchisor. Under the franchise agreement, the franchisee is
granted the right, license and privilege to open and operate a Hooters
Restaurant and to use the Hooters proprietary trademark. The term of the
franchise agreement is 20 years with no provision for renewal. The franchisor is
obligated to provide an approved supplier list, a management training program
and assistance in training hourly employees and other assistance, including
advertising and promotional plans, merchandising and marketing advice as may be
requested by the franchisee. The franchisor also must provide all the
requirements for a standardized system for accounting, cost control and
inventory control. The franchisee is required to pay a $75,000 franchise fee
upon execution of the franchise agreement, a 6% royalty fee on gross sales of
the restaurant and is required to spend a minimum of three percent of gross
sales of the restaurant on local advertising and promotion, subject to approval
of the franchisor. If the franchisor establishes a local advertising cooperative
within the franchisee's area of operation, the franchisee must contribute
one-third of the foregoing three percent to the local advertising cooperative.
The franchisee must also pay the franchisor a national advertising fee of one
percent of gross sales.
The franchisee is required to purchase equipment, fixtures, furnishings,
signs, supplies and other products and materials required for the operation of
the restaurant solely from suppliers, manufacturers, distributors and other
sources approved by the franchisor. The franchisor has the right to inspect the
premises at any reasonable time to insure that franchisor is in compliance with
the franchise agreement. The franchisee is prohibited from using the premises
for any purpose other than the operation of a Hooters Restaurant and may not
engage in any trade or practice that would be harmful to the goodwill or reflect
unfavorably on the reputation of the franchisee or the franchisor. The
franchisee must operate the restaurant strictly in accordance with the
trademarks and manuals provided by the franchisor and keep confidential all
information included in the manual provided to the franchisor relating to the
operation of a Hooters Restaurant. The franchisee must adhere to accounting and
reporting procedures established by the franchisor and must purchase accounting
and reporting equipment as required by the franchisor. The franchisor has the
right to examine the books records and tax returns of the franchisee's business
at any reasonable time. A transfer of ownership in the franchise agreement, or
in the franchisee, is subject to approval of the franchisor. This Offering may
be considered a transfer of control of the franchisee which requires the consent
of the Hooters Franchisor. The Hooters Franchisor has not given its consent to
this Offering and under the terms of the franchise agreement may have the right
to terminate the Company's franchise. In the event of a proposed transfer in
interest in a franchisee, the franchisor shall has the right of first refusal to
purchase the interest so offered on the same terms and conditions offered by the
third party. The franchisee is required to indemnify and hold harmless the
franchisor from all losses and expenses incurred in connection with any action,
suit or proceeding or settlement arising out of the franchisee's construction,
management and operation of the franchised restaurant. In the event of a default
under the franchise agreement on the part of the franchisee, the franchisor may
terminate the franchise agreement and the franchisee's right to operate the
Hooters Restaurant licensed thereunder. The franchisor is not required to
purchase the restaurant but has the right to purchase the assets thereof at the
fair market value as determined by an independent appraiser.
The Hooters Restaurants
General. The Company's Hooters Restaurants offer casual dining using a
limited, moderately-priced menu that features chicken wings, seafood, salads,
and sandwich type items. Although the Company's Hooters Restaurants attract a
variety of patrons, the concept of the restaurant is targeted toward young
working and professional people interested in a beach or neighborhood restaurant
atmosphere.
Design and Layout. The exterior of the Hooters Restaurants developed by
the Company are of a rustic design trimmed with Christmas lights. The Company's
restaurants are located in highly visible and high-traffic commercial areas and
in outdoor "strip mall" locations. The size of the Company's Hooters Restaurants
range from 4,500 to 6,500 square feet. The interior features a 1950s-style
jukebox, business advertising signs, highway-style signs, sports memorabilia
from local or area teams and an open-view grill/food preparation area. The
female wait staff serves customers wearing cutoff T-shirts, tank tops and orange
jogging shorts. The dining and bar areas seat generally between 140 and 200
people depending upon the size of the restaurant and the layout is flexible,
permitting tables to be rearranged to accommodate customer demand. To complement
the overall design and dining experience, certain of the Company's Hooters
Restaurants provide separate areas with pool tables and outdoor seating.
Television sets throughout the bar area allow customers to watch sporting and
other special events.
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Menu and Pricing. The typical menu items in the Company's Hooters
Restaurants include chicken wings, hamburgers, chicken sandwiches, grilled ham
and cheese sandwiches, Philly cheesesteak sandwiches, steak sandwiches, hot
dogs, garden salads, chicken crab legs, oyster roasts, steamed clams, fish
sandwiches, clam chowder, chili and raw oysters. Alcoholic beverages are limited
to beer, wine and champagne.
The average menu prices are $5.50 for sandwiches, $5.25 for 10 chicken
wings, $5.00 for salads and $10.00 for seafood items.
Customers. The Company believes that its Hooters Restaurants generally
appeal to a wide range of customers from throughout the metropolitan areas where
the Restaurants are located. However, the concept of the Restaurant targets
young working and professional people interested in a beach or neighborhood
restaurant atmosphere. The Restaurants compete for customers with casual dining
restaurants operated independently and by national, regional and local chains,
particularly those featuring female sex appeal. The Company's Restaurants are
typically open every day during the hours from 11:00 a.m. to 12:00 midnight
Monday through Thursday, 11:00 a.m. to 1:00 a.m. Friday and Saturday and from
12:00 p.m. to 10:00 p.m. on Sundays, except Thanksgiving and Christmas.
Sales and Marketing. Pursuant to the Company's franchise agreements with
the Hooters Franchisor, the Company is obligated to spend during the term of the
franchise agreements, three percent of "gross sales" from each Restaurant on
local advertising and promotion endeavors. "Gross sales" includes all revenue
(other than revenues from any sales taxes or other add on taxes collected from
customers) from the sale of all products and performance of services at each
Restaurant, including insurance proceeds and/or condemnation awards for loss of
sales, profit or business. In addition to spending three percent on marketing,
the Company is required to contribute one percent of "gross sales" of each of
its Hooters Restaurants to a national advertising fund established by the
Hooters Franchisor for advertising and promotion of Hooters restaurants. This
fund is used to maximize general public recognition of the Hooters name.
Generally, each of the Company's Hooters Restaurants is staffed with one
full-time promotions manager who directs the local marketing effort for that
Restaurant. Local marketing consists of a combination of radio and newspaper
advertisements, billboard displays, charity and sports events and local
promotions.
The Company's Hooters Restaurants have a section located near the
entrance which sells merchandise, including "T-shirts," sweat shirts, baseball
caps and other casual clothing bearing the Hooters logo.
Restaurant Locations and Expansion Plans
The Company currently operates three Hooters Restaurants and has paid
the Hooters Franchisor $145,000 (including an additional $65,000 paid for the
Milwaukee, Wisconsin location) for options to open 8 additional Hooters
Restaurants in California and Wisconsin. Under the terms of addenda to the
franchise agreements, the options to open additional restaurants have lapsed and
the Hooters Franchisor has advised the Company that it will not allow the
Company to build additional restaurants under such options. As a result, the
Company intends to sell its existing Hooters Restaurants. If the Company is
unable to sell its existing Hooters Restaurants, the Hooters Franchisor may have
the ability under the franchise agreement to terminate the Company's right to
operate the restaurants as Hooters Restaurants, in which case the Company will
be dependent upon the operations of its existing and future Mrs. Fields Cookie
Stores and expansion into other lines of business. Expansion may include the
acquisition of a micro brewery with which the Company has had preliminary
discussions. There can be no assurance that the Company will consummate the
acquisition of the micro brewery or, if consummated, that the micro brewery will
be profitable. For the sixteen week period ended April 20, 1997 and the fiscal
year ended December 29, 1996, the operations of the Company's Mrs. Fields Cookie
Stores resulted in losses of $341,116 and $881,655, respectively. There can be
no assurance that the development of additional Mrs. Fields Cookie Stores or the
expansion into new businesses will be profitable. See "Risk
Factors-"Consequences of Inability to Open New Hooters Restaurants" and
"Expansion of Mrs. Fields Cookie Stores and Other Businesses" and " - Hooters
Franchise Agreements."
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The following table sets forth data regarding the Company's existing
restaurant locations.
<TABLE>
<CAPTION>
======================== -------------- ----------------- --------------- ===============
Restaurant Opening Date Annual Basic Approximate Lease
Rent Square Feet Expiration(3)
======================== -------------- ----------------- --------------- ===============
<S> <C> <C> <C> <C>
Madison Restaurant(1) April 1994 $42,497 6,500 sq. ft. October 2003
6654 Mineral Point Road increasing to
Madison, Wisconsin $59,496.
53705
======================== -------------- ----------------- --------------- ===============
Gaslamp Restaurant(2) September $90,000 6,600 sq. ft. September 1999
410 Market Street 1994 increasing to
San Diego, California $105,288.
92101
======================== -------------- ----------------- --------------- ===============
Mission Valley December 1994 $86,580 subject 5,550 sq. ft. November 1999
Restaurant(2) to increase
1400 Cimo De La Reina based on CPI
San Diego, California adjustment.
92108
======================== ============== ================= =============== ===============
</TABLE>
(1) The lessee of this Restaurant is Butterwings of Wisconsin, Inc., a
wholly-owned subsidiary of the Company.
(2) The lessee of these Restaurants is Butterwings of California, Inc., a
wholly-owned subsidiary of the Company. The lease agreement for the Gaslamp
Restaurant is guaranteed by New Era Management Corporation, the principal
shareholder of the Company.
(3) Does not include renewal options. See "--Properties."
Restaurant Economics. The major sources of revenue from the operations
of the Company's Hooters Restaurants are from food and beverage sales. The
Company also realizes revenue from the sale of merchandise, including T-shirts.
For the year ended December 29, 1996, food contributed approximately 61% to
gross sales; beverages contributed approximately 30% to gross sales; and
merchandise contributed approximately 9% to gross sales. The gross profit
percentages on food sales, beverage sales and merchandise sales were
approximately 64%, 74% and 54% respectively, during the same period.
The costs of developing and opening the Company's four Hooters
Restaurants have ranged from $823,308 for the El Cajon Restaurant (which was
closed in September 1996) to $956,413 for the Gaslamp Restaurant, exclusive of
allowances for tenant improvements which were paid by the landlords under
particular lease agreements.
Restaurant Operations and Management
Each of the Company's Hooters Restaurants employs approximately 35-50
part-time female wait staff who serve food and beverages and approximately 10-20
part-time kitchen staff who are responsible for all food preparation.
Generally, each of the Company's Hooters Restaurants is managed by the
following persons: a general manager, assistant managers, kitchen managers and
promotions managers. The general manager oversees all operational and
administrative aspects of the Company's Hooters Restaurant including food and
beverage service, food preparation and promotions. The general manager also
supervises the kitchen manager, assistant manager and promotions manager.
Currently, the Company's general managers are employees promoted from assistant
general manager positions who generally have had other restaurant experience.
The Company provides management training through classroom seminars sponsored by
the Hooters Franchisor or through an in-store "on the job" training program.
The assistant manager is responsible for customer service, inventory
control, preparation of necessary reports and forms, maintenance and cleaning of
equipment, scheduling labor and compliance with federal wage and labor laws.
Generally, the assistant managers hired by the Company have prior restaurant or
retail experience.
The kitchen manager is responsible for supervising all food preparation
by the kitchen staff. The kitchen manager's duty is to ensure that the methods
of food preparation, weight and dimensions of products served and standards of
cleanliness, health and sanitation conform to the franchisor's standards and
specifications as well as in accordance with all applicable health standards.
The promotions manager's duty is to create and conduct marketing,
advertising and promotional campaigns to promote and exemplify the Hooters
concept. The promotions manager is responsible for preparing promotional
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budgets, conducting promotional training sessions, organizing and overseeing the
merchandising of promotional items sold at a Hooters Restaurant. The promotions
manager is also responsible for making direct sales calls, attending community
meetings and meeting with the media.
Purchasing Operations
The Company's management negotiates directly with suppliers for key food
and beverage products to assure uniform quality and freshness of food products
in its restaurants, and to obtain competitive prices. Food products and related
supplies used by the Company's restaurants are purchased from specified food
producers, independent wholesale food distributors and manufacturers. See
"-Products, Inventory and Equipment."
Competition
The restaurant industry is highly competitive. The Company's Hooters
Restaurants compete with other casual dining restaurants and with restaurants
and bars featuring female sex appeal on the basis of service, quality and
atmosphere, among other factors. Various casual dining restaurants which have
established name brand recognition and revolve around themes, include, among
others: Lone Star Steakhouse & Saloon, Hard Rock Cafe, TGIFridays, Bennigans,
Planet Hollywood, Houlihans and Outback Steakhouse. Many competitors for the
Company's Hooters Restaurants are well established and have substantially
greater financial and other resources than does the Company. The Company's
Hooters Restaurants operate in the casual dining segment of the restaurant
industry. Casual dining generally refers to a type of restaurant that falls in
between fast-food and fine dining establishments and typically feature a full
range of moderately priced foods and full waiter and bar service.
The restaurant industry generally is affected by changes in consumer
tastes, national, regional or local economic conditions, demographic trends,
traffic patterns and the type, number and location of competing restaurants. The
Company believes its ability to compete effectively will continue to depend upon
its ability to offer high quality menu items with superior service in
distinctive dining environments. See "Risk Factors - Risks Restaurant Industry;
Changes in Consumer Preferences, Economic Conditions and Trends."
Government Regulations
Approximately 30% of revenues of the Company's Hooters Restaurants are
derived from the sale of beer and wine. The Company is required to operate in
compliance with federal licensing requirements imposed by the Bureau of Alcohol,
Tobacco and Firearms of the United States Department of Treasury, as well as the
licensing requirements of states and municipalities where its restaurants are
located. Failure to comply with federal, state or local regulations could cause
the Company's licenses to be revoked and force it to cease the sale of alcoholic
beverages at its restaurants. Typically licenses must be renewed annually and
may be revoked or suspended for cause at any time. While the Company has not
experienced and does not anticipate any significant problems in renewing
required licenses, permits or approvals, any difficulties, delays or failures in
such renewals would adversely affect the restaurant operations because the
restaurants depend, to a significant extent on the ability to serve alcoholic
beverages. In addition, changes in legislation, regulations or administrative
interpretation of liquor laws in a jurisdiction may prevent or hinder the
Company's operations in that jurisdiction. Management believes the Company is
operating in substantial compliance with applicable laws and regulations
governing its operations. Additionally, the Company may be subject in certain
states to "dram-shop" statutes, which generally provide a person who is injured
by an intoxicated person the right to recover damages from an establishment that
wrongfully served alcoholic beverages to the intoxicated person. The Company
carries liquor liability insurance as part of its comprehensive general
liability insurance in all states in which it operates.
The restaurant and fast food industry is subject to numerous federal,
state and local government regulations, including those relating to the
preparation and sale of food and to building and zoning requirements. The
Company is subject to regulation by air and water pollution control divisions of
the environmental protection agencies of the United States and by the various
states and municipalities in which its Restaurants and Cookie Stores are
located. The Company is also subject to laws governing its relationship with
employees, including minimum wage requirements, overtime, working and safety
conditions and citizenship requirements. Restaurant operating costs are affected
by increases in the minimum hourly wage, unemployment tax rates, sales taxes and
similar matters, such as any government mandated health insurance, over which
the Company has no control. Management believes the Company is operating in
substantial compliance with applicable laws and regulations governing its
operations.
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Employees
In connection with its Hooters Restaurants, the Company employs
approximately 133 persons, of which 12 are full-time and 121 are part-time. The
Company believes that relations with its employees are good.
Insurance and Indemnification
The Company's franchise agreements with the Hooters Franchisor and the
lease agreements for the Restaurants require the Company to procure and maintain
an insurance policy insuring against any demand or claim with respect to
personal injury, death or property damage or any loss, liability, or expense
whatsoever arising or occurring upon or in connection with the restaurants in
amounts as specified in the franchise agreements and the lease agreements. In
addition, the Company is obligated to indemnify and hold harmless the Hooters
Franchisor, Hooters Florida, its corporate affiliates, successors and assigns
and the respective directors, officers, employees, agents and representatives of
each from all losses and expenses incurred in connection with any suit, action
or claim arising out of the Company's renovation, management and operation of
the Restaurants. The Company currently retains a $2,000,000 aggregate liability
policy for each state in hich it has a restaurant or cookie store as well as a
$5,000,000 umbrella policy providing excess liability coverage. In addition, the
Company retains coverage for contents in the amount of $3,125,500. These
policies also provide business interruption coverage for the actual loss
sustained for up to twelve months. The Company also maintains workers
compensation insurance of $500,000 per illness or accident. The umbrella policy
also provides excess coverage above workers compensation limits. The Company
maintains insurance that it believes is adequate to cover its liabilities and
risks.
Products, Inventory and Equipment
The Company is obligated to prepare and offer to patrons certain menu
items prepared and sold by Eastern Foods, Inc., a company which is affiliated
with the Hooters Franchisor. These items include certain salad dressings, the
breading mix for the chicken wings, and the dipping sauce served with the
chicken wings at the Company' Restaurants. The Company has the option of either
purchasing these items from Eastern Foods, Inc. or preparing and making the
items according to the confidential recipes provided by the Hooters Franchisor.
Certain novelty items, such as Hooters waitress dolls and Hooters
calendars, may only be purchased from Hooters Florida or a licensee. A
subsidiary of the Hooters Franchisor, Hooters Magazine, Inc., publishes Hooters
Magazine. The Company may sell the magazine at its Hooters Restaurants. There
are no alternative sources of supply for these merchandise items and the
magazine. Due to exclusive distribution rights of certain beer distributors, all
beer must be purchased from particular suppliers depending on the location of a
particular Hooters Restaurant.
Pursuant to the Company's franchise agreements with the Hooters
Franchisor, the Company is required to maintain in sufficient supply, and use at
all times, only such products, materials and supplies as conform to the Hooters
Franchisor's standards and specifications. In addition, the Hooters Franchisor
will have the right to require that certain equipment, fixtures, non-food
inventory, furnishings, signs, supplies and other products and materials be
purchased from suppliers approved by the Hooters Franchisor. Any purchases of
products from an unapproved supplier are subject to the written consent of the
Hooters Franchisor.
Inventory consists of food, beverages, merchandise and paper products.
In accordance with its franchise agreements with the Hooters Franchisor, the
Company is required to maintain an inventory level sufficient to operate the
Hooters Restaurants at full capacity. Food and supplies are shipped directly to
the Hooters Restaurants. The Company does not maintain a central product
warehouse. The Company believes that alternative sources of inventory items are
available (subject to approval by the Hooters Franchisor) if the Company's
current suppliers are unable to provide adequate quantities of such items. The
Company has not experienced any significant delays in receiving any inventory
items.
Administrative and Accounting Systems
All of the Company's Hooters Restaurants use Panasonic 7500 point of
sale machines. The Panasonic register is widely used in the restaurant industry
and is used and recommended by the Hooters Franchisor. The operational features
of this machine include programmable keyboard with preset pricing, precheck and
bar workstations, unique employee numbers for ringing sales, keylock security,
check tracking and comprehensive reporting (time and attendance reporting, sales
reporting, etc.) The data collected by the register is transmitted daily to the
Company's corporate offices via a modem and prepackaged polling software called
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PanPoll. The information polled (sales and hours data) is distributed to
management for review and analysis.
The Company's Hooters Restaurants are supported by a centralized
accounts payable, payroll and accounting department. The Company operates on a
personal computer network and utilizes a variety of prepackaged software
packages. The Company uses the General Ledger and Accounts Payable modules of a
package called MAS90. The Company's fixed assets are maintained by a software
package called BNA and investor related data is tracked by Equinet. Payroll is
prepared by the corporate offices and is processed by an independent payroll
service. The Company also uses Lotus, WordPerfect, Excel and Word. See "Certain
Relationships and Related Transactions" and "Note 8 to Consolidated Financial
Statements."
Hooters Franchise Agreements
Pursuant to option addenda entered into between the Company and the
Hooters Franchisor, the Company paid the Hooters Franchisor $10,000 per
restaurant for options to open 13 new restaurants in Wisconsin and California
which option fees were to be credited against the $75,000 franchise fee payable
for each new restaurant. Butterwings/Wisconsin entered into a franchise
agreement dated October 31, 1993 and an option addendum thereto pursuant to
which Butterwings/Wisconsin was granted exclusive options to establish and
operate four additional Hooters Restaurants in the cities of Madison and
Milwaukee, Wisconsin by July 31, 1996. Butterwings/California also entered into
a franchise agreement dated October 31, 1993 and an option addendum thereto
pursuant to which Butterwings/California was granted the exclusive right to
operate a Hooters Restaurant in San Diego County and exclusive options to
establish and operate nine additional Hooters Restaurants in San Diego County,
two of which have been exercised. In October 1995, the option addendum was
modified at the request of the Company to reduce the option to establish and
operate Hooters Restaurants in San Diego County by three. Pursuant to such
option, the remaining four Hooters Restaurants in the territory were required to
be open by July 31, 1996.
The Company has been unable to complete the development of such
additional Hooters Restaurants within the time frames set forth in option
addenda to the Hooters franchise agreements and under the terms thereof, the
options have lapsed and the option fees paid by the Company may be retained by
the Hooters Franchisor. Although the Hooters Franchisor has advised the Company
that it does not intend to renew the options and may have the right to terminate
the Company's franchise to operate the Hooters Restaurants, it has not done so
at the date hereof.
Nevertheless, the Company will not develop additional Hooters
Restaurants and intends to sell its existing Hooters Restaurants. The Company
does not have a ready buyer for its restaurants and there can be no assurance
that a buyer can be found in a reasonable time or at a reasonable price. The
company may incur continuing losses in the operation of its Hooters Restaurants
if it is unable to find a buyer and may incur a loss on the sale if a sale is
consummated. In the event the Company sells its existing Hooters Restaurants, it
will be dependent on the operations of its present and future Mrs. Fields Cookie
Stores owned and expansion into other fields, including entertainment and
restaurant concepts in which the company has not had any management experience.
The Company has had preliminary discussions with respect to the acquisition of a
micro brewery. chain although there is no definitive agreement therefor and no
assurance can be given that the acquisition can be or will be made. See
"-General."
Franchise and Royalty Fees
Pursuant to its franchise agreements with the Hooters Franchisor, the
Company has paid franchise fees in the amount of $75,000 for each of five
Hooters Restaurants (including one Restaurant in Milwaukee, Wisconsin for which
a suitable site was not located) for a total of $375,000. The Company has also
paid $70,000 to secure option rights to develop seven additional Hooters
Restaurants in its Madison and Milwaukee, Wisconsin and San Diego, California
territories. Option fees may be retained by the Hooters Franchisor in the event
the Company's rights under the option addenda are terminated. See "Note 12 to
Consolidated Financial Statements."
During the term of each franchise agreement, the Company is required to
pay monthly to the Hooters Franchisor a continuing royalty fee of six percent
(6%) of the "gross sales" of each of its Hooters Restaurant. "Gross sales"
includes all revenue (other than revenues from any sales taxes or other add on
taxes collected from customers) from the sale of all products and performance of
services at each restaurant including insurance proceeds and/or condemnation
awards for loss of sales, profits or business. See "Summary of Hooters Franchise
Agreements."
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Properties
Butterwings/Wisconsin has entered into a lease agreement for its Hooters
Restaurant in Madison, Wisconsin under a noncancelable 10-year lease expiring
October 31, 2003. Butterwings/Wisconsin has the option at the end of the initial
lease term to extend the lease for two additional 5-year periods. The lease
contains escalation clauses which provide for increases in base rental to cover
increases in future operating costs. In connection with the rental of this
property an irrevocable letter of credit in the amount of $83,000 has been
issued by a financial institution on behalf of Butterwings/Wisconsin securing
payment of future rents. The letter of credit is collateralized by an
interest-bearing deposit in the amount of $83,000.
Butterwings/California has entered into a lease agreement for the
Hooters Gaslamp Restaurant in San Diego, California under a noncancelable 5-year
lease expiring September 30, 1999, with the option to extend the lease for three
additional 5-year periods. The initial lease term commenced in September 1994
upon the opening of the Restaurant. The lease agreement has been guaranteed by
NEMC, a principal shareholder of the Company.
Butterwings/California has also entered into a lease agreement for the
Hooters Mission Valley Restaurant in San Diego, California under a non
cancelable 5-year lease expiring November 30, 1999, with the option to extend
the lease for three additional 5-year periods. The initial lease term commenced
December 1994 upon the opening of the Hooters Restaurant.
Butterwings/California has also entered into a lease agreement for its
Hooters El Cajon Restaurant in San Diego, California under a non cancelable
10-year lease with the option to extend the lease for two additional 5-year
periods. The initial lease term commenced April 1995 and is guaranteed by NEMC.
In September 1996, the Company closed the El Cajon Restaurant and entered into
an agreement whereby the leasehold improvements and equipment were surrendered
to the landlord and the Company is obligated to pay the landlord $4,750 per
month from August 1, 1996 to June 20, 2005. See Note 11 to Consolidated
Financial Statements.
Effective April 1, 1995, Butterwings/California assumed a land lease for
an additional Hooters Restaurant to be located in Oceanside, California. The
remaining lease term is for 7 years with the option to extend for two additional
five year periods. The right to utilize an existing building located at the site
was also acquired by the Company at a cost of approximately $75,000. In November
1995, the Company decided not to develop this property and in September 1996
entered into a sublease agreement whereby the subleasee will pay substantially
all amounts due under the original lease. However, under certain conditions, the
subleasee can terminate the lease in September 1998, causing the Company to be
liable for the remaining rentals through September 2003, equal to $311,040. If
an existing restaurant does not perform at a profitable level and the decision
is made to close the restaurant, the Company may be obligated to pay rent until
expiration of the lease. This could influence management's decision in deciding
to close an unprofitable location. See "Risk Factors-Long Term Leases;
Restaurant and Cookie Store Closings" and Note 10 to Consolidated Financial
Statements.
The Company utilized the offices of NEMC in Hoffman Estates, Illinois
paid rent to NEMC of $5,400 per month. The property was sold to an unaffiliated
third party and the Company will pay the new owner approximately $5,500 per
month rent beginning June 1, 1997.
Litigation
The Company in the past has been the subject of several charges of
employment discrimination or sexual harassment suits in administrative
proceedings in the Milwaukee, Wisconsin and San Diego, California offices of the
Equal Employment Opportunity Commission (the "EEOC"). In April 1996, the
Milwaukee office of the EEOC advised the Company that it had determined that it
would not bring a civil action against the Company arising out of a charge of
employment discrimination brought by a male person alleging he had been denied
employment as a "Hooters Girl" in violation of Title VII of the Civil Rights Act
of 1964 ("Title VII") on the basis of his sex but that the complainant had the
right to bring such an action in the United States District Court within 90
days. At the date hereof, the Company has not received notice that any suit has
been filed and management believes that the threat of litigation in this matter
is past.
In March 1996, the San Diego office of the EEOC advised the Company that
the complainant in a similar charge failed to establish a claim but that the
hiring practices of one of the Company's San Diego Restaurants, insofar as they
required that only females be hired for "Hooters Girl" positions, were violative
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of Title VII. The Company does not believe that this constitutes a significant
threat of litigation in light of the position taken by the EEOC in the federal
matter discussed below. The Company was also charged in a May 1995 proceeding
brought with the Equal Opportunities Commission ("EOC") of Madison, Wisconsin by
a former employee alleging sexual harassment, hostile work environment and
termination on the basis of sex and retaliation for complaints against sexual
harassment. The Company advised the EOC that it declined to participate in the
administrative process unless the complainant waived her right to sue in federal
court because the law firm representing the complainant had filed an earlier
charge on behalf of a waitress at the same Restaurant and as soon as the 180 day
waiting period had expired filed suit in federal court. At the date hereof no
decision in this matter has been rendered and the Company is unable to predict
its outcome but intends to defend its position vigorously.
In October 1991, the EEOC filed a charge of employment discrimination
against the Hooters Franchisor and all related business entitles generally
referred to as the Hooters restaurant system (collectively "Hooters") including
franchisees, licensees, and any other entity permitted to operate under the
Hooters trademark with unlawful employment practices under Title VII. In
September 1994, the EEOC issued a decision that there was reasonable cause to
believe that Hooters engaged in employment discrimination for failing to
recruit, hire or assign men into server, bartender or host positions. However,
in March 1996, the EEOC advised that the EEOC's general counsel would not
recommend that the EEOC file a lawsuit against Hooters and that this procedure
terminated the EEOC's consideration of litigation against Hooters to challenge
its policies. Accordingly, the Company believes that the likelihood of EEOC
action regarding these policies is remote. However, in the event litigation is
commenced by the EEOC and the EEOC implements its earlier decision, the Company
may be required to implement a gender neutral hiring policy and to pay money
damages to men who were previously discriminated against by Hooter's hiring
practices, the effect of which could have a substantial adverse impact on the
Company's business.
In December 1993, a lawsuit was filed against Hooters, Inc. and Hooters
of Orland Park, Inc. in the United States District Court for the Northern
District of Illinois alleging Hooters "nation wide policy" of refusing to
recruit, hire, or assign men into server, bartender or host positions violates
Title VII. The plaintiff seeks certification of a plaintiffs' class consisting
of all males who, since April 1992, have applied, were deterred from applying,
or may in the future apply for server, bartender or host positions at any
Hooters Restaurant and for certification of defendant class consisting of all
owners of Hooters Restaurants, licensed, sublicensed or whose hiring practices
are determined directly or indirectly by Hooters or its affiliates. As of the
date hereof, neither the Company nor any of its affiliates has been served with
any notice that a defendant class which includes any of them has been certified.
Accordingly ,the Company is unable to predict the outcome of this matter.
However, in the event that a defendant class including the Company or any of its
affiliates is certified, the Company may be required to implement a gender
neutral hiring policy and to pay money damages to persons who were previously
found to have been discriminated against because of Hooters hiring practices,
the effect of both of which could have a substantial adverse impact on the
business of the Company.
In January 1997, a civil action was filed in the United States District
Court for the Northern District of Wisconsin styled: Joanne Lind vs. Butterwings
of Wisconsin, Inc. alleging sexual harassment by a manager of the restaurant
where she was employed and termination of her employment as retaliation for
complaints made by her to management. The complaint seeks compensatory and
punitive damages, pre-and post-judgment interest and attorney's fees. The
Company has denied the material allegations of this complaint and intends to
defend the suit vigorously. The suit is in the discovery stage and it is too
early to predict the outcome in this matter.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the
Company's directors and executive officers.
Name Title Age
---- ----- ---
Stephan S. Buckley President and Director 38
Kenneth B. Drost Vice President, Secretary and Director 42
Douglas E. Van Scoy Chief Financial Officer and Director 55
Jeffrey A. Pritikin Director 42
Thomas P. Kabat Director 49
Stephan S. Buckley has served as President and Director of the Company
since August 1993. Mr. Buckley has also served as President and Director of
NEMC, the principal shareholder of the Company, since March 1993. Mr. Buckley is
also Chairman of the Board, President and Director of New Era Funding Corp.
("NEFC"), an affiliate of the Company, which through October 1, 1996, managed
several public limited partnerships originally sponsored by Datronic Rental
Corporation, Schaumburg, Illinois ("Datronic"). Mr. Buckley also is President
and Director of Cookie Crumbs a wholly owned subsidiary of the Company and a
franchisee of the Mrs. Fields Franchisor. Prior to his association with NEMC and
NEFC, Mr. Buckley served as a director and Executive Vice President-Broker
Services of Datronic from January, 1987 to March, 1993. Prior to his association
with Datronic, Mr. Buckley was employed by ISFA Corporation, a securities
broker-dealer located in Tampa, Florida, as a Branch Manager from February, 1985
through January, 1987. From September, 1983 to February, 1985, he was an Account
Executive with Dean Witter Reynolds. Mr. Buckley also served as an Assistant
Branch Manager with Transamerica Financial Services, Inc. from June, 1982 to
September, 1983. Mr. Buckley is the sole shareholder, a registered principal and
an officer and director of ASA Investment Company, an Illinois and
NASD-registered broker-dealer and an Illinois-registered insurance broker. Mr.
Buckley received a Bachelors Degree in Economics from Southern Illinois
University in 1982.
Kenneth B. Drost has served as Vice President, Secretary and Director of
the Company since August 1993. Mr. Drost has also served as Vice President,
Secretary and Director of NEMC since March, 1993. Mr. Drost is also Executive
Vice President, General Counsel and Director of NEFC. Prior to his association
with NEMC and NEFC, Mr. Drost served as general counsel to Datronic from
January, 1992 to March, 1993. Mr. Drost was previously a partner with Siegan
Barbakoff Gomberg & Kane, Ltd. and prior thereto, was a partner with the law
firm of Katten, Muchin & Zavis. Mr. Drost obtained a Bachelor of Arts Degree
from Knox College in 1975 and a J.D. from Hastings College of Law, University of
California in 1978.
Douglas E. Van Scoy has served as Chief Financial Officer and Director
of the Company since August 1993. Mr. Van Scoy has also served as Chief
Financial Officer and Director of NEMC since March, 1993. Mr. Van Scoy is also
Chief Financial Officer and Director of NEFC. Prior to his association with NEMC
and NEFC, Mr. Van Scoy served as Chief Financial Officer of Datronic from
January, 1991 to March, 1993. Prior to that time, Mr. Van Scoy was Chief
Executive Officer of both Oceanica Trading Limited, Ltd., Wheeling, Illinois and
CMV Enterprises, Inc., Wheeling, Illinois from April, 1987 to December, 1990.
From January, 1981 to March, 1987, Mr. Van Scoy was Senior Vice President and
General Auditor of The First National Bank of Chicago, Chicago, Illinois. From
June, 1964 to April, 1976, he was associated with the public accounting firm of
Price Waterhouse, Chicago, Illinois, and from May, 1976 to December, 1980, he
served as a Partner of that firm. Mr. Van Scoy obtained a Bachelors of Business
Administration from the University of Michigan in 1963 and a Masters of Business
Administration from the University of Michigan in 1964. Mr. Van Scoy is a
Certified Public Accountant.
Jeffrey A. Pritikin has served as a Director of the Company since
September 1995. Mr. Pritikin has served as an accountant and tax consultant in
private practice since 1981. Mr. Pritikin's practice is concentrated in IRS
matters, business and individual tax preparation services, tax and investment
planning. Since 1993, Mr. Pritikin has also served as President and Director of
ARJ Investments and Management Consultants, Inc., a private company providing
business consulting and investment planning. Mr. Pritikin holds a Bachelor of
Science degree in Accounting from the University of Illinois at Chicago and is
enrolled to practice before the IRS.
Thomas P. Kabat has served as a Director of the Company since September
1995. Mr. Kabat has been employed by Durst Brokerage, Inc., ("Durst") a
foodservice brokerage and sales company since 1985. He has been Executive Vice
President, Secretary and Treasurer of that company since 1993. Mr. Kabat has
over 26 years experience in the industrial brokerage and foodservice sales
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industry having held sales and management positions with various companies
including a company owned by Mr. Kabat which merged with Durst in 1985. Durst is
a member of the National Food Brokerage Association, International Food
Manufacturers Association, Institute of Food Technologists, and the Food
Ingredients Network Development.
Director Compensation. As compensation to outside directors, the Company
plans to pay directors' fees not to exceed $2,500 per quarter, plus expenses.
While not presently finalized, the Company is considering a program wherein up
to one - half of directors' fees may, upon agreement between the Company and the
director, be payable in shares of the Company's Common Stock, based on the value
of the stock on the last day of each quarter. Inside directors will not receive
compensation, but may be reimbursed for expenses.
Executive Compensation. The Company's executive officers did not receive
compensation from the Company (excluding Cookie Crumbs) from its inception
through December 29, 1996. In order for the accompanying Financial Statements
for the fiscal years ended December 29, 1996 and December 31, 1995 to reflect
reasonable compensation levels, a capital contribution has been recorded to
reflect the value of their services rendered. An offsetting amount has been
included in general and administrative expenses in the accompanying Statements
of Operations. The capital contributions were $50,000 for the years ended
December 31, 1995 and December 25, 1994, respectively and $100,000 for the
fiscal year ended December 29, 1996. For fiscal year 1997, the Company's three
executive officers will receive salaries at the rate of $60,000 annually. There
are no bonus or other compensation plans other than the 1996 Stock Compensation
Plan.
The following table sets forth summary information concerning
compensation earned by or paid to the President of the Company in his capacity
as Chief Executive Officer of Cookie Crumbs for the fiscal years ended December
31, 1995 and December 29, 1996. No other executive officer was paid a salary and
bonus in excess of $100,000 for services rendered in all capacities to Cookie
Crumbs for the fiscal years 1995 and 1996.
Summary Compensation Table
Long-Term Compensation
Awards
Name and Annual Compensation Securities
Principal Position Year Salary Bonus Underlying Options
------------------ ---- ------ ----- ------------------
Stephan S. Buckley
President 1996 $9,231 -0- -0-
1995 16,154 -0- -0-
1996 Stock Compensation Plan. The Company's 1996 Stock Compensation Plan
(the "Plan") was approved by the Board of Directors and stockholders of the
Company on November 14, 1996 to provide for the grant of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and options which do not constitute incentive options to officers,
directors, employees and advisors of the Company or a subsidiary of the Company.
A total of 200,000 shares of Common Stock has been authorized and reserved for
issuance under the Plan, subject to adjustment to reflect changes in the
Company's capitalization in the case of a stock split, stock dividend or similar
event. The Plan is administered by the Board of Directors. The Board has the
sole authority to interpret the Plan, to determine the persons to whom options
will be granted, to determine the basis upon which the options will be granted,
and to determine the exercise price, duration and other terms of options to be
granted under the Plan; provided that, (i) the exercise price of each option
granted under the Plan may not be less than the fair market value of the Common
Stock on the day of the grant of the option, (ii) the exercise price must be
paid in cash upon exercise of the option, (iii) no option may be exercisable for
more than 10 years after the date of grant, and (iv) no option is transferable
other than by will or the laws of descent and distribution. No option is
exercisable after an optionee ceases to be employed by the Company or a
subsidiary of the Company, subject to the right of the Board to extend the
exercise period for not more than 90 days following the date of termination of
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an optionee's employment. An optionee who was a director or advisor may exercise
his option at any time within 90 days after such optionee's status as a director
or advisor terminates to the extent he was entitled to exercise such option at
the date of termination of his status. If an optionee's employment is terminated
by reason of disability, the Board has the authority to extend the exercise
period for not more than one year following the date of termination of the
optionee's employment or service as an advisor or director. If an optionee dies
and holds options not fully exercised, such options may be exercised in whole or
in part within one year of the optionee's death by the executors or
administrators of the optionee's estate or by the optionee's heirs. The vesting
period, if any, specified for each option will be accelerated upon the
occurrence of a change of control or threatened change of control of the
Company.
The Board of Directors granted 100,000 options under the Plan on
November 14, 1996. Such options are exercisable at $5.00 per share until
November 14, 2006. The following table sets forth information regarding options
granted to the President of the Company during the fiscal year ending December
29, 1996. No options were granted during the sixteen week period ended April 20,
1997.
Option Grants in Current fiscal Year
Individual Grants
Number of % of Total Options
Securities Granted to
Underlying Employees in Exercise or Base Expiration
Name Options Granted Fiscal Year Price per Share Date
---- --------------- ----------- --------------- ----
Stephan S. Buckley 20,000 25 $5.00 11/14/2006
The following table sets forth information regarding exercised options
and the value of unexercised options held by the President of the Company as of
December 29, 1996. No options were exercised or granted during the sixteen week
period ended April 20, 1997.
Aggregated Option Exercises in Current Fiscal Year
and Fiscal Year-End Options
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options at In the Money
Fiscal Options
Shares Acquired Year-End At Fiscal Year-End
Name on Exercise Exercisable Exercisable
---- ----------- ----------- -----------
Stephan S. Buckley -0- 20,000 -0-
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1996, the Board of Directors granted stock options under the
1996 Stock Compensation Plan to its officers and directors as follows: Stephan
S. Buckley, President; Kenneth B. Drost, Vice President; and Douglas E. Van Scoy
, Chief Financial Officer, 20,000 each; Jeffrey Pritikin and Thomas A Kabat,
Directors, 10,000 each.
The Company appointed ASA as a consultant to solicit and procure broker
dealers in connection with the private placement of the Notes and Convertible
Preferred Stock during the period 1994 through 1996. ASA did not receive any
direct compensation for its services but was reimbursed for actual out of pocket
expenses. Stephan S. Buckley, President and a director of the Company is the
sole shareholder, an officer and director of ASA. In addition, Clarke
Consulting, an affiliate of Mr. Buckley, provided services to the Company in
connection with the Notes and Convertible Preferred Stock private offerings,
including structuring of the offerings and financial and investor relations
services, for which Clarke Consulting was paid $55,000.
Until October 1, 1996, the Company operated under an informal
arrangement with NEMC pursuant to which NEMC provided office space, accounting,
administrative and computer system services to the Company at NEMC's cost. The
amounts paid for such rent and services for the fiscal years ended December 31,
1995 and December 29, 1996 were $138,524 and $246,619 respectively. On October
1, 1996, the Company began providing its own accounting, administrative and
computer system services using substantially the same personnel and equipment.
The Company expects that the costs for these services will be higher in 1997.
The Company made monthly rental payments of approximately $5,400 to NEMC for
space for its corporate offices through March 31, 1997. The building was sold to
an unaffiliated third party and the Company will pay the new owner $5,500 per
month beginning June 1, 1997. All of the outstanding common stock of NEMC is
owned equally by Messrs. Buckley, Drost and Van Scoy who are officers and
directors of the Company. However, Mr. Buckley owns preferred stock of NEMC
which gives him 50% of the voting power of NEMC. NEMC owned approximately 90% of
the Company's outstanding Common Stock prior to the Offering and will own
approximately 48% after the Offering. See, "Business and Properties -
Properties," "Principal Stockholders," and Note 8 to Consolidated Financial
Statements.
Pursuant to intercorporate tax allocation practices, NEMC was entitled
to include the tax losses attributable to the Company's operations in NEMC's
consolidated tax return for which the Company was to receive credit from NEMC
under certain conditions. As of December 29, 1996, the Company had generated tax
losses of approximately $2,140,000, which have been or are expected to be
utilized by NEMC. Concurrent with this Offering, the Company will no longer be
eligible for inclusion in NEMC's consolidated tax return and NEMC will be
relieved from any obligation to pay the Company the tax benefit attributable to
the Company's tax losses utilized in consolidation. Upon the completion of this
Offering, the Company will have approximately $1,330,000 of tax loss
carryforwards which are available to the Company until their expiration in 2011.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Net Operating Loss Carryforwards" and Note 7 to Consolidated
Financial Statements.
In July 1996, Cookie Crumbs borrowed $100,000 from Stephan S. Buckley,
its sole stockholder, to fund construction costs of a new Mrs. Fields Cookie
Store in Chesterfield, Missouri. This loan was repaid in October 1996. In
October 1996, the Company acquired all of the outstanding common stock of Cookie
Crumbs from Mr. Buckley for $1.00.
In August 1995, Cookie Crumbs acquired certain rights for the
development of five Mrs. Fields Cookie Stores in New Mexico for $100,000. Cookie
Crumbs granted the Company an option to acquire the development rights to the
New Mexico territory which was exercisable upon the payment of $100,000 to
Cookie Crumbs and expires January 2001. Upon exercise of the option, the Company
will acquire an assignment of the area development agreement but will not be
obligated to pay any development fees to the Mrs. Fields Franchisor. At the time
of the transaction, Cookie Crumbs was owned by Mr. Buckley, President and a
director of the Company. Since the Company now owns all of the stock of Cookie
Crumbs, the Company will not be obligated to pay the $100,000 if it elects to
exercise the option.
The Company entered into a separation agreement (the "Separation
Agreement") effective August 1, 1995, with Edmund C. Lipinski ("Lipinski")
pursuant to which: (i) an employment agreement dated September 13, 1993, was
terminated; (ii) the 216,400 -shares of Common Stock of the Company owned by
Lipinski (in which he had no cost basis) was repurchased by the Company for
$1.00, and (iii) the restricted stock agreement dated September 13, 1993 was
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terminated. Simultaneously with the execution of the Separation Agreement, the
Company and Lipinski entered into an independent contractor agreement (the
"Agreement") pursuant to which the Company retained the services of Lipinski as
an independent contractor for a five year term to: (i) assist the Company in
identifying and selecting site locations suitable for Hooters Restaurants; (ii)
assist the Company in constructing and developing Hooters Restaurants within the
territories; (iii) consult with and advise the Company regarding operations of
Hooters Restaurants within the territories; and (iv) perform such other and
further services relating to restaurant construction and operation as the
Company shall direct. In consideration for the services to be rendered by
Lipinski, the Company agreed to pay him $8,683.33 per month, plus $5,000 upon
the opening of each of the Company's fifth and sixth Hooters Restaurants.
Lipinski agreed to keep confidential all "proprietary information" ( as defined
in the Agreement ) during term of the Agreement and for a period of two years
after termination thereof. At the time of the Separation Agreement, Mr. Lipinski
was Director of Operations for the Company.
The Company believes that the foregoing transactions were on terms no
less favorable to the Company than could have been obtained from independent
third parties. All future transactions with officers and directors will also be
on terms no less favorable than could be obtained from independent third parties
and will be approved by a majority of the Company's independent, disinterested
directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding certain
principal stockholders' beneficial ownership of the Common Stock of the Company
as of the date of this Prospectus and as adjusted to reflect the sale of Units
offered hereby by: (i) each person known by the Company to be the beneficial
owner of more than five percent of the total outstanding shares of Common Stock
of the Company, (ii) each Director or executive officer of the Company, and
(iii) all Directors and executive officers of the Company as a group. Except as
otherwise indicated all persons listed below have record and beneficial
ownership and sole voting power and investment power with respect to their
shares of Common Stock (except to the extent that authority is shared by spouses
under applicable law).
Name of Beneficial Amount Percent of Percent of
Owner Beneficially Ownership Ownership
----- Owned Prior Prior to the After the
to Offering Offering Offering
----------- -------- --------
New Era Management
Corporation (1)........ 1,947,603 90.5% 47.6%
Jeffrey Steiner (2) 204,444 9.5 5.0
All Officers and Directors
as a group (five persons) 1,947,603 90.5% 47.6%
(1) New Era Management Corp. is owned by Messrs. Stephan S. Buckley, Kenneth B.
Drost and Douglas E. Van Scoy, the executive officers of the Company. The
address of NEMC is 2345 Pembroke Avenue, Hoffman Estates, Illinois 60195.
(2) The address of Mr. Steiner is 6 Cheyne Walk, London, England.
SELLING SECURITY HOLDERS
The table below sets forth the number of Units which are being sold by
the Selling Security Holders who acquired their Units upon automatic exercise of
warrants issued to them as additional consideration in connection with the
issuance of the Bridge Loan Notes. None of the Selling Security Holders are
affiliated with the Company.
Units Beneficially Units to be Number of Units
Owned Prior to this Sold in this Beneficially Owned
Name Offering Offering After this Offering
---- -------- -------- -------------------
Sunset Bridge Fund
# 3, LP. 19,600 19,600 -0-
Sagax Fund II Ltd. 22,400 22,400 -0-
Ken Cattell 7,000 7,000 -0-
Dominic M. Genovese 3,500 3,500 -0-
Riad Abou-Mourad 3,500 3,500 -0-
John McGinnis 35,000 35,000 -0-
------ ------
Total 91,000 91,000 -0-
====== ======
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DESCRIPTION OF SECURITIES
Capital Stock of the Company
The authorized capital stock of the Company presently consists of
10,000,000 shares of Common Stock, $0.01 par value, and 100,000 shares of
preferred stock, no par value.
Preferred Stock
The board of directors, without further action by the stockholders, is
authorized to issue up to 100,000 shares of no par value preferred stock in one
or more series and to fix and determine as to any series, any and all of the
relative rights and preferences of shares in each series, including without
limitation, preferences, limitations or relative rights with respect to
redemption rights, conversion rights, voting rights, dividend rights and
preferences on liquidation. The issuance of preferred stock with voting and
conversion rights could have a material adverse affect on the voting power of
the holders of the Common Stock. The issuance of preferred stock could also
decrease the amount of earnings and assets available for distribution to holders
of the Common Shock. In addition, the issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control of the Company.
The Company has no plans to issue any shares of preferred stock other than the
Convertible Preferred Stock described below.
Convertible Preferred Stock. At the date of this Prospectus the Company
had authorized the issuance of 27,500 shares of convertible preferred stock, the
only series of preferred stock authorized (the "Convertible Preferred Stock"),
of which series 15,685 shares were issued and outstanding. The Convertible
Preferred Stock bears a cumulative, non compounded dividend at a rate of 10% per
annum, payable quarterly on the first day of January, April, July and October.
To the extent not paid, dividends are added to the liquidation value of the
Convertible Preferred Stock until paid. In the event dividends are paid in an
amount less than the full dividend due, they shall be paid pro rata to the
holders of the Convertible Preferred Stock. So long as any shares of Convertible
Preferred Stock are outstanding, the Company will not declare or pay any cash
dividends or distributions on any other class of stock unless all dividends are
current on the Convertible Preferred Stock.
The holders of the Convertible Preferred Stock are entitled to the
Liquidation Value on their shares upon liquidation, dissolution or winding up of
the Company before any distribution or payment is made to holders of any other
class of stock of the Company. The term Liquidation Value is defined as the sum
of $100 plus any unpaid dividends calculated cumulatively on a monthly basis to
the close of business on the most recent dividend payment date. The Convertible
Preferred Stock is protected in the event of any stock splits, reverse stock
splits or distributions of additional shares of capital stock in a fashion
similar to share dividends.
Each share of Convertible Preferred Stock is convertible into Common
Stock of the Company upon the consummation of the first sale of Common Stock by
the Company to underwriters in a public offering of Common Stock registered
under the Securities Act of 1933. The number of shares of Common Stock to be
received by holders of the Convertible Preferred Stock is determined by dividing
the offering price per share of the Convertible Preferred Stock ($100) by 95% of
the offering price per share of the Common Stock in the public offering of the
Common Stock. The Company is required to give notice to the Convertible
Preferred Stock holders of the effective date of the public offering and to
exchange the Convertible Preferred Stock for shares of Common Stock within ten
business days after the effective date of the public offering. The Convertible
Preferred Stock has no voting rights except as provided by the Illinois Business
Cooperation Act, which provides for voting as a class upon proposed amendments
to the Articles of Incorporation which would adversely affect an outstanding
series of preferred stock.
As a consequence of this Offering, the Company will be required to issue
254,008 shares of its Common Stock upon the automatic conversion of the
Convertible Preferred Stock and the Convertible Preferred Stock received in
exchange therefor will be canceled.
No dividends have been paid on the Convertible Preferred Stock.
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Units
Each Unit consists of one share of Common Stock and one Series A
Warrant. The shares of Common Stock and the Series A Warrants included in the
Units may not be separately traded until _______, 1997 [six months after the
date of this Prospectus] unless earlier separated upon three days prior written
notice from the Representative to the Company.
Common Stock
At the date of this Prospectus, there were 3,091,000 shares of Common
Stock outstanding, including 593,945 shares issued to the Note holders, 254,008
shares issued to the Convertible Preferred Stock holders and 91,000 shares
issued to the Bridge Loan Note holders.
The holders of the Common Stock are entitled to share ratably in any
dividends paid on the Common Stock when, as and if declared by the Board of
Directors out of funds legally available therefor. Each holder of Common Stock
is entitled to one vote for each share held of record. The Common Stock is not
entitled to cumulative voting or preemptive rights and is not subject to
redemption. Upon liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in the net assets legally
available for distribution. All outstanding shares of Common Stock are fully
paid and non assessable.
Series A Warrants
The Company has authorized the issuance of Series A Warrants to purchase
1,091,000 shares of Common Stock (not including 163,650 Series A Warrants which
may be issued pursuant to the Underwriters' Over-allotment Option, and 109,100
Underwriters' Warrants) and has reserved an equivalent number of shares of
Common Stock for issuance upon exercise of such Series A Warrants and
Underwriters' Warrants. The following statements are brief summaries of certain
provisions of the Warrant Agreement (defined below). Copies of the Warrant
Agreement may be obtained from the Company or the Warrant Agent (defined below)
and have been filed with the Commission as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Series A Warrants will be issued in registered form under, governed
by, and subject to the terms of a warrant agreement (the "Warrant Agreement")
between the Company and American Stock Transfer & Trust Company as warrant agent
(the "Warrant Agent"). Each Warrant entitles the holder thereof to purchase one
share of Common Stock at an exercise price of 120% of the offering price per
Unit exercisable at any time commencing on ________________________, 199_
[thirteen months after the closing of this Offering], until ______________,
2002, unless earlier redeemed. The Series A Warrants will not become separately
traded until ________________________, 1997 [six months after the date of this
Prospectus] unless earlier separated upon three days prior written notice by the
Representative to the Company at the discretion of the Representative. The
Series A Warrants contain provisions that protect the Warrant holders against
dilution by adjustment of the exercise price in certain events, including, but
not limited to stock dividends, stock splits, reclassifications or mergers. A
Warrant holder will not possess any rights as a shareholder of the Company.
Shares of Common Stock, when issued upon the exercise of the Series A Warrants
in accordance with the terms thereof, will be fully paid and non-assessable. No
fractional shares will be issued upon the exercise of the Series A Warrants. The
Company will pay cash in lieu of fractional shares.
The Series A Warrants are subject to redemption by the Company at a
price of $0.05 per Series A Warrant at any time commencing thirteen months after
the date of this Prospectus, on thirty days prior written notice, provided that
the closing sale price per share for the Common Stock has equaled or exceeded
200% of the offering price per Unit for twenty consecutive trading days within
the thirty-day period immediately preceding such notice.
At any time when the Series A Warrants are exercisable, the Company has
agreed to have a current registration statement on file with the Commission and
to effect appropriate qualifications under the laws and regulations of the
states in which the holders of the Series A Warrants reside in order to comply
with applicable laws in connection with the exercise of the Series A Warrants
and the resale of the Common Stock issued upon such exercise. So long as the
Series A Warrants are outstanding, the Company has agreed to file all
post-effective amendments to the registration statement required to be filed
under the Securities Act, and to take appropriate action under federal law and
the securities laws of those states where the Series A Warrants were initially
offered to permit the issuance and resale of the Common Stock issuable upon
exercise of the Series A Warrants. However, there can be no assurance that the
Company will be in a position to effect such action under the federal and
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applicable state securities laws, and the failure of the Company to effect such
action may cause the exercise of the Series A Warrants and the resale or other
disposition of the Common Stock issued upon such exercise to become unlawful.
The Company may amend the terms of the Series A Warrants, but only by extending
the termination date or lowering the exercise price thereof. The Company has no
present intention of amending such terms.
Bridge Loan Securities
From October through December 1996, the Company sold $483,000 of Bridge
Loan Notes to provide working capital and funds for this Offering. The Bridge
Loan Notes are secured promissory notes bearing interest at the LIBOR rate and
are payable at the earlier of nine months from the date of issuance or closing
of this Offering. As additional consideration, the Company issued to the Bridge
Loan Note holders warrants to acquire, without additional cost, Units identical
to the Units offered hereby at the time the registration statement of which this
prospectus is a part becomes effective. The Bridge Loan units are included in
the Units offered hereby. See "Selling Security Holders."
Transfer Agent and Registrar; Warrant Agent
The Transfer Agent and Registrar for the Units, Common Stock and the
Warrant Agent for the Series A Warrants and the Underwriters' Warrants will be
American Stock Transfer & Trust Company, New York.
Reports to Shareholders
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
The Company has agreed, subject to the sale of the Units offered hereby,
that on the date of this Prospectus, it will register its Common Stock and
Series A Warrants under the provisions of Section 12(b) of the Exchange Act, and
that it will use its best efforts to continue to maintain such registration.
Such registration will require the Company to comply with periodic reporting,
proxy solicitation, and certain other requirements of the Exchange Act.
Boston Stock Exchange and NASDAQ Small-Cap Market
The Company is seeking approval for listing of the Units, Common Stock
and the Series A Warrants on the Boston Stock Exchange under the symbols ETS.U,
ETS, and ETS.W and on the NASDAQ Small-Cap Market under the symbols EATS.U, EATS
and EATS.W, respectively.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 4,091,000 shares
of Common Stock outstanding (4,254,650 shares if the Underwriters'
over-allotment option is exercised in full). Of the 4,091,000 shares of Common
Stock to be outstanding, the 1,091,000 shares to be sold in this Offering
(1,254,650 if the Underwriters' over-allotment option is exercised in full) will
be freely tradable in the public market without restriction under the Securities
Act, except shares purchased by an "affiliate" (as defined in the Securities Act
- - in general, a person who is in a control relationship with the Company) of the
Company. All of the remaining, 3,000,000 shares of Common Stock will be
"restricted shares" within the meaning of the Securities Act and may be publicly
sold only if registered under the Securities Act or sold in accordance with an
exemption from registration, such as those provided by Rule 144 promulgated
under the Securities Act. NEMC, which holds 1,947,603 shares of Common Stock,
has agreed that it will not, without the prior written consent of the
Representative, offer, sell or otherwise dispose of any shares of Common Stock
beneficially owned by it or acquired upon the exercise of stock options by its
principals for a period of two years after closing of this Offering.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) is entitled to sell restricted shares if at least
one year has passed since the later of the date such shares were acquired from
the Company or any affiliate of the Company. Rule 144 provides that within any
three-month period such person may sell only up to the greater of one percent
(1%) of the then outstanding shares of the Company's Common Stock (approximately
40,000 shares following completion of this Offering) or the average weekly
trading volume in the Company's Common Stock during the four calendar weeks
immediately preceding the date on which the notice of the sale is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
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certain other requirements relating to manner of sale, notice of sale and
availability of current public information. Any person who has not been an
affiliate of the Company for a period of three months preceding a sale of
restricted shares is entitled to sell such shares under Rule 144 without regard
to such limitations if at least two years have passed since the later of the
date such shares were acquired from the Company or any affiliate of the Company.
Shares held by persons who are deemed to be affiliates of the Company are
subject to such volume limitations regardless of how long they have been owned
or how they were acquired. The foregoing is a brief summary of certain
provisions of Rule 144 and is not intended to be a complete description thereof.
The 254,008 shares of Common Stock to be received by the holders of the
Convertible Preferred Stock and the 593,945 shares of Common Stock received by
the Note holders in the Exchange Offer will be restricted shares and will not be
eligible for sale pursuant to Rule 144 for one year from the date of this
Prospectus. The Company, however, has agreed with the holders of the Notes, to
register any shares they received in the Exchange Offer at any time after one
year from the date of this Prospectus upon the request of the holders of at
least 50% of the shares and the Representative has agreed to use its best
efforts to effect a firm commitment underwriting of such shares, subject to
favorable market conditions.
Prior to this Offering, there has been no public market for the Common
Stock, and no predictions can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. The sale, or availability for sale, of
substantial amounts of the Common Stock in the public market, including an
underwritten offering, could adversely affect prevailing market prices.
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UNDERWRITING
Pursuant to the terms and subject to the conditions contained in the
Underwriting Agreement, the Company and the Selling Security Holders have agreed
to sell on a firm commitment basis to the Underwriters named below, and each of
the Underwriters, for whom National Securities Corporation is acting as the
Representative, have severally agreed to purchase the number of Units set forth
opposite their names in the following table.
Underwriters Number of Units
National Securities Corporation
-----------
Total 1,091,000
The Representative has advised the Company that the Underwriters propose
to offer the Units to the public at the initial public offering price per share
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession of not more than $____per Unit, of which $ may be
reallowed to other dealers. After the Offering, the public offering price,
concession and reallowance to dealers may be reduced by the Representative. No
such reduction will change the amount of proceeds to be received by the Company
as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable
during the 45-day period after the date of this Prospectus, to purchase up to
163,650 additional Units to cover over-allotments, if any, at the offering price
to the public of the Units subject to this Prospectus less the Underwriting
Discount. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional Units that the number of Units to be purchased by
it shown in the above table represents as a percentage of the 1,091,000 Units
offered hereby. If purchased, such additional Units will be sold by the
Underwriters on the same terms as those on which the 1,091,000 Units are being
sold.
The Underwriters have the right to offer the Units offered hereby only
through licensed securities dealers in the United States who are members of the
National Association of Securities Dealers, Inc. (the "NASD") and may allow such
dealers such portion of its ten (10%) percent commission as each Underwriter may
determine.
The Underwriters will not confirm sales to any discretionary accounts.
The Company has agreed to pay the Representative a non-accountable
expense allowance of 2.5% of the gross amount of the Units sold ($177,288) upon
the sale of the Units offered) at the closing of the Offering. The Underwriters'
expenses in excess thereof will be paid by the Representative. To the extent
that the expenses of the underwriting are less than that amount, such excess
will be deemed to be additional compensation to the Underwriters.
The Company has agreed to enter into a consulting agreement with the
Representative at a rate of $2,500 per month for a period of 24 months.
For a period of 24 months following the completion of this Offering,
NEMC has agreed to vote its shares for election to the Board of Directors, a
person designated by the Representative and acceptable to the Company. Such
designee will have voting rights, will receive the same compensation as other
outside Directors, will be reimbursed for all out-of-pocket expenses incurred in
attending meetings, and will be indemnified by the Company against all claims,
liabilities, damages, costs and expenses arising out of his or her participation
at Board of Directors meetings.
The Underwriting Agreement provides for indemnification between the
Company and the Underwriters against certain civil liabilities, including
liabilities under the Securities Act. In addition, the Underwriters' Warrants
provide for indemnification among the Company and the holders of the
Underwriters' Warrants and underlying shares against certain civil liabilities,
including liabilities under the Securities Act and the Exchange Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
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advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Underwriters' Warrants
Upon the closing of this Offering, the Company has agreed to sell to the
Underwriters, for nominal consideration, warrants to purchase 10% of the number
of Units offered hereunder (the "Underwriters' Warrants"). The Underwriters'
Warrants are exercisable at 120% of the public offering price per Unit for a
four-year period commencing one year from the effective date of this Offering.
The Underwriters' Warrants may not be sold, transferred, assigned or
hypothecated for a period of one year from the date of this Offering except to
the officers of the Underwriters, their successors and dealers participating in
the Offering and/or the partners or officers of such dealers. The Underwriters'
Warrants will contain anti-dilution provisions providing for appropriate
adjustment of the number of shares subject to the Underwriters' Warrants under
certain circumstances. The holders of the Underwriters' Warrants will have no
voting, dividend or other rights as shareholders of the Company with respect to
shares underlying the Underwriters' Warrants until the Underwriters' Warrants
have been exercised.
The Underwriters' Warrants and the Securities issuable thereunder have
been registered under the Securities Act in connection with this Offering;
however, such Securities may not be offered for sale except in compliance with
the applicable provisions of the Securities Act. The Company is required to
register the Securities underlying the Underwriters Warrants commencing on the
first anniversary date of the effectiveness of this Offering. The Company is
also required to keep the registration statement registering the Securities
effective until the fifth anniversary of the effective date of this Offering.
For the exercise period during which the Underwriters' Warrants are exercisable,
the holder or holders will have the opportunity to profit from a rise in the
market value of the Common Stock, with a resulting dilution in the interest of
the other stockholders of the Company. The holder or holders of the
Underwriters' Warrants can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital from an
offering of its unissued Common Stock on terms more favorable to the Company
than those provided for in the Underwriters' Warrants. Such factors may
adversely affect the terms on which the Company can obtain additional financing.
To the extent that the Underwriters realize any gain from the resale of the
Underwriters' Warrants or the securities issuable thereunder, such gain may be
deemed additional underwriting compensation under the Securities Act.
Determination of Offering Price
Prior to this Offering, there has been no public market for the
securities offered and there can be no assurance that a regular trading market
will develop upon completion of the Offering. Consequently, purchasers of the
Units may not find a ready market for the sale of their securities. The initial
public offering price for the Units will be determined by negotiation between
the Company and the Representative. The factors to be considered in determining
the initial public offering price include the Company's revenue growth since its
organization, the industry in which it operates, the Company's business
potential and earnings prospects and the general condition of the securities
markets at the time of the Offering. The initial public offering price does not
necessarily bear any relationship to the Company's assets, book value, net worth
or other recognized objective value.
57
<PAGE>
LEGAL MATTERS
Certain matters with respect to the validity of the securities offered
hereby will be passed upon for the Company by Maurice J. Bates, L.L.C., Dallas,
Texas 75225. Certain legal matters will be passed upon for the Underwriters by
Winstead Sechrest & Minick P. C., Dallas, Texas.
EXPERTS
The Consolidated Financial Statements of Butterwings Entertainment
Group, Inc. and Subsidiaries at December 29, 1996 and December 31, 1995 and for
the fiscal years then ended, appearing in this Prospectus, have been audited by
McGladrey & Pullen, LLP, independent accountants, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given on authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form SB-2 under the Securities Act
with respect to the Units. This Prospectus does not contain all of the
information set forth in the registration statement and the exhibits. For
further information with respect to the Company and the Units, reference is made
to the registration statement and the exhibits filed as a part thereof.
Statements made in this 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 document filed as an exhibit
to the registration statement, each such statement being qualified in all
respects by such reference to such exhibit. The registration statement,
including exhibits thereto, may be inspected without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, NW, Washington, DC 20549 and at the regional offices of the
Commission at 7 World Trade Center, 13th Floor, New York, New York 10048 and at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
registration statement and the exhibits thereto may be obtained from the
Commission at such offices upon payment of prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the
Commission. The address of such Web site is http;// www.sec.gov.
The Company is not presently a reporting company. The Company intends to
register the securities offered hereby under the Securities Exchange Act of
1934, as amended, simultaneously with the effectiveness of the Registration
Statement of which this Prospectus is a part. As a result, the Company will
become a reporting Company.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
58
<PAGE>
CONTENTS
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditor's Report...............................................................F-3
Consolidated Balance Sheets as of December 29, 1996
and December 31, 1995.................................................................... F-4
Consolidated Statements of Operations for the Fiscal Years Ended
December 29, 1996 and December 31, 1995.................................................. F-6
Consolidated Statement of Stockholders' Equity (Deficit) for the Fiscal Years Ended
December 29, 1996 and December 31, 1995.................................................. F-7
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 29, 1996 and December 31, 1995.................................................. F-8
Notes to the Consolidated Financial Statements........................................... F-10
UNAUDITED FINANCIAL STATEMENTS........................................................... F-28
Consolidated Balance Sheets as of April 20,1997 (Unaudited)
And December 29,1996.................................................................... F-29
Consolidated Statements of Operations for the Sixteen
Week Period Ended April 20, 1997 (Unaudited) and April 21, 1996 (Unaudited)............. F-31
Consolidated Statement of Stockholders' Equity (Deficit) for
The Sixteen Week Period Ended April 20, 1997............................................ F-32
Consolidated Cash Flows For the Sixteen Week Periods Ended
April 20, 1997 (Unaudited) and April 21,1996 (Unaudited) ............................... F-33
Notes to the Consolidated Financial Statements (Unaudited)............................... F-35
PRO FORMA FINANCIAL STATEMENTS........................................................... F-36
Pro Forma Consolidated Balance Sheet as
of April 20, 1997 (Unaudited)........................................................... F-37
Pro Forma Consolidated Statements of Operations
for the Sixteen Weeks Ended April 20, 1997 (Unaudited)................................. F-39
Pro Forma Consolidated Statements of Operations
for the Fiscal Year Ended December 29,1996 (Unaudited)................................. F-40
</TABLE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 29, 1996
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Butterwings Entertainment Group, Inc. and Subsidiaries
Hoffman Estates, Illinois
We have audited the accompanying consolidated balance sheets of Butterwings
Entertainment Group, Inc. and subsidiaries as of December 29, 1996, and December
31, 1995, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years then ended. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Butterwings
Entertainment Group, Inc. and Subsidiaries as of December 29, 1996 and December
31, 1995, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 20 to the
financial statements, the Company has suffered recurring losses from operations,
is in default on its debt, and its total liabilities exceed its total assets.
This raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are described in Note 20.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Schaumburg, Illinois /s/McGladrey & Pullen, LLP
March 6, 1997.
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995
----------------- -----------------
ASSETS
<S> <C> <C>
Current Assets
Cash $ 534,072 $ 774,157
Accounts receivable 3,137 70,736
Inventories 118,647 139,605
Prepaid expenses 46,032 55,823
Assets available for sale - 62,500
Income tax receivable 17,925 8,700
------ -----
Total current assets 719,813 1,111,521
------- ---------
Leasehold Improvements and Equipment
Leasehold improvements 1,898,818 1,771,947
Equipment 1,034,568 1,175,620
--------- ---------
2,933,386 2,947,567
Less accumulated depreciation and amortization 619,141 258,534
------- -------
2,314,245 2,689,033
--------- ---------
Deferred Income Taxes - 17,150
---- ------
Other Assets
Initial public offering expenses 240,408 -
Deposits 124,437 126,088
Franchise costs, net of accumulated amortization
of $52,341 and $23,415 respectively 497,659 746,585
Finance costs, net of accumulated amortization
of $194,213 and $121,719, respectively 309,740 382,234
Organization costs, net of accumulated amortization
of $15,859 and $7,035, respectively 26,011 34,835
Goodwill, net of accumulated amortization
of $79,320 and $18,890, respectively 839,242 899,672
Bridge loan financing costs net of
accumulated amortization of $206,831 434,646 -
------- -
$ 5,506,201 $ 6,007,118
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current Liabilities
Current maturities of long-term debt $ 4,288,063 $ 59,574
Due to parent 134,469 43,006
Accounts payable 390,149 461,372
Accrued liabilities 694,754
383,797
Income taxes payable 17,150
-
Total current liabilities 5,507,435 964,899
--------- -------
Long-term debt, less current maturities 128,721 3,959,515
Store closing expense 393,000
------- -
521,721 3,959,515
------- ---------
Redeemable Preferred Stock of subsidiary, $100 par value,
100,000 authorized, 16,900 and 16,650 shares
issued and outstanding, respectively 1,690,000 1,665,000
--------- ---------
Stockholders' Equity (Deficit)
Preferred Stock no par value, 27,500 shares
of 10% convertible preferred stock
authorized, 15,685 and 12,660 shares,
issued and outstanding, respectively 1,568,500 1,266,000
Common stock, $0.01 par value, 10,000,000 shares
authorized, 2,152,047 and 1,947,600 shares
issued and outstanding, respectively 21,520 19,476
Capital in excess of par value 1,564,979 595,523
Unearned compensation expense (127,000) -
Accumulated deficit (5,240,954) (2,463,295)
---------- ----------
(2,212,955) (582,296)
------------ -------------
$ 5,506,201 $ 6,007,118
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Fiscal Years Ended
December 29, December 31,
1996 1995
---- ----
<S> <C> <C>
Sales $8,551,033 $7,730,956
Costs and expenses:
Cost of products sold 2,454,078 2,316,341
Salaries and benefits 2,472,022 2,147,595
Other operating costs 2,911,454 2,525,486
Depreciation and amortization 479,840 256,142
Pre-opening costs 153,334
-
General and administrative expenses 996,200 566,918
Write off of franchise fee options 145,000 -
Provisions for losses on leased
property 927,148
145,000
Loss on impairment of assets 159,474
-
Total costs and expenses 10,385,742 8,270,290
Operating (Loss) (1,834,709) (539,334)
---------- --------
Financial income (expense):
Interest income 17,963 25,499
Interest expense (493,279) (480,958)
Amortization of finance costs (279,324) (72,493)
-------- -------
(754,640) (527,952)
-------- --------
Net (Loss) (Income taxes $0 for all periods
presented) before redeemable preferred
stock dividends of subsidiary (2,589,349) (1,067,286)
---------- ----------
Redeemable preferred stock dividends of subsidiary (167,910) (86,388)
-------- -------
Net (Loss) $(2,757,259) $(1,153,674)
=========== ===========
Net (loss) per common share $ (1.23) $ (.51)
======== =======
Weighted average number of
shares outstanding 2,250,736 2,250,736
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Unearned Total
Preferred Common Compensation Accumulated Stockholders'
Stock Stock Expense Deficit Equity (Deficit)
----- ----- ------- ------- ----------------
In
Par Excess
Value Of Par
----- ------
<S> <C> <C> <C> <C>
Balance, December 25, 1994 $ $ 21,640 $ 528,360 $ $ (880,663) $(330,663)
- -
Issuance of subsidiary
common stock - - 15,000 - - 15,000
Sale of 12,660 shares of
preferred
stock 1,266,000 - - - (212,960) 1,053,040
Issuance costs related to
redeemable preferred stock - - - - (200,998) (200,998)
Redemption of 216,400 shares
of common stock - (2,164) 2,163 - - (1)
Contributed services - - 50,000 - - 50,000
Common stock dividends
of subsidiary - - - - (15,000) (15,000)
Net (loss) (1,153,674) (1,153,674)
---- ---- ---- ---- ---------- ----------
Balance, December 31, 1995 1,266,000 19,476 595,523 - (2,463,295) (582,296)
Issuance costs related to
redeemable
preferred stock - - - - (2,250) (2,250)
Sale of 3,025 shares of 302,500 - - (18,150) 284,350
preferred stock -
Sale of 204,444 shares of
common
stock - 2,044 127,956 - - 130,000
Stock options-compensation - - 150,000 (127,000) - 23,000
costs
Contributed services - - 100,000 - - 100,000
Bridge loan - - 591,500 - - 591,500
warrants
Net (loss)
- - - - (2,757,259) (2,757,259)
---- ---- ---- ---- ---------- ----------
Balance, December 29, 1996 $ 1,568,500 $ 21,520 $ 1,564,979 $ (127,000) $(5,240,954) $(2,212,955)
=========== ========= =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Fiscal Years Ended
December 29, December 31,
1996 1995
---- ----
Cash Flows from Operating Activities:
<S> <C> <C>
Net (loss) $(2,757,259) $ (1,153,674)
Adjustments to reconcile net (loss)
to net cash (used in) operating activities:
Depreciation and amortization 768,596 334,240
Provisions for losses on leased property 927,148 145,000
Contributed Services 100,000 50,000
Write off of franchise fees and options 145,000 -
Loss on impairment of asset - 159,474
Deferred income taxes - (17,150)
Compensation expenses - stock options 23,000 -
Changes in operating assets and liabilities:
Accounts receivable 67,599 (61,172)
Inventories 20,958 78,531
Prepaid expenses 9,791 (53,683)
Income tax deposits 7,925 25
Income taxes payable (17,150) 17,150
Accounts payable (71,223) 124,604
Accrued liabilities 103,957 216,215
Due to parent 91,463 (753)
------ ----
Net cash (used in) operating activities (580,195) (161,193)
-------- --------
Cash Flows from Investing Activities:
Acquisition of stores net of $1,500 of cash
acquired (includes assets available for
sale of $62,500) - (2,199,548)
Deposits 1,652 5,718
Organizational costs - (30,032)
Leasehold improvements and equipment (268,452) (591,034)
Franchise costs - (35,000)
Collection of receivable from lessor 100,000
-
Disposition of assets available for sale 62,500 -
------ ------
Net cash (used in) investing activities $ (204,300) $ (2,749,896)
----------- ------------
</TABLE>
Continued on page F-9
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued from page F-8)
<TABLE>
<CAPTION>
For the Fiscal Years Ended
-------------------------------
December 29, December 31,
------------ ------------
1996 1995
---- ----
Cash Flows from Financing Activities:
<S> <C> <C>
Borrowing from franchisor $ - $600,000
Payments on borrowings from franchisor - (600,000)
Borrowings from sole stockholder 100,000 500,000
Payments on borrowings from sole stockholder (100,000) (500,000)
Proceeds from long-term debt - 25,000
Payments of long-term debt (85,305) (48,723)
Proceeds from sale of common stock 130,000 15,000
Redemption of common stock - (1)
Proceeds from issuance of preferred
stock, net 307,100 2,517,042
Proceeds from bridge loans 483,000 -
Bridge loan commissions (49,977) -
Payments of prepaid initial public offering (240,408) -
expense
Dividends paid on common stock of subsidiary - (15,000)
----------- -------
Net cash provided by financing activities 544,410 2,493,318
------- ---------
Net (decrease) in cash (240,085) (417,771)
Cash:
Beginning of period 774,157 1,191,928
------- ---------
Ending of period $ 534,072 $ 774,157
=========== ==========
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest $ 187,814 $ 480,295
=========== ===========
Supplemental Schedule of Non Cash Investing and
Financing Activity
Capital Lease Obligations
Incurred for Purchase of Equipment $ 203,164
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Butterwings Entertainment Group, Inc. (Butterwings) was formed July 29,
1993, and incorporated in the State of Illinois. Operations commenced in
1994. Butterwings is a 90.5% owned subsidiary of New Era Management
Corporation (parent). Butterwings entered into franchise agreements with
Hooters of America, Inc. by which Butterwings received the right to
establish and operate restaurants in Wisconsin and Southern California.
During 1994 Butterwings opened three Hooters restaurants as follows: one in
April, one in September and another in December. A fourth restaurant opened
in May, 1995 and was closed in September 1996 (see Note 11).
Butterwings also acquired a Mrs. Fields cookie store in 1995.
On October 18, 1996, Butterwings acquired 100% of the outstanding common
stock of Cookie Crumbs, Inc. (CCI) (wholly owned by a stockholder of
Butterwings and the parent) for $1. The transaction was accounted for as an
exchange of common stock between entities under common control. This
resulted in assets being transferred at historical cost and accounting
similar to a pooling. The consolidated financial statements have been
restated to include the results of operations as if the transaction occurred
upon incorporation of CCI. CCI was formed May 17, 1995, and incorporated in
the State of Illinois. CCI was formed to acquire and operate a minimum of
six cookie store facilities which meet the plans and specifications for
franchised Mrs. Fields Cookie Stores in the St. Louis, Missouri area. In
October 1995, CCI acquired six existing franchised Mrs. Fields cookie stores
in Minnesota. These six stores were transferred to Butterwings at historical
cost effective January 1, 1996. Included in the Statement of Operations are
net losses for CCI of $(297,218) and $(211,552) for the fiscal years ended
December 29, 1996 and December 31, 1995, respectively. There were no
adjustments to income.
Significant accounting policies are as follows:
Principles of Consolidation: The financial statements include the accounts
and results of operations of Butterwings and its wholly-owned subsidiaries,
Butterwings of Wisconsin, Butterwings of California and CCI, collectively
referred to as the Company. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Fiscal Year: The Company's fiscal year is the 52/53-week period ending on
the last Sunday in December. The first quarter consists of four, four-week
periods and each of the remaining three quarters consists of the three,
four-week periods, with the first, second, and third quarters ending 16
weeks, 28 weeks, and 40 weeks, respectively, into the fiscal year.
The financial statements presented for the fiscal years ended December 29,
1996 and December 31, 1995 are comprised of 52 and 53 weeks, respectively.
F10
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (continued)
Concentration of Cash: The Company had approximately $283,000 at two
financial institutions and $533,000 at two financial institutions on deposit
at December 29, 1996 and December 31, 1995, respectively.
Inventories: Inventories consisting of food, beverages, and novelty items,
are stated at the lower of cost or market on a first-in, first-out basis.
Cost is determined by the actual invoice price.
Leasehold Improvements and Equipment: Leasehold improvements and equipment
are carried at cost and are depreciated using the straight-line method over
the estimated useful lives of the assets. In general, the assets have the
following lives:
Leasehold improvements over lease term (not to exceed 8 years)
Equipment 3 years used/8 years new
Depreciation of these assets coincides with each restaurant's or store's
commencement of operations or purchase. Amortization on leased assets is
included with depreciation and amortization on owned assets.
Franchise Costs: Franchise costs represent payments made for the rights to
operate either restaurant facilities or cookie stores meeting the plans and
specifications of the respective franchisor. Franchise costs for a
restaurant are amortized to expense using the straight-line method over a
20-year period commencing with the opening of the restaurant. Franchise
costs for a cookie store are amortized to expense using the straight-line
method over a 15-year period commencing with the purchase of the cookie
store.
Finance Costs: Finance costs represent legal, accounting, regulatory and
blue sky expenses, printing costs, expense reimbursements and commissions
paid to brokers in connection with the issuance of Secured Promissory Notes.
These costs are amortized to expense using the straight-line method over a
seven-year period coinciding with the life of the notes.
Organization Costs: Organization costs are one-time costs related to the
formation of Butterwings and its subsidiaries which are being amortized to
expense using the straight-line method over a five-year period commencing
with the opening of the first restaurant or cookie store for each entity.
F-11
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 1.Nature of Business and Significant Accounting Policies (continued)
Goodwill: The Company has classified as goodwill the cost in excess of fair
value of the net assets of the cookie stores acquired in purchase
transactions. Goodwill is being amortized on a straight-line method over 15
years commencing with the purchase of the stores.
Offering Expenses: Offering expenses incurred by Butterwings in connection
with the issuance of non-redeemable convertible preferred stock have been
charged to accumulated deficit as there is no preferred capital in excess of
par value. Offering expenses incurred by CCI in connection with the issuance
of preferred stock have been charged directly to accumulated deficit because
the preferred stock is redeemable. Offering expenses include legal,
accounting, escrow, regulatory and blue sky expenses, printing costs,
expense reimbursements and commissions paid to brokers.
Impairment of Long Lived Assets: Long lived assets are evaluated for
impairment based on a periodic analysis of cash flows on a location by
location basis.
Accounting Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of income and expenses during the reporting year. Actual results could
differ from those estimates.
Financial Instruments: The Company has no financial instruments for which
the carrying value differs from fair value.
Income Taxes: Butterwing's results for the entire year are included in the
parent's consolidated tax return. CCI is not part of the consolidated group
for tax purposes. Intercorporate tax allocation practices adopted by
Butterwings and its parent provide that to the extent the Company has
income, taxes related to such income will be reflected in the Company's
financial statements and paid by the Company. The tax benefit of losses, if
any, will be reflected in the Company's financial statements and paid to the
Company by the parent if: a) the Company would otherwise be entitled to such
benefits if it were filing a separate tax return, b) the parent has received
benefit of such losses on a consolidated basis, and c) the Company continues
to be included in the parent's consolidated tax return. If the Company is no
longer part of the parent's consolidated tax return, then the Company will
receive no benefit of its losses used by the parent on a consolidated tax
return basis.
F-12
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 1.Nature of Business and Significant Accounting Policies (continued)
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Stock Compensation: During October 1995, the FASB issued FAS 123, Accounting
for Stock-Based Compensation. FAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans (See Note
17) and also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees (See Note 2).
FAS 123 is effective for transactions entered into in fiscal years beginning
after December 15, 1995. The Company has adopted the provisions of FAS 123
for non-employee stock transactions and has elected to apply APB opinion No.
25 for its stock compensation plan.
Per Share Data: Net (loss) per common share is calculated based on the
weighted average number of shares of common stock outstanding. The weighted
average number of shares has been adjusted to reflect as outstanding, for
each period presented using the treasury stock method at the estimated
initial public offering (IPO) price ($6.50 per share), the 204,444 shares
issued in September, 1996 (See Note 16), all shares issuable upon the
exercise of stock options subsequent to December 29, 1996, and bridge loan
shares to be issued in conjunction with the IPO (See Note 2).
Reclassification: Certain items for the 1995 financial statements have been
reclassified to conform with the 1996 presentation.
F-13
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 2.Long-Term Debt
Long-term debt consists of the following at
<TABLE>
<CAPTION>
December 29, 1996 December 31,1995
----------------- ----------------
<S> <C> <C>
Secured promissory notes $3,700,000 $3,700,000 (a)
Bridge loan 483,000 --
Capitalized equipment leases 233,784 319,089
----------- ------------
Total long-term debt 4,416,784 4,019,089
Current maturities 4,288,063 59,574
--------- ----------
Long-term debt, net of current maturities $ 128,721 $ 3,959,515
=========== ===========
</TABLE>
(a) Long term at December 31, 1995
Secured Promissory Notes issued in May 1994 mature April 2001, bear interest
at 12% per annum, are collateralized by all assets of Butterwings, and until
retired entitle the note holders to receive 5% of the pre-tax profits of
Butterwings (none as of December 29, 1996). The notes provide for monthly
payments of interest only from date of issuance for 48 months and
thereafter, 36 equal monthly payments of principal and interest. The Secured
Promissory Notes may be prepaid by Butterwings at any time at a redemption
price of 103% of face value. The notes are secured senior obligations of
Butterwings and rank senior to all existing and future unsecured
indebtedness of Butterwings provided, however, that Butterwings may issue
additional debt instruments through private or public debt offerings for the
purpose of opening Hooters restaurant franchises in which the additional
debt will rank equal to the notes. The notes contain covenants which may
limit the incurrence of additional debt, the payment of dividends, the
making of other distributions, and the ability to enter into certain
transactions with affiliates or merge, consolidate or transfer substantially
all of the assets of Butterwings.
On May 1, 1996, payments of interest on the Secured Promissory Notes were
suspended to conserve cash for operating purposes. Per the agency agreement
for the Secured Promissory Notes, an event of default occurs upon failure by
Butterwings to pay interest on the notes when it becomes due and payable and
the continuance of such failure for 90 days. If an event of default occurs
and is continuing, the noteholders' agent by notice to Butterwings, or the
noteholders of at least 25% of the principal amount of the notes by notice
to Butterwings and the agent, may declare the notes and accrued interest to
be due and payable immediately. As of March 6, 1997 Butterwings has not
received notice of acceleration from either the noteholders' agent or the
noteholders. The notes have been classified as current liabilities as of
December 29, 1996 and as of this date, accrued and unpaid interest on these
notes is $330,964. (See Note 18.)
F-14
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 2. Long-Term Debt (continued)
From October 1996 through December 1996, the Company has received $483,000
in bridge loan financing from a group of lenders. These borrowings bear
interest at the LIBOR rate and are due on the earlier of the close of the
Company's initial public offering (IPO) (see Note 18) or nine months from
the date of issuance. In conjunction with this financing, the Company will
issue as compensation to the lender ninety one thousand (91,000) shares of
the Company's common stock to be sold in conjunction with the Company's IPO.
The compensation of $591,500 (91,000 shares at $6.50 per share) has been
recognized as deferred financing cost and as additional capital in excess of
par value at December 29, 1996. This deferred charge and other financing
costs of $49,977 are being charged to operations over the estimated life of
the bridge loan.
Various equipment with a cost of $376,164 and accumulated amortization of
$78,700 at December 29, 1996 and $33,596 at December 31, 1995 is recorded
under capital leases. The capitalized leases provide for 36 to 60 equal
monthly payments including imputed interest at 12% per annum. Upon maturity,
ownership of the equipment is transferred to the Company. The leases are
subordinate to the Secured Promissory Notes described above. Future lease
payments for capital leases are as follows:
<TABLE>
<CAPTION>
As of
-- --
December 29, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Fiscal years ending:
1996 $ - $ 124,786
1997 128,676 128,670
1998 108,164 94,483
1999 39,400 39,400
---------- ----------
276,240 387,339
Less amount representing interest 42,456 68,250
----------- ---------
$ 233,784 $ 319,089
========= =========
</TABLE>
F-15
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 3. CCI Redeemable Preferred Stock Offering
From June 20, 1995 to January 25, 1996, CCI offered through a private
placement a maximum of $4,000,000 of its 10% participating preferred stock
at an offering price of $100 per share exclusively to accredited investors.
The redemption price of the preferred stock equals its par value plus any
accrued and unpaid dividends and can be redeemed at any time after January
31, 1998, at the option of the Investor during any fiscal year in which CCI
under certain conditions has net income in excess of required dividend
distributions, including unpaid cumulative regular dividends, provided,
however, that CCI has no obligation to apply more than 25% of its net income
(adjusted as aforesaid) for its prior fiscal year towards the redemption of
any shares so surrendered for redemption. Similarly, at any time after
January 31, 1998, the preferred stock is redeemable, in whole or in part, at
the option of CCI under certain conditions, for an amount equal to the
redemption value plus 3% of the offering price of such shares. In the event
of a sale of substantially all of the assets and liquidation of CCI, the
liquidation value of the preferred stock is equal to the redemption price
plus, pro rata, 10% of the proceeds from the sale up to 8% of the par value.
Holders of the shares will be entitled to receive, to the extent declared by
CCI's Board of Directors, noncompounded, cumulative dividends in an amount
equal to 10% per annum of the offering price of the shares. In addition,
holders of shares will be entitled to receive, to the extent declared by
CCI's Board of Directors, on a pro rata basis, an additional dividend
(Participating Dividend) in respect of each fiscal year of CCI in an amount
equal to 10% of CCI's net income for such year determined in accordance with
generally accepted accounting principles provided, however, in no event
shall the Participating Dividend, if any, exceed 8% of the Offering Price.
The Participating Dividend shall be noncumulative and noncompounded. The
shares have no voting rights.
CCI paid $201,748 of costs and expenses in connection with this offering. A
total of $1,690,000 ($1,488,252 net of expenses) was raised through this
offering.
F-16
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 4. Non-redeemable Preferred Stock Offering
From September 25, 1995 to March 13, 1996, Butterwings sold $1,568,500
($1,337,390 net of offering expenses) of its 10% Convertible Preferred Stock
through a private placement at a price of $100 per share to accredited
investors. The shares are non redeemable and have no voting rights. Holders
of the shares will be entitled to receive, to the extent declared by
Butterwings' Board of Directors, non-compounded, cumulative dividends in an
amount equal to 10% per annum on the offering price of the shares. Each
share is convertible into shares of Butterwings' common stock upon the
consummation of the first sale of common stock by Butterwings to
underwriters for the account of Butterwings pursuant to a registration
statement under the 1933 Act filed with and declared effective by the
Securities and Exchange Commission (see Note 18). The number of shares of
common stock to be issued to each holder of the preferred stock upon
conversion will be determined by dividing the offering price of the
preferred by an amount equal to 95% of the sale price per share of common
stock at the time of the initial public offering.
Butterwings paid a commission to the selling agent of 6% of the gross
proceeds of each of the shares sold. In addition, expenses of approximately
$137,000 were incurred in connection with this offering.
Note 5. Lease Commitments
The Company leases a number of facilities under non cancelable leases
ranging from four to ten years. Most of these leases contain renewal options
which can extend the lease from ten to fifteen years. Some of these leases
contain escalation clauses to cover future operating cost increases while
other leases provide for a percentage of gross sales in excess of minimum
levels. The minimum levels were not met for the fiscal years ended December
29, 1996 and December 31, 1995. Several of these leases have been guaranteed
by the parent. In connection with the rental of one facility, an irrevocable
letter of credit in the amount of $83,000 has been issued by a financial
institution on behalf of the Company securing payment of future rent. The
letter of credit is collateralized by an interest-bearing deposit of
$83,000. All of the leases require the Company to pay real estate taxes,
insurance and maintenance on the respective properties. The leases for the
cookie stores also provide the lessor with the ability to charge an
additional percentage rent for general advertising costs.
F-17
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 5.Lease Commitments (continued)
Future minimum rentals under these leases are as follows:
<TABLE>
<CAPTION>
As of
-- --
December 29, 1996(a) December 31, 1995
-------- ----------- -----------------
<S> <C> <C>
Fiscal years ending:
1996 $ - $ 944,564
1997 796,591 984,704
1998 812,996 1,008,148
1999 645,936 814,284
2000 591,485 510,739
Subsequent years 872,442 1,576,785
------------ ------------
$3,719,450 $5,839,224
========== ==========
</TABLE>
(a) Excludes amounts related to leased properties discussed in Notes 10 and 11.
The total rent expense included in the statements of operations is
approximately $1,048,000 and $515,000 for the fiscal years ended December
29, 1996 and December 31, 1995, respectively.
Note 6.Franchise Agreements
The Company operates under franchise agreements with each franchisor. In
addition to an initial franchise fee for each location, the Company is
required to pay the respective franchisor additional fees for royalties and
advertising based on a percentage of sales. These fees totalled $487,449 and
$486,266 for the fiscal years ended December 29, 1996 and December 31, 1995
respectively. The franchise agreement also provides that all cookie
materials be purchased from one vendor specified in the agreement.
F-18
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 7.Deferred Income Taxes
The Company accounts for deferred income taxes under the liability method.
As explained in Note 1, the liability method requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the reported amounts of assets and
liabilities and their tax bases. The sources of these differences as of
December 29, 1996 and December 31, 1995 and the tax effect for each were as
follows:
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Loss on impairment of assets $ 279,140 $ 63,790
Other assets 121,744 142,708
Tax credit carryforwards 95,516 93,897
Accrued expenses 40,000 58,000
Net operating loss carryforwards 1,391,030 567,258
---------- ------------
1,927,430 925,653
Valuation allowance (1,805,642) (805,212)
---------- --------
121,788 120,441
Deferred tax liability:
Leasehold improvements and equipment 121,788 103,291
----------- ------------
$ -- $ 17,150
=============== ============
</TABLE>
No income taxes are reflected on the Statement of Operation for the year
ended December 31,1995 as they have been eliminated by an increase in the
valuation allowance of approximatey $468,000. Reconciliation of income tax
expense computed at the statutory federal income tax rate to the Company's
income tax expense is as follows:
December 29, 1996
-----------------
Computed "expected' tax expense $(880,379)
Increase (decrease) in income taxes resulting from:
Non deductible expenses 30,888
Lower bracket taxes (4,303)
State income taxes, net of federal tax benefit (140,009)
Tax credit generated (15,233)
Valuation allowance 1,000,430
---------
$ 0
============
F-19
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 7. Deferred Income Taxes (continued)
The Company has net operating loss carryforwards of approximately $3,470,000
of which $2,140,000 have been or are expected to be utilized in the parent's
consolidated tax return. As discussed in Note 1, once the Company's IPO
becomes effective (See Note 18) the Company will receive no benefit from the
$2,140,000 of tax losses which have been utilized on a consolidated basis.
The remaining $1,330,000 of net operating loss carryforwards that have not
been utilized in the parent's consolidated tax return may be utilized by the
Company until their expiration in 2011. After the IPO, the net operating
loss amount available for use each year may be limited if ownership changes
by more than 50%. CCI files a separate tax return and has net operating loss
carryforwards of $286,000 which expire 2011.
Note 8.Related Party Transactions
The Company pays a monthly amount to the parent for ongoing rent and
accounting services. Total charges by the parent to the Company were
$246,619 for the fiscal year ended December 29, 1996 and $138,524 for the
fiscal year ended December 31, 1995. At December 29, 1996 and December 31,
1995, the amounts due the parent were $134,469 and $43,006, respectively.
Management believes services being provided from the parent are at fair
value. Beginning in October 1996, all activities and costs related to
accounting services have been incurred directly by the Company.
In connection with a private placement of CCI preferred stock, a company
related through common ownership was used to provide financial advisory and
investor relations services for a charge of 3% of gross proceeds raised by
the offering. Total charges by the related company in connection with the
offering were approximately $50,000.
Note 9.Purchase of Franchised Cookie Stores
In two separate purchase transactions during the fiscal year ended December
31, 1995, CCI entered into a purchase and franchise agreement with Mrs.
Fields Development Corporation by which CCI acquired thirteen operating
cookie stores for $1,836,375 cash. Six of these cookie stores were
subsequently sold to Butterwings on January 1, 1996 at CCI's historical
cost.
F-20
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 9.Purchase of Franchised Cookie Stores (continued)
In October 1995, Butterwings entered into a purchase and franchise agreement
with Mrs. Fields Development Corporation by which Butterwings purchased one
existing cookie store in Flint, Michigan for $364,673 cash.
The aggregate assets acquired were as follows:
Cash $ 1,500
Deposits 8,916
Inventory 36,500
Equipment and leaseholds 888,869
Franchise fees 350,000
Goodwill 915,263
-----------
$2,201,048
These transactions were accounted for using the purchase method of
accounting and therefore the purchase price was allocated to the assets
acquired based on their fair market values. The financial statements include
the results of operation of the acquired business since the date of
acquisitions.
Note 10. Provision for Loss on Leased Property
During 1995, the Company provided a $145,000 allowance for loss on leased
property which the Company no longer planned to develop. The allowance
represents management's estimate of loss, including loss on purchased
leasehold improvements, carrying costs, and commissions. During September
1996, the Company executed a sublease whereby the sublessee will pay
substantially all amounts due under the original lease agreement for the
remaining lease term. Under certain conditions, the sublessee may terminate
the lease in September 1998 causing the Company to be liable for the
remaining rentals of $5,184 per month through September 30, 2003, equivalent
to $311,040. During 1996 the Company provided an additional $50,000 to the
allowance for loss.
The remaining provision at December 29, 1996 is $168,523.
Note 11. Provision for Restaurant Closing
During first quarter 1996, the Company recognized a long lived asset charge
of $327,148 related to one of its Hooters restaurants. A loss was recognized
for the carrying amount of the equipment, building improvements, and
franchise fee related to the restaurant. In addition, a $100,000 provision
was established for probable future expenses primarily related to vacating
the lease of this location.
F-21
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 11. Provision for Restaurant Closing (continued)
During the third quarter of 1996, the Company closed the restaurant and
entered into an agreement with the landlord to vacate the lease agreement.
Under the terms of the agreement, were surrender to the landlord all
leasehold improvements and equipment housed at the site and the Company is
obligated to pay the landlord $4,750 per month from August 1, 1996 through
June 30, 2005. Accordingly, the Company recorded an additional provision of
$450,000 to provide for the settlement and all costs and expenses associated
with the closing of the site. The remaining provision at December 29, 1996
is $529,327.
Note 12. Write off of Franchise Fee Options
During third quarter 1996, the Company recognized a charge to operations of
$145,000 for the franchise fee options paid in contemplation of building
additional Hooters restaurants. This write down was recorded because, under
existing agreements with Hooters, the Company may have no options to build
additional restaurants.
Note 13. Disposal of Assets
On October 26, 1996, CCI sold a cookie store for $62,500 to an unrelated
party. Since the carrying value of the assets of this store at December 31,
1995 were $221,974, a loss on impairment of assets of $159,474 has been
recognized in the Statement of Operations for the period ending December 31,
1995. Also included in the Statement of Operations for the periods ending
December 31, 1995 and December 29, 1996, are sales of $74,279 and $141,812,
respectively, and income (loss) from operations of $74 and $(14,146),
respectively, attributable to this store.
Note 14. Contributed Services of Officers
The Company's officers have not received compensation for services provided
by them since inception of the Company. Accordingly, in order for the
financial statements to reflect reasonable compensation levels, capital
contributions of $100,000 for the fiscal year ended December 29, 1996 and
$50,000 for the fiscal year ended December 31, 1995 have been recorded to
reflect the fair market value of such services. Offsetting amounts have been
included in general and administrative in the accompanying statements of
operations.
F-22
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 15. Changes in Authorized and Issued Common Stock
In October, 1996, the Company changed its common stock, no par value, 1,000
shares authorized to a par value of $.01 per share with 10,000,000 shares
authorized. In connection with this change, 21,640 shares of the new common
stock were issued for each share of the old common stock outstanding. This
change has been retroactively reflected in the accompanying financial
statements.
Note 16. Sale of Common Stock
As a result of an option issued by the Company on July 11, 1996, 204,444
shares of common stock were sold to an independent investor for $130,000 in
September 1996.
Note 17. Stock Compensation Plan
The 1996 Stock Compensation Plan ("Plan") was approved by stockholders of
Butterwings on November 14, 1996. Accordingly, there will be reserved for
the use upon the exercise of options to be granted from time to time under
the Plan, an aggregate of two hundred thousand (200,000) shares of common
stock, $.01 par value, which shares in whole or in part shall be authorized,
but unissued, shares of common stock or issued shares of common stock which
shall have been reacquired by Butterwings as determined from time to time by
the Board of Directors of Butterwings. On November 14, 1996, the Board of
Directors approved the grant of 100,000 shares to employees, officers and
directors at a price of $5.00 per share which become exercisable one year
from date of grant and expire ten years from the date of grant.
The Company has elected to apply APB Opinion No. 25 and related
interpretations in accounting for its plan. Currently Butterwings
anticipates selling its common stock at a price of $6.50 per share in an
initial public offering in 1997 (see Note 18). Accordingly, compensation has
been recognized in the accompanying financial statements by charging general
and administrative $23,000 for the fiscal year ended December 29, 1996 and
recording additional capital in excess of par value of $150,000 offset by
unearned compensation expense of $127,000 in stockholders' equity (deficit)
at December 29, 1996.
F-23
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 17. Stock Compensation Plan (continued)
Had compensation cost for the employee stock transactions been determined
consistent with FASB statement of Financial Accounting Standards No. 123
(FAS 123) the Company's net (loss) applicable to common stockholders and net
(loss) per common share would have been reduced to the pro forma amounts
indicated below:
Net (loss) applicable to common stockholders , as $(2,757,259)
reported
Pro forma $(2,796,259)
Net (loss) per common share as reported $( 1.23)
Pro forma $( 1.24)
Under the plan, the exercise price of the options is $5.00 per share and the
market price of Butterwings' stock on the date of grant was estimated to be
$6.50 per share. For purposes of calculating the compensation cost
consistent with FAS 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in fiscal 1996: (a)
dividend yield of 0 for all years, (b) expected volatility of 22%, (c) risk
free interest rates of 6.5%, and (d) expected life of ten years. Additional
information on shares subject to options is as follows:
Forfeited 0
Outstanding at the end of the year 100,000
Options exercisable at year end 0
Weighted average fair value of options granted
during the year $4.01 per share
Note 18. Public Offering
The Company has executed letters of intent with underwriters to file a
Registration Statement on Form SB-2 with the Securities and Exchange
Commission to offer approximately $6.5 million of its common stock in an
IPO. Expenses related to the IPO of $240,408 at December 29, 1996 will be
charged against proceeds from the IPO. In connection with the IPO, the
Company intends to issue warrants to a) the purchasers of shares of the
common stock on a one-to-one basis and b) to the underwriter which will
enable the underwriter to acquire shares of common stock equal to 10% of the
shares offered in the IPO. It is anticipated that the warrants will be
exercisable between one and five years after the IPO at a price equal to
120% of the share price of the IPO.
F-24
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 18. Public Offering (continued)
In conjunction with the IPO, the Company has offered common stock to the
noteholders to obtain conversion of the Secured Promissory Notes (See Note
2) to equity. The number of common shares offered is equal to 120% of the
outstanding debt and unpaid interest ($344,700 as of March 31, 1997) divided
by the IPO per share offering price of $6.50 per share. Pursuant to the
exchange offer dated January 1997 (Exchange Offer), note holders
representing a total of 77.64% ($2,872,500) principal amount of the notes
have accepted the Exchange Offer. Accordingly, the Company will be obligated
to issue 593,945 shares of its common stock to the note holders accepting
the exchange concurrently with the IPO. If the IPO does not occur, the note
holders agreeing to the exchange will continue as holders of the Secured
Promissory Notes.
Concurrent with the IPO, the Company's 10% Convertible Preferred Stock will
be converted to common stock in accordance with the original conversion
privileges (see Note 4).
Note 19. Litigation
The Company in the past has been the subject of several charges of
employment discrimination or sexual harassment suits in administrative
proceedings in the Milwaukee, Wisconsin and San Diego, California offices of
the Equal Employment Opportunity Commission (the "EEOC"). In April 1996, the
Milwaukee office of the EEOC advised the Company that it had determined that
it would not bring a civil action against the Company arising out of a
charge of employment discrimination brought by a male person alleging he had
been denied employment as a "Hooters Girl" in violation of Title VII of the
Civil Rights Act of 1964 ("Title VII") on the basis of his sex but that the
complainant had the right to bring such an action in the United States
District Court within 90 days. At the date hereof, the Company has not
received notice that any suit has been filed and management believes that
the threat of litigation in this matter is past.
In March 1996, the San Diego office of the EEOC advised the Company that the
complainant in a similar charge failed to establish a claim but that the
hiring practices of one of the Company's San Diego Restaurants, insofar as
they required that only females be hired for "Hooters Girl" positions, were
violative of Title VII. The Company does not believe that this constitutes a
significant threat of litigation in light of the position taken by the EEOC
in the federal matter discussed below. The Company was also charged in a May
1995 proceeding brought with the Equal Opportunities Commission ("EOC") of
Madison, Wisconsin by a former employee alleging sexual harassment, hostile
work environment and termination on the basis of sex and retaliation for
complaints against sexual harassment. The Company advised the EEOC that it
declined to participate in the administrative process unless the complainant
waived her right to sue
F-25
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 19. Litigation (continued)
in federal court because the law firm representing the complainant had filed
an earlier charge on behalf of a waitress at the same Restaurant and as soon
as the 180 day waiting period had expired filed suit in federal court. At
the date hereof no decision in this matter has been rendered and the Company
is unable to predict its outcome but intends to defend its position
vigorously.
The Company is currently a defendant in a civil action in the United States
District Court for the Western District of Wisconsin filed in May 1996 in a
case alleging discrimination against a female employee on the basis of her
sex, for unlawful retaliation and for punitive damages and restoration to
her former position as a waitress. The Hooters Franchisor has been named as
an additional defendant claiming that the Hooters Franchisor employed the
plaintiff. The district court judge has granted the Company summary
judgement on the retaliation claim. Recently, the Company reached a
settlement with the plaintiff for approximately $85,000 which has been
reflected in the accompanying consolidated financial statements.
In October 1991, the EEOC filed a charge of employment discrimination
against the Hooters Franchisor and all related business entitles generally
referred to as the Hooters restaurant system (collectively "Hooters")
including franchisees, licensees, and any other entity permitted to operate
under the Hooters trademark with unlawful employment practices under Title
VII. In September 1994, the EEOC issued a decision that there was reasonable
cause to believe that Hooters engaged in employment discrimination for
failing to recruit, hire or assign men into server, bartender or host
positions. However, in March 1996, the EEOC advised that the EEOC's general
counsel would not recommend that the EEOC file a lawsuit against Hooters and
that this procedure terminated the EEOC's consideration of litigation
against Hooters to challenge its policies. Accordingly, the Company believes
that the likelihood of EEOC action regarding these policies is remote.
However, in the event litigation is commenced by the EEOC and the EEOC
implements its earlier decision, the Company may be required to implement a
gender neutral hiring policy and to pay money damages to men who were
previously discriminated against by Hooter's hiring practices, the effect of
which could have a substantial adverse impact on the Company's business.
In December 1993, a lawsuit was filed against Hooters, Inc. and Hooters of
Orland Park, Inc. in the United States District Court for the Northern
District of Illinois alleging Hooters nation wide policy" of refusing to
recruit, hire, or assign men into server, bartender or host positions
violates Title VII. The plaintiff seeks certification of a plaintiffs' class
consisting of all males who, since April 1992, have applied, were deterred
from applying, or may in the future apply for server, bartender or host
positions at any Hooters Restaurant and for certification of defendant class
consisting of all owners of Hooters Restaurants, licensed,
F-26
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Note 19. Litigation (continued)
sublicensed or whose hiring practices are determined directly or indirectly
by Hooters or its affiliates. As of the date hereof, neither the Company nor
any of its affiliates has been served with any notice that a defendant class
which includes any of them has been certified. Accordingly, the Company is
unable to predict the outcome of this matter. However, in the event that a
defendant class including the Company or any of its affiliates is certified,
the Company may be required to implement a gender neutral hiring policy and
to pay money damages to persons who were previously found to have been
discriminated against because of Hooters hiring practices, the effect of
both of which could have substantial adverse impact on the business of the
Company.
The Company is currently a defendant in a civil action in the United States
District Court for the Western District of Wisconsin filed in January 1997
in a case alleging sexual harassment by a manager of the restaurant where
she was employed and termination of her employment as retaliation for
complaints made by her to management. The complaint seeks compensatory and
punitive damages, pre- and post- judgement interest and attorney's fees. The
Company has denied the material allegations of this complaint and intends to
defend the suit vigorously. The suit is in the discovery stage and it is too
early to predict the outcome in this matter.
Note 20. Going Concern
The Company has incurred recurring losses and its ability to continue as a
going concern is dependent on several factors. The successful completion of
the IPO discussed in Note 18 is expected to position the Company to continue
as a going concern and to pursue its business strategies.
As discussed in Note 2, the Company is currently in default of the
provisions of the $3,700,000 Secured Promissory Notes and unable to service
the notes in accordance with the original terms. Further, the Bridge Loan
Notes are subordinate to the Secured Promissory Notes. If the IPO does not
occur, the Company will remain in default on the Secured Promissory Notes
and in accordance with the default provisions be prohibited from repaying
the Bridge Loan Notes. In the event the IPO is unsuccessful, the Company
will seek alternate sources of equity or attempt to refinance or renegotiate
its debt obligations or it may be required to seek protection from creditors
under the Federal Bankruptcy Code.
F-27
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
APRIL 20, 1997
(UNAUDITED)
F-28
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 20, 1997 December 29, 1996
-------------- -----------------
(Unaudited)
ASSETS
Current Assets
<S> <C> <C>
Cash $ 132,536 $ 534,072
Accounts receivable 3,676 3,137
Inventories 37,182 118,647
Prepaid expenses 46,690 46,032
Assets available for sale -
888,488
Income tax receivable 17,925
17,925
Total current assets 1,126,497 719,813
--------- -------
Leasehold Improvements and Equipment
Leasehold improvements 826,285 1,898,818
Equipment 409,293 1,034,568
------- ---------
1,235,578 2,933,386
Less accumulated depreciation and amortization 391,107 619,141
------- -------
844,471 2,314,245
------- ---------
Other Assets
Initial public offering expenses 384,548 240,408
Deposits 124,437 124,437
Franchise costs, net of accumulated amortization
of $30,471 and $52,341 respectively 269,529 497,659
Finance costs, net of accumulated amortization
of $216,519 and $194,213, respectively 287,435 309,740
Organization costs, net of accumulated amortization
of $18,550 and $15,859 respectively 23,320 26,011
Goodwill, net of accumulated amortization
of $97,446 and $79,320, respectively 812,542 839,242
Bridge loan financing costs, net of
accumulated amortization of $641,477
and $206,831, respectively 434,646
---------- -------
-
$ 3,872,779 $ 5,506,201
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 20, 1997 December 29, 1996
-------------- -----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
<S> <C> <C>
Current maturities of long-term debt $ 4,255,987 $ 4,288,063
Capital lease obligations related to
assets available for sale 97,368 --
Due to parent 210,757 134,469
Accounts payable 306,195 390,149
Accrued liabilities 844,087
-------
694,754
Total current liabilities 5,714,392 5,507,435
--------- ---------
Long-term debt, less current maturities 35,637 128,721
Store closing expense 336,000 393,000
------- -------
371,637 521,721
------- -------
Redeemable Preferred Stock of subsidiary, $100 par value,
100,000 authorized, 16,900 shares issued and
outstanding 1,690,000 1,690,000
--------- ---------
Stockholders' Equity (Deficit)
Preferred Stock, no par value, 27,500 shares of 10%
convertible preferred stock authorized,
15,685 shares issued and outstanding 1,568,500 1,568,500
Common stock, $0.01 par value, 10,000,000 shares
authorized, 2,152,047 shares
issued and outstanding 21,520 21,520
Capital in excess of par value 1,564,979 1,564,979
Unearned compensation expense (88,000) (127,000)
Accumulated deficit (6,970,249) (5,240,954)
------------ ----------
(3,903,250) (2,212,955)
------------ ----------
$ 3,872,779 $ 5,506,201
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Sixteen Week Period Ended
---------------------------------
April 20, 1997 April 21,1996
-------------- -------------
Sales $ 2,428,091 $2,608,191
2,608,191
Costs and expenses:
Cost of products sold 693,645 714,052
Salaries and benefits 734,208 764,106
Other operating costs 817,008 886,784
Depreciation and amortization 162,163 166,838
General and administrative expenses 333,355 151,718
Provisions for losses on leased property - 427,148
Loss on impairment of assets available for sale 775,000 -
------- -------
Total costs and expenses 3,515,379 3,110,646
Operating (Loss) (1,087,288) (502,455)
---------- --------
Financial income (expense):
Interest income 1,927 279
Interest expense (135,126) (150,171)
Amortization of finance costs (456,950) (22,306)
(590,149) (172,198)
-------- --------
Net (Loss) (Income taxes $0 for all periods
presented) before redeemable
preferred stock dividends of subsidiary (1,677,437) (674,653)
---------- --------
Redeemable preferred stock dividends of subsidiary (51,858) (41,507)
------- -------
Net (Loss) $(1,729,295) $(716,160)
=========== ==========
Net (loss) per common share $(.76) $(.32)
==== ====
Weighted average number of
shares outstanding $ 2,266,121 $2,246,121
- -------------------------------------------- -----------------------------------
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Unearned Total
Preferred Common Compensation Accumulated Stockholders'
Stock Stock Expense Deficit Equity (Deficit)
----- ----- ------- ------- ----------------
In
Par Excess
Value Of Par
----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 29, 1996 $1,568,500 $ 21,520 $1,564,979 $ (127,000) $(5,240,954) $(2,212,955)
Stock options - compensation
costs (Unaudited) - - - 39,000 - 39,000
Net (loss) (Unaudited) - - - (1,729,295) (1,729,295)
------------ ----------- ----------- ------------ ---------- ----------
Balance, April 20, 1997 $1,568,500 $ 21,520 $1,564,979 $(88,000) $(6,970,249) $(3,903,250)
(Unaudited) ========== =========== ========== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Sixteen Week Period Ended
---------------------------------
April 20, 1997 April 21,1996
-------------- -------------
Cash Flows from Operating Activities:
Net (loss) $ (1,729,295) $ (716,160)
Adjustments to reconcile net (loss)
to net cash (used in) operating activities:
Depreciation and amortization 621,994 166,838
Writedown of impaired assets 775,000 427,148
Changes in operating assets and liabilities:
Accounts receivable (539) 67,256
Inventories 2,882 (18,247)
Prepaid expenses (658) (45,662)
Income taxes - (16,300)
Accounts payable (88,955) (136,695)
Accrued liabilities 92,333 (225,722)
Due to parent 76,288 (37,634)
------ -------
Net cash (used in) operating activities (250,950) (535,178)
-------- ---------
Cash Flows from Investing Activities:
Deposits - (4,559)
Leasehold improvements and equipment (17,654) 200,433
Goodwill (352,982)
----------- --------
-
Net cash (used in) investing activities $ (17,654) (157,108)
------------ --------
Cash Flows from Financing Activities:
Proceeds from long-term debt $ - $ 94,532
Payments of long-term debt (27,792) (19,626)
Proceeds from issuance of preferred
stock, net - 307,100
Unearned compensation expense 39,000 -
Payments of prepaid initial public offering (144,140) -
expense -------- -------
Net cash provided by financing activities (132,932) 382,006
-------- -------
Net (decrease) in cash (401,536) (310,280)
Cash:
Beginning of period 534,072 774,157
------- -------
Ending of period $ 132,536 $ 463,877
=========== ==========
Continued on Page F-34
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Continued from Page F-33
For the Sixteen Week Period Ended
---------------------------------
April 20, 1997 April 21,1996
-------------- -------------
Supplemental Schedule of Non Cash Investing
and Financing Activity
Transfer to Assets Available For Sale
Leasehold improvements and equipment, net $ (1,354,084) $ -
-
Franchise costs, net (217,995) -
Goodwill, net (7,826) -
Writedown of impaired assets 775,000
-
Other (83,583) -
-------- -
Assets Available For Sale $ 888,488 $ -
========== ===========
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------
Note 1. Basis of Financial Statements
The accompanying financial statements should be read in conjunction with the
December 29, 1996 audited Financial Statements. The financial information
furnished herein is unaudited but in the opinion of management, includes all
adjustments necessary (all of which are normal recurring adjustments) for a
fair presentation of financial condition and results of operations.
Note 2. Assets Held for Sale
Recently, management has decided to sell the Company's Hooters Restaurants
since expansion of the Hooters concept by the Company no longer is a viable
alternative. Accordingly, preliminary decisions with potential buyers have
occurred. As a result, an allowance of $700,000 has been provided in the
sixteen week period ended April 20,1997 to record the investment in these
restaurants at net realizable value. Further, the net realizable value of
these assets have been recorded as Assets Available for Sale at April 20,
1997.
Note 3. Disposal of Assets
The Company has entered into an agreement to sell a cookie store located in
Minnesota as of June 1, 1997 for $37,000. The carrying value of the assets
of this store at April 20, 1997 were $112,000. Accordingly, a loss on
impairment of assets held for sale of $75,000 has been recognized in the
Statement of Operations for the sixteen week period ending April 20, 1997.
F-35
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
PRO FORMA FINANCIAL STATEMENTS
The following unaudited consolidated pro forma balance sheets at April 20, 1997
and the statements of operations for the 16 weeks ended April 20, 1997 and the
fiscal year ended December 29, 1996 (collectively, the "Proforma Statements")
were prepared to illustrate the estimate effects of the exchange of senior notes
for common stock, the conversion of preferred stock to common stock, the effect
of the bridge loans, the sale of the shares of common stock offered hereby by
the Company, and the impact of removing the results of operations related to the
Hooter Restaurants and Cookie Stores assests available for sale at April 20,
1997 as if those transactions had occurred for statement of operations purposes
as of January 1, 1996 and for balance sheet purposes as of April 20,1997. The
Pro Forma Statements do not purport to represent what the Company's results of
operations or balance sheet would actually have been if such transactions had
indeed taken place on such dates or to project the Company's results of
operations or balance sheet for any future period or date.
The adjustments for the Pro Forma Statements are based on available information
and upon certain assumptions which management believes are reasonable. The Pro
Forma Statements and accompanying notes thereto should be read in conjunction
with the Financial Statements and notes thereto, and other financial information
appearing elsewhere in this Prospectus.
F-36
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS
April 20, 1997
<TABLE>
<CAPTION>
ACTUAL PRO FORMA PRO FORMA
------ --------- ---------
ADJUSTMENTS
-----------
Current Assets
<S> <C> <C> <C>
Cash $ 132,536 $5,684,548 (2)
(500,308)(3)
(105,029)(6) $5,211,747
Accounts receivable 3,676 3,676
Inventories 37,182 37,182
Prepaid expenses 46,690 46,690
Assets available for sale 888,488 888,488
Income tax receivable 17,925 17,925
------ ------
Total current assets 1,126,497 6,205,708
========= =========
Leasehold improvements and Equipment
Leasehold improvements 826,285 826,285
Equipment 409,293 409,293
------- -------
1,235,578 1,235,578
Less accumulated depreciation
and amortization 391,107 391,107
------- -------
844,471 844,471
------- -------
Other Assets
Initial public offering expense 384,548 (384,548)(2) --
Deposits 124,437 124,437
Franchise costs, net of
accumulated amortization 269,529 269,529
Finance costs, net of
accumulated amortization 287,435 (223,151)(1) 64,284
Organization costs, net of
accumulated amortization 23,320 23,320
Goodwill, net of accumulated
amortization 812,542 812,542
------- -------
1,901,811 1,294,112
--------- ---------
$3,872,779 $ 8,344,291
========== ===========
</TABLE>
(1) Represents write-off of debt issue costs on retirement of 12% Notes
exchanged for Common Stock. (See (6) below)
(2) Represents the proceeds to the Company from the initial public offering of
$6,500,000 net of $1,200,000 ($384,548 included in other assets) of offering
costs.
(3) Represents repayment of bridge loans and interest.
(4) Represents the conversion of Butterwings Convertible Preferred Stock to
Common Stock at the time of the Offering.
(5) Represents the issuance of 91,000 shares of Common Stock related to Bridge
Loan Notes.
(6) Pursuant to the results of the Exchange Offer, the Company will exchange
593,945 shares of its Common Stock for $2,872,500 principal amount of the
Company's 12% Notes. The Exchange Offer is based upon the principal amount
of the Notes outstanding, accrued interest ($344,700 to March 31,1997), and
a 20% premium ($643,440) of the aggregate principal amount exchanged and
related accrued and unpaid interest. In addition, as a result of the
Exchange Offer, finance costs of $223,151 at April 20, 1997 related to the
debt exchanged will be written off. With respect to those Notes not
exchanged, accrued and unpaid interest ($105,029 at April 20, 1997) will be
paid at the time of the Offering.
F-37
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS
April 20, 1997
<TABLE>
<CAPTION>
ACTUAL PRO FORMA PRO FORMA
------ --------- ---------
ADJUSTMENTS
-----------
Current Liabilities
<S> <C> <C> <C> <C>
Current maturities of long term debt $ 4,255,987 (2,872,500)(6)
(483,000)(3) $ 900,487
Capital lease obligations related to
assets available for sale 97,368 97,368
Due to parent 210,757 210,757
Accounts payable 306,193 306,193
Accrued liabilities 844,087 (449,729)(6)
(17,308)(3) 377,050
------- -------
Total current liabilities 5,714,392 1,891,855
--------- ---------
Long term debt, less current maturities 35,637 35,637
Store closing expense 336,000 336,000
------- -------
Total non current liabilities 371,637 371,637
------- -------
Preferred Redeemable Stock
no par value;100,000 shares
authorized,16,900 issued and
outstanding 1,690,000 1,690,000
Stockholders' Deficit
Preferred Stock, no par value; 27,500
shares authorized, 15,685 issued and
outstanding and no stock issued and
outstanding on a pro forma basis 1,568,500 (1,568,500)(4) --
Common Stock, $.01 par value;
10,000,000 shares authorized,
2,152,047 shares issued and
outstanding and 4,091,000 issued
and outstanding on a pro forma basis 21,520 2,540 (4)
910 (5)
10,000 (2)
5,940 (6) 40,910
Capital in excess of par value 1,564,979 1,565,960 (4)
(910)(5)
5,290,000 (2)
3,854,700 (6) 12,274,729
Unearned compensation expense (88,000) -- (88,000)
Accumulated deficit (6,970,249) (643,440)(6) --
(223,151)(1) (7,836,840)
-----------
(3,903,250) 4,390,799 $
----------- --------- =
3,872,779 $ 8,344,291
========= ===========
</TABLE>
(1) Represents write-off of debt issue costs on retirement of 12% notes
exchanged for Common Stock. (See (6) below).
(2) Represents the proceeds to the Company from the initial public offering of
$6,500,000 net of $1,200,000 ($384,548 included in other assets) of offering
costs.
(3) Represents repayment of Bridge Loan Notes and interest.
(4) Represents the conversion of Butterwings Convertible Preferred Stock to
Common Stock at the time of the Offering.
(5) Represents the issuance of 91,000 shares of Common Stock related to Bridge
Loan Notes.
(6) Pursuant to the results of the Exchange Offer, the Company will exchange
593,945 shares of its Common Stock for $2,872,500 principal amount of the
Company's 12% Notes. The Exchange Offer is based upon the principal amount
of the Notes outstanding, accrued interest ($344,700 to March 31,1997), and
a 20% premium ($643,440) of the aggregate principal amount exchanged and
related accrued and unpaid interest. In addition, as a result of the
Exchange Offer, finance costs of $223,151 at April 20, 1997 related to the
debt exchanged will be written off. With respect to those Notes not
exchanged, accrued and unpaid interest ($105,029 at April 20, 1997) will be
paid at the time of the Offering.
F-38
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
16 Weeks Ended April 20, 1997
<TABLE>
<CAPTION>
Less:
OPERATIONS
RELATED TO TOTAL BEFORE OTHER
ASSETS AVAILABLE OTHER PROFORMA PRO FORMA
ACTUAL FOR SALE (D) ADJUSTMENTS ADJUSTMENTS ADJUSTED
------ ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Sales $ 2,428,091 $ 1,355,207 $ 1,072,884 $ 1,072,844
Costs and expenses:
Cost of products sold 693,545 431,842 261,803 261,803
Salaries and benefits 734,208 415,986 318,222 318,222
Other operating costs 817,008 428,826 388,183 388,183
Depreciation and amortization 162,163 49,726 112,437 112,437
General and administrative expenses 333,355 -- 333,355 333,355
Loss on impairment of assets
available for sale 775,000 775,000 -- --
------- -------
Total costs and expenses 3,515,379 2,101,380 1,414,000 1,414,000
--------- --------- --------- ---------
Operating (loss) (1,087,288) (746,173) (341,116) (341,116)
------------ --------- --------- ---------
Financial income (expense):
Interest income 1,927 1,282 645 645
Interest expense (135,126) (4,302) (130,824) 94,829(b) (35,995)
Amortization of
finance costs (456,950) -- (456,950) 451,544(a) (5,406)
--------- ------- --------- -------
(590,149) (3,020) (587,129) (40,756)
--------- ------- --------- --------
(Loss) before income taxes (1,677,437) (749,193) (928,245) (381,872)
Net (loss) before redeemable
preferred stock dividends of
subsidiary (1,677,437) (749,193) (928,245) (381,872)
Redeemble preferred stock
dividends of subsidiary (51,858) -- (51,858) (51,858)
Net (Loss) $ (1,729,295) $(749,193) $ (980,103) $ (433,730)
============== =========== ============ ==============
Net (Loss) per common share $(0.76) $ (0.43) $(0.10)
======= ======== =======
Weighted average number of common
shares outstanding 2,266,121 2,266,121 4,144,077 (c)
================ ================ ===============
</TABLE>
(a) To remove amortized bridge loan financing costs ($434,645 ) and debt issue
costs related to the exchange of senior notes ($16,899).
(b) To remove interest expense related to the exchange of senior notes ($
86,175) and bridge loan financing ($8,654 ).
(c) Includes the weighted average number of shares outstanding (See Note 1 to
the Consolidated Financial Statements) plus the effect of shares assumed to
be outstanding related to the exchange of Notes to common stock, the
conversion of convertible preferred to common stock, bridge loan units, and
IPO.
(d) To remove statement of operations amounts related to the Hooters Restaurants
and Mrs. Fields Cookie store being held for sale as of April 20, 1997.
(e) When the initial public offering is completed the unamortized finance costs
($223,151) and the 20% Premium ($643,440) related to the senior notes
exchanged for common stock will be charged to the Consolidated Statement of
Operations.
F-39
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended December 29, 1996
<TABLE>
<CAPTION>
Less:
OPERATIONS
RELATED TO TOTAL BEFORE OTHER
ASSETS AVAILABLE OTHER PROFORMA PRO FORMA
ACTUAL FOR SALE (D) ADJUSTMENTS ADJUSTMENTS ADJUSTED
------ ------------ ----------- ----------- --------
<S> <C> <C> <C> <C>
Sales $ 8,551,033 $ 5,005,554 $ 3,545,479 $ 3,545,479
Costs and expenses:
Cost of products sold 2,454,078 1,558,570 895,508 895,508
Salaries and benefits 2,472,022 1,553,109 918,913 918,913
Other operating costs 2,911,454 1,605,266 1,306,188 1,306,188
Depreciation and amortization 479,840 169,515 310,325 310,325
General and administrative expenses 996,200 -- 996,200 996,200
Write off of franchise fee options 145,000 145,000 -- --
Provisions for losses on leased
property 927,148 927,148 -- --
------- ------- ------ -------
Total costs and expenses 10,385,742 5,958,608 4,427,134 4,427,134
---------- --------- ---------- ---------
Operating (loss) (1,834,709) (953,054) (881,655) (881,655)
------------ --------- --------- ---------
Financial income (expense):
Interest income 17,963 3,802 14,161 14,161
Interest expense (493,279) (15,541) (477,738) 353,354 (b) (124,384)
Amortization of finance costs (279,324) -- (279,324) 261,752 (a) (17,572)
--------- ------ --------- --------
(754,640) (11,739) (742,901) (127,795)
--------- -------- --------- ---------
(Loss) before income taxes (2,589,349) (964,794) (1,624,556) (1,009,450)
Net (loss) before redeemable preferred
stock dividends of subsidiary (2,589,349) (964,794) (1,624,556) (1,009,450)
Redeemble preferred stock dividends
of subsidiary (167,910) -- (167,910) (167,910)
Net (Loss) $ (2,757,259) $(964,794) $ (1,792,466) $ (1,177,360)
============== =========== ============== =============
Net (Loss) per common share $(1.23) $ (0.80) $ (0.28)
======== ======== =========
Weighted average number of common
shares outstanding 2,250,736 2,250,736 4,144,077 (c)
========= ========== ==============
</TABLE>
(a) To remove amortized bridge loan financing costs ($206,831 ) and debt issue
costs related to the exchange of senior notes ($54,921).
(b) To remove interest expense related to the exchange of senior notes
($344,700) and bridge loan financing ($8,654 ).
(c) Includes the weighted average number of shares outstanding (See Note 1 to
the Consolidated Financial Statements) plus the effect of shares assumed to
be outstanding related to the exchange of Notes to common stock, the
conversion of convertible preferred to common stock, bridge loan units, and
IPO.
(d) To remove statement of operations amounts related to the Hooters Restaurants
and Mrs. Fields Cookie store being held for sale as of April 20, 1997.
(e) When the initial public offering is completed the unamortized finance costs
($240,467) and the 20% Premium ($643,440) related to the senior notes
exchanged for common stock will be charged to the Consolidated Statement of
Operations.
F-40
<PAGE>
No person has been authorized to give any information or to make any
representation in connection with this offering other than those contained in
this Prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the Company or any Underwriter.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the securities to which it relates or an
offer to sell or the solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstance, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information herein is
correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
PAGE
Prospectus Summary........................ 2
Risk Factors.............................. 8
Use of Proceeds........................... 17
Dividend Policy........................... 18
Dilution.................................. 19
Capitalization............................ 20
Management's Discussion and
Analysis of Financial Condition
and Results of Operation................. 21
Business and Properties................... 33
Management................................ 46
Certain Relationships
and Related Transactions............... 43
Principal Stockholders.................... 51
Selling Security Holders.................. 51
Description of Securities................. 52
Shares Eligible For Future Sale........... 54
Underwriting.............................. 56
Legal Matters............................. 58
Experts................................... 58
Additional Information.................... 58
Index to Financial Statements............. F-1
Until , 1997 (25 days from the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
1,091,000 UNITS
Each Unit Consisting of
One Share of Common Stock
and
One Redeemable Series A
Common Stock Purchase Warrant
OFFERING PRICE
$
PER UNIT
Butterwings
Entertainment
Group, Inc.
Prospectus
National Securities
Corporation
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Article SEVEN of the Amended Articles of Incorporation provides that no
director of the Corporation shall be personally liable to the Corporation or its
shareholders for monetary damages for breach of his fiduciary duty, as a
director; provided, that nothing therein shall be construed to eliminate or
limit the liability of a director (a) for any breach of the director's duty of
loyalty to the Corporation or its shareholders, (b) for acts or omissions not in
good faith or involving intentional misconduct or a knowing violation of Law,
(c) under Section 8.65 of the Illinois Business Corporation Act, as amended, or
(d) for any transaction from which the director derived an improper benefit.
Article 11 of the By-laws of the Corporation provide that the
Corporation may indemnify an officer, director, employee or agent of the
Corporation against expenses, judgments, fines and settlement amounts incurred
in connection with an action, suit or proceeding, other than an action, suit or
proceeding by or in the right of the Corporation, if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Corporation and with respect to any criminal proceeding, has no
reasonable cause to believe his conduct was unlawful.
The Corporation may also indemnify an officer, director, employee or agent of
the Corporation who is a party or is threatened to be made a party to an action,
suit or proceeding by or in the right of the Corporation against expenses
actually and reasonably incurred by him in connection with his defense of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the Corporation, provided
that no indemnification shall be made in respect of any claim, issue or matter
as to which he shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation, unless the court
in which such action was brought shall determine upon application that despite
the adjudication of liability, but in view of all the circumstances of the case,
such person fairly and reasonably is entitled to indemnification and expenses as
the court may deem proper,
Any indemnification under Article 11 of the By-laws shall be made by the
Corporation only upon a determination that indemnification of the indemnified
person is proper by (i) a majority vote of a quorum of the board of directors
who were not parties to such action, suit or proceeding, (ii) if such a quorum
is not obtainable, or if directed by the board, by independent legal counsel in
a written opinion, or (iii) by the shareholders.
Expenses incurred in defending a civil or criminal action may be
advanced by the Corporation upon receipt of an undertaking by or on behalf of an
officer, director, employee or agent to repay such amount unless it shall be
determined that he is entitled to indemnification as authorized by the Illinois
Business Corporation Act.
Indemnification under the By-laws is not exclusive of any other rights
which an indemnified party may be entitled under any other By-law, agreement,
vote of shareholders or disinterested directors or otherwise. The Corporation
may purchase and maintain insurance on behalf of persons entitled to
indemnification under Section 8.75 of the Illinois Business Corporation Act. If
the Corporation has paid indemnity or has advanced expenses to a director,
officer, employee or agent, the Corporation shall report the indemnification or
advance in writing to shareholders with or before notice of the next
shareholders meeting.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
Estimated expenses in connection with the public offering by the Company of the
securities offered hereunder are as follows:
Securities and Exchange Commission Filing Fee $6,067.85
NASD Filing Fee 2,502.17
Blue Sky Fees and Expenses* 20,000.00
NASDAQ Small Cap Application and Listing Fee 13,000.00
Boston Stock Exchange Application and Listing Fee 7,500.00
Accounting Fees and Expenses* 40,000.00
Legal Fees and Expenses 55,000.00
Printing* 50,000.00
Fees of Transfer Agents and Registrar* 5,000.00
Underwriters' Non-Accountable Expense Allowance 162,500
Miscellaneous* 188,429.98
----------
Total* $550,000.00
* Estimated.
Item 26. Recent Sales of Unregistered Securities
The following is a summary of transactions by the Registrant during the
last three years involving the sale of securities which were not registered
under the Securities Act:
During the period September 1993 through April 1994 the Company issued
$3,700,000 of secured 12% promissory notes (the "Notes") to 132 60 investors in
an offering exempt from registration pursuant to Regulation D under the
Securities Act. The purchasers were all accredited investors who took the Notes
for investment and without a view to distribution. The offering was effected
through registered broker dealers who are members of the National Association of
Securities Dealers, Inc.("NASD") and were paid a commission for their sale of
the Notes. The Notes bear a restrictive legend prohibiting the transfer thereof
except in compliance with the Securities Act or in reliance upon an opinion of
counsel that distribution may be made in reliance upon applicable exemptions
from the provisions thereof.
In January 1997, the Registrant offered to exchange the Notes for Common
Stock of the Registrant pursuant to an Exchange Offer to all Note holders. The
number of shares of common stock to be exchanged was based upon the principal
amount of Notes held by each Note holder, plus accrued interest plus a premium
of 20% of principal and interest, divided by the proposed public offering price
per share of the common stock in the offering covered by this registration
statement($6.50 per share). If all of the Note holders accept the Exchange Offer
the Registrant will issue 744,554 shares of its Common Stock based upon the
proposed offering price The Note holders are required to agree to take the
shares of Common Stock for investment and not with a view to distribution. The
stock certificates are to be issued concurrently with the certificates issued to
public stockholders in this offering and will bear a restrictive legend
prohibiting transfer in the absence of an effective registration statement or an
opinion of counsel that registration is not required. No commissions or other
remuneration will be paid for soliciting the exchange. The exchange is exempt
under Section 3(a)(9) of the Securities Act for securities exchanged by the
issuer with its securities holders exclusively where no commissions or other
remuneration is paid for soliciting such exchange.From September 1995 through
February 1996 the Registrant issued and sold 15,685 shares of its Convertible
Preferred Stock (the "Preferred Stock") at $100 per share to sixty-three
investors in an offering exempt from registration pursuant to Regulation D under
the Securities Act. The offering was effected through registered broker dealers
who are members of the NASD and were paid a commission for their sale of the
Preferred Stock. The certificates bear a restrictive legend prohibiting the
transfer thereof except in compliance with the Securities Act or in reliance
upon an opinion of counsel that distribution may be made in reliance upon
applicable exemptions from the provisions thereof. By its terms the Preferred
Stock is automatically convertible into common stock of the Registrant upon the
consummation of the first sale of common stock by the Company to underwriters
for the account of the Company pursuant to a registration statement under the
Securities Act. The number of shares of common stock to be issued to each holder
of the Preferred Stock upon conversion will be determined by dividing the
offering price of the Preferred Stock by 95% of the sale price per share of the
common stock in the public offering. The issuance of the common stock for the
Preferred Stock will be exempt under Section 3(a)(9) of the Securities Act. The
certificates for the new common stock will be issued concurrently with the
II-2
<PAGE>
certificates to be issued to the public stockholders in this offering and will
bear a restrictive legend prohibiting transfer in the absence of an effective
registration statement or an opinion if counsel that registration is not
required.
From October through December 1996, the Company issued $483,000 of
Bridge Loan Notes with warrants to provide working capital and funds for this
offering. The transaction was exempt from registration pursuant to Section 4 (2)
of the Securities Act of 1933 for transactions not involving a public offering.
The securities were sold to four investors through La Jolla Securities
Corporation, a registered broker/dealer which received a commission for its
services and to Palisades Capital, LLC as general partner of Sunset Bridge Fund
#3 and to Sagax Fund II Ltd., the latter two as principals, without commissions.
The securities were stamped with a restrictive legend and the investors agreed
to hold the same for investment and not with a view to distribution. The
warrants are automatically convertible into Units identical to the Units offered
pursuant to this registration statement at the time the registration statement
is declared effective. The Units are included in this registration statement and
the Bridge Loan holders are listed as Selling Security Holders.
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Item
- ----------- ----
<S> <C> <C>
Exhibit 1.1 Form of Underwriting Agreement. (2)
Exhibit 1.2 Form of Underwriters' Warrant Agreement. (2)
Exhibit 1.3 Form of Selected Dealer Agreement. (2)
Exhibit 1.4 Form of Agreement Among Underwriters. (2)
Exhibit 3.1 Articles of Incorporation, as amended (3)
Exhibit 3.2 Bylaws of the Registrant (3)
Exhibit 4.1 Specimen of Common Stock Certificate ()
Exhibit 4.2 Specimen of Warrant Certificate. (2)
Exhibit 5.1 Opinion of Maurice J. Bates L.L.C.(3)
Exhibit 10.1 Franchise Agreement between Mrs. Fields Development Corporation and the Registrant. (3)
Exhibit 10.2 Franchise Agreement between Hooters of America, Inc. and Butterwings/Wisconsin. (3)
Exhibit 10.3 Form of 12.0% $3,700,000 Notes, as amended. (3)
Exhibit 10.4 Copy of Exchange Offer for 12.0% Notes, with Acceptance and Transmittal Letter.(3)
Exhibit 10.5 Form of Underwriter's Financial Consulting Agreement. (2)
Exhibit 10.6 Form of Warrant Agreement.(3)
Exhibit 10.7 Independent Contractor Agreement between the Registrant and Edmund C. Lipinski. (3)
Exhibit 10.8 Copy of 1996 Stock Compensation Plan. (3)
Exhibit 10.9 Copy of Stock Purchase Agreement between the Registrant and Cookie Crumbs, Inc.(3)
Exhibit 10.10 Copy of Draft Asset Purchase Agreement for sale of Minnesota Cookie Store. (1)
Exhibit 21.1 Subsidiaries of the Registrant.(3)
Exhibit 23.1 Consent of McGladrey & Pullen, LLP Certified Public Accountants. ( 1)
Exhibit 23.2 Consent of Maurice J. Bates, L.L.C. is contained in his opinion to be filed as Exhibit 5.1 to this registration
statement.(3)
Exhibit 27.1 Financial Data Schedule (1)_______________
</TABLE>
(1) Filed herewith
(2) To be filed by amendment
(3) Previously filed
II-3
<PAGE>
Item 28. Undertakings
The undersigned registrant hereby undertakes as follows:
(1) 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.
(2) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the Prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the Registration Statement Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation form the low or high end
of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424
(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement; and
(iii)Include any additional or changed material information on the
plan of distribution.
(3) For determining any liability under the Securities Act, treat each
post-effective amendment that as a new Registration Statement of the
securities offered, and the offering of the securities at that time to
be deemed to be the initial bona fide offering
(4) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering..
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, or
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 shares of 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.
(7) For determining any liability under the Securities Act, treat 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 small business issuer under Rule
424(b)(1), or (4) or 497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission declared it
effective.
(8) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus s anew
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, State of Illinois on June 2, 1997.
BUTTERWINGS ENTERTAINMENT GROUP, INC.
By: /s/ Stephen S.Buckley
Stephen S. Buckley, President and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature
appears below constitutes and appoints Stephen S. Buckley and Douglas E. Van
Scoy, and each for them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities (until revoked in writing), to sign any and
all further amendments to this Registration Statement (including post-effective
amendments), and to file same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person thereby ratifying and confirming all that said
attorneys-in-fact and agents, and each of them, or their substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
_/s/_Stephan_S._Buckley__________
Stephen S. Buckley President and Director June 2, 1997
(Principal Executive Officer)
/s/_Douglas_E._Van_Scoy_________ Chief Financial Officer June 2, 1997
Douglas E. Van Scoy (Principal Financial
and Accounting Officer)
/s/ Kenneth B .Drost Director June 2, 1997
Kenneth B. Drost
/s/_Jeffrey_A._Pritikin__________Director June 2, 1997
Jeffrey A. Pritikin
/s/_Thomas_P._Kabat_____________
Thomas P. Kabat Director June 2, 1997
* By: Stephen S. Buckley,
As Attorney in Fact
Stephen S. Buckley
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, State of Illinois on May , 1997.
BUTTERWINGS ENTERTAINMENT GROUP, INC.
By:
Stephen S. Buckley, President and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose signature
appears below constitutes and appoints Stephen S. Buckley and Douglas E. Van
Scoy, and each for them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities (until revoked in writing), to sign any and
all further amendments to this Registration Statement (including post-effective
amendments), and to file same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person thereby ratifying and confirming all that said
attorneys-in-fact and agents, and each of them, or their substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- ----------------
Stephen S. Buckley President and Director June , 1997
(Principal Executive Officer)
- -----------------
Douglas E. Van Scoy Chief Financial Officer June , 1997
(Principal Financial
and Accounting Officer)
- ---------------
Kenneth B. Drost Director June , 1997
- ---------------
Jeffrey A. Pritikin Director June , 1997
- ------------------
Thomas P. Kabat Director June , 1997
* By: Stephen S. Buckley,
As Attorney in Fact
Stephen S. Buckley
II-5
ASSET PURCHASE AGREEMENT
------------------------
DRAFT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made as
of_____________1997, by and between Butterwings Entertainment Group, Inc., an
Illinois corporation (the "Seller"), and TeNaKi Corp., a Minnesota corporation
(the "Buyer").
Recitals
--------
Buyer wishes to purchase from Seller and Seller wishes to sell to
Buyer, certain of the assets, property, rights and business of the Seller
relating to its Mrs. Fields cookie franchise operation located at 3001 White
Bear Ave., Maplewood, Minnesota, upon the terms and conditions of this
Agreement.
Agreement
---------
In consideration of the premises and the mutual covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
-----------
For purposes of this Agreement, the following terms shall have the
following meanings.
"Assumed Liabilities" shall mean the duties, liabilities, or obligations
of Seller identified on Schedule 1A.
"Business" shall mean Seller's business of producing, marketing and
selling Mrs. Fields Cookie goods and products, from its Maplewood Mall, 3001
White Bear Ave., Maplewood, Minnesota location.
"Business Assets" shall mean the assets used in Seller's Business
including but not limited m all equipment, fixtures, leasehold improvements and
inventory, which items are identified on Schedule 1B, located at its Maplewood
Mall, 3001 White Bear Ave., Maplewood, Minnesota location.
"Closing" shall mean the consummation of the purchase and sale
transaction described herein.
"Closing Date" shall mean the date on which the Closing occurs, as
specified in Article 2.
"Confidential Information" shall mean any information or compilation of
information which is proprietary to the parties and which relates to their
existing or reasonably foreseeable business, including, but not limited to,
trade secrets and information contained in or relating to product designs,
manufacturing methods, processes, techniques, tooling, sales techniques,
marketing plans or proposals existing or potential customer lists and all other
customer information. Confidential Information shall not include information
which (i) is or becomes publicly available other than as a result of any breach
of a confidentiality obligation, (ii) is rightfully received from a third party
and not derived directly or indirectly from any breach of a confidentiality
obligation, or (iii) is independently developed by the parties without any
reference to any such in All information which either party hereto identifies as
being "confidential" or a "trade secret" shall be presumed to be Confidential
Information.
"Customer List" shall mean the list of the names and addresses of the
customers serviced by Seller and third parties who refer customers to the
Business.
"Governmental Entity" shall mean any court, administrative agency,
commission, state, municipality or other governmental authority or
instrumentality, domestic or foreign
"Liens" shall mean, with respect to the Purchased Assets, all
liabilities, claims, liens, charges, pledges, security interests, restrictions
and or other encumbrances of any kind.
"Material Adverse Effect" shall mean a material adverse effect on the
business, results of operations, financial condition or prospects of the
Business.
"Non-Compete" shall mean the covenants of Seller pursuant to Section 4.7.
"Purchase Price" shall mean the aggregate amount to be paid by Buyer to
Seller for the Purchased Assets and the Non-Compete.
"Purchased Assets" shall mean all of the assets to be purchased and sold
hereunder on the Closing Date, consisting of the Business Assets Customer List,
and Records and those items described on Schedule 1B and excluding those assets
described on the "Excluded Assets" portion of Section 1B.
"Records" shall mean all books of account, general, financial and
accounting records, files, invoices, payment authorizations, certificates of
need, correspondence to and from customers, suppliers and payors, and other data
owned by Seller on the Closing Date, which relate to the Business, Purchased
Assets or Assumed Liabilities.
ARTICLE 2
SALE OF ASSETS: CLOSING
-----------------------
Section 2.1. Sale of Assets. At the Closing, Seller shall sell, assign,
transfer, convey and deliver to Buyer free and clear of all Liens, all of the
Purchased Assets.
Section 2.2. Purchase Price and Consulting Agreement Payments.
(a) Buyer shall pay to Seller the Asset Purchase Price, which shall be
thirty-six thousand and 00/100 Dollars ($36,000-00), which shall be payable in
cash or certified funds on Closing Date. Said purchase price includes the value
of the inventory on hand on the Date of Closing and a Five thousand and 00/100
Dollars ($5,000.00) transfer fee to be paid by Seller to the Mrs. Fields Cookie
Franchisor.
(b) Buyer's shall pay to Seller on the Closing, One Thousand and 00/100
Dollars ($1,000.00) as consideration for the non-competition and agreements by
the Seller.
Section 2.3. Buyers Assumptions of Liabilities. On the terms and subject
to the conditions set forth in this Agreement, and in further consideration of
the transfer of the Purchased Assets, at the Closing, Buyer shall assume only
those duties, liabilities or obligations of Seller included in the Assumed
Liabilities.
Section 2.4. Closing. The Closing shall take place at the offices of
Renae Lillegard Fry, 2345 Rice Street, Suite 145, Roseville, Minnesota, on June
1, 1997, or at such other time and location as the parties hereto shall agree in
writing.
Section 2.5. Deliveries at Closing. At the Closing, Seller shall convey,
transfer, assign and deliver to Buyer all of the Assets, including good and
merchantable title to all personal property included therein. Seller shall
deliver to Buyer:
(a) A Bill of Sale in the form of Exhibit A, and such assignments and
other instruments of transfer as may be reasonably satisfactory to Buyer's
counsel, and with such consents to the conveyance, transfer and assignment
thereof as may be necessary to effect the conveyance, transfer, assignment and
delivery of the Purchased Assets and to vest in Buyer the title specified in
this Section and to assure Buyer the full benefit of the Purchased Assets; and
(b) A Consent to Assignment for those Material Contracts and real estate
leases for which a consent to assignment is required, together with those
Material Contracts specifically listed on Schedule 1A. Simultaneously with the
delivery referred m in this on, Seller shall take or cause to be taken all such
actions as may reasonably be required to put Buyer in actual possession and
operating control of the Purchased Assets.
ARTICLE 3
REPRESENTATION AND WARRANTIES
-----------------------------
A. Seller hereby represents and warrants to Buyer as follows:
Section 3.1. Organization and Power of Seller. Seller is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Illinois, and Seller is authorized to transact business in Minnesota
and holds a Certificate of Authority issued by the State of Minnesota. Seller
has full power and authority to own its properties and conduct the business
presently being conducted by it, to execute this Agreement, and to consummate
the transactions contemplated by this Agreement.
Section 3.2. Authorization. The execution, delivery and performance of
this Agreement by Seller have been duly authorized and approved by all requisite
action on the part of Seller this Agreement constitutes the valid and binding
obligation of Seller and is enforceable against Seller in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, and other similar laws relating to or limiting
creditors' rights generally and by equitable principles.
Section 3.3. No Conflict. The execution and delivery of this Agreement
do not, and the consummation of the actions contemplated hereby and the
compliance with the terms hereof will not (a) violate any law, judgment, order,
decree, statute, ordinance, rule or regulation applicable to Seller. (b)
conflict with any provision of Seller's governing documents, (c) result in any
violation of, and will not conflict with, or result in a breach of any terms of,
or constitute a default under any mortgage, instrument or agreement to which the
Seller is a party or by which Seller or any of the Purchased Assets is bound, or
create any lien or encumbrance upon any of the Purchased Assets, or (d) require
any consent, approval, order or authorization of, or the registration,
declaration or filing with, any Governmental Entity or Other third party.
Section 3.4. Title to Purchased Assets. Seller has, or will have as of
Closing, good, valid and marketable title to all of the Purchased Assets, free
and clear of all Liens. No other party has any rights or claims to possession of
any of the Purchased Assets. None of the Purchased Assets are subject to any
option, contract, arrangement or understanding that would restrict Seller's
ability to transfer the Purchased Assets to Buyer as contemplated herein.
Section 3.5. Condition of Purchased Assets. All of the Purchased Assets
are in good operating condition and repair, ordinary wear and tear excepted, and
in the state of maintenance repair and operating condition required for the
proper operation and use thereof in the ordinary and usual course of business by
Seller.
Section 3.6. Litigation. There is not suit, action or proceeding pending
against or affecting Seller relating to the Purchased Assets or the transactions
contemplated hereby, nor is there, to the best of Seller's knowledge, any suit,
action or proceeding threatened against Seller relating to Purchased Assets.
Section 3.7. Insurance. The Business Assets included in the Purchased
Assets is insured for the Seller's benefit and will continue to be so insured
through the Closing, in amounts and against risks that are commercially
reasonable.
Section 3.8. Brokers. There are no claims for brokerage commissions,
finder's fees or similar compensation arising out of or due to any act of the
Seller in connection with the transactions contemplated by this Agreement.
Section 3.9. Compliance: Business Practices.
(a) Compliance with Laws and Regulations. Seller has conducted the
Business in accordance with applicable laws and regulations and the Mrs. Fields
Franchise Agreement, the violation of which might have a material adverse effect
upon the Business as now conducted or any of the Purchased Assets or the Assumed
Liabilities.
(b) Business Forms, Procedures, and Practices. Seller's forms,
procedures and practices are in compliance with all laws and regulations and the
Mrs. Fields Franchise Agreements, to the extent applicable, the violation of
which might have a adverse effect on the Business as now conducted or any of the
Purchased Assets, or the Assumed Liabilities.
Section 3.10. Condition of Business. Since October 1, 1996, until the
date of this Agreement:
(a) Material Change. There has been no material change in the accounting
practices of Seller, the maintenance of Records by Seller or the relationship of
the Business with customers, suppliers or others;
(b) Ordinary Course. Seller has carried on the Business in the ordinary
course in substantially the same manner as conducted as of October 1, 1996; and
(c) No Dispositions. Seller has not sold, leased or otherwise disposed
of, or agreed to sell, lease or otherwise dispose of, any material assets of the
Business except as provided in this Agreement or in the ordinary course of
business consistent with prior practice.
Section 3. 11. Bulk Sale Law. The transfer of Purchased Assets by Seller
under this Agreement is not subject to any statutory bulk sale or fraudulent
conveyance law adopted by the State of Minnesota.
Section 3.12. Financial Statements. Seller has delivered to Buyer
financial information respecting the Seller, (the "Financial Statements"), which
consist of unaudited financial statements for the Seller's Maplewood Mall, 3001
White Bear Ave., Maplewood, Minnesota location, as of October 6, 1996. The
Financial Statements fairly present the financial position and results of
operations of the Seller as for the periods then ended and the financial
position of the Seller at the dates thereof in accordance with generally
accepted accounting principles. The Seller has maintained its books of account
in accordance with generally accepted accounting principles consistently
applied, and such books of account are and, during the period covered by the
Financial Statements were, correct and complete in all material respects, fairly
and accurately reflect or reflected the income, expenses, assets and liabilities
of the Seller, including the nature thereof and the transactions giving rise
thereto, and provide or provided a fair and accurate basis for the preparation
of the Financial Statements. Seller's revenue accounts support the revenue
recognition shown on the Financial Statements for the period indicated and are
complete and accurate in all material respects. Seller's revenues, as reflected
in Seller's Financial Statements, are recorded at levels which are realizable
and collectable. All quantities and costing used by Seller to record the values
of the Purchased Assets are complete and accurate in all material respects.
Section 3.13. Real Estate Lease. The lease for the premises located at
the Maplewood Mall, 3001 White Bear Ave., Maplewood, Minnesota (the "Lease") is
valid and binding and enforceable in accordance with its terms, and to the best
of Seller's knowledge, neither Seller nor the other party to the Lease are in
material default of any of the provisions thereof.
Section 3.14. Inventories. Merchandise inventories are consistently
represented in the Financial Statements at their proper cost. Seller represents
that the inventory, within normal tolerance for minor clerical errors, exists as
and is verifiable by physical count.
Section 3.15. Pre-Bill. Seller has not prebilled or received prepayment
for products to be sold, services to be rendered or expenses to be incurred
subsequent to the Closing Date.
Section 3.16. Patents, Trademarks, Trade Secrets, etc. Seller owns no
patents, patent applications, trademarks, trademark registrations, applications
for trademark registration, service marks, service mark registrations,
applications for service mark registration, trade names, registered copyrights
and any other intellectual property rights or licenses needed to operate the
Business or holds the franchise rights for the use of such marks.
Section 3.17. Material Contracts. Schedule 3.17 lists all of the
contacts leases (including, but not limited to, the Lease), arrangements and
understandings including, without limitation, sales orders, purchase orders and
distribution agreements which are material to and relate to the Business as it
is conducted by Seller, each of which was entered into, arrived at or conducted
on behalf of Seller with appropriate authority in accordance with Seller's
customary practices. No sales order contains or entitled the customer to any
discount, credit, rebate or allowance of any kind or nature that reflects
prepayment made by a customer. To Seller's and Owners' knowledge, neither Seller
nor the other parties to such contracts, arrangements and understandings are in
material default thereof.
Section 3.18. Labor. Seller is not, and, as of the Closing Date will not
be, a party to any employment or consulting agreement or to any collective
bargaining agreement, nor are its employees members of a collective bargaining
unit or union, nor has there been any recent unionization activity. Seller has
substantially complied with all laws relating to the employment of labor,
including provisions relating to wages, hours, collective bargaining, and the
payment of unemployment compensation and workers' compensation amounts and
social security, withholding and similar taxes, and is not liable for any
arrears of wages, compensation fund contributions or any taxes or Penalties for
failure to comply with such laws. To the best knowledge of Seller and Owners,
none of employees of Seller has given any notice or made any threat, or
otherwise revealed an intent to cancel or otherwise terminate his relationship
with Seller, or given notice or expressed an interest not to accept employment
with Buyer as of the Closing, or to thereafter cancel or otherwise terminate his
employment with Buyer. At the Closing Date, all employees of Seller which Buyer
has notified will be hired by Buyer as of the Closing will be free effective as
of Closing, of all employment obligations to Seller and. will be free to become
employees of Buyer.
Section 3.19. Taxes. Seller has failed or will timely file all tax
returns and reports required by federal, state or local law and has paid, or
made adequate provision for the payment of, all taxes, interest, penalties,
assessments or deficiencies due in connection therewith. No Lien on the
Purchased Assets will result from, nor will any transferee liability attach to
the Purchased Assets by virtue of, any failure to file any return required to be
filed or payment required to be paid with respect to the Seller for any and all
taxes, levies, imports, duties, franchise, license and registration fees,
charges or withholdings of any nature.
Section 3.20. Statements Not Misleading. Seller and Owners have
disclosed all facts, events or transactions which are material to the
Purchased Assets and the Business. No representation or warranty of Seller or
of Owners, or document furnished by Seller and Owners hereunder is false or
inaccurate in any material respect or contains or will contain any untrue
statement of a material fact or omits or will omit to state any fact necessary
to the herein or in not misleading.
B. Buyer hereby represents and warrants to Seller as follows:
Section 3.21. Organization and Power of Buyer. Buyer is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Minnesota, and Buyer is authorized to transact business in Minnesota.
Buyer has full power and authority to own its properties and conduct the
business presently being conducted by it, to consummate the transactions
contemplated by this Agreement.
Section 3.22. Authorization. The execution, delivery and performance of
this Agreement by Buyer have been duly authorized and approved by all requisite
action on the part of Buyer, this Agreement constitutes the valid and binding
obligation of Buyer and is enforceable against Buyer in accordance with its
terms, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, and other similar laws relating to or limiting
creditors' rights generally and by equitable principles.
Section 3.23. No Conflict. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby and the
compliance with the terms hereof will not (a) violate any law, judgment, order,
decree, statute, ordinance, rule or regulation applicable to Buyer or either
Owner, (b) conflict with any provision of Buyer's governing documents, (c)
result in any violation of, and will not conflict with, or result in a breach of
any terms of, or constitute a default under any mortgage, instrument or
agreement to which the Buyer is a party or by which Buyer or any of the
Purchased Assets is bound, or create any lien or encumbrance upon any of the
Purchased Assets, or (d) require any consent, approval, order or authorization
of, or the registration, declaration or filing with, any Governmental Entity or
other third party.
Section 3.24. Litigation. There is suit action or proceeding pending
against or affecting Buyer relating to the Purchased Assets or the transactions
contemplated hereby, nor is there, to the best of Buyer's knowledge, any suit,
action or proceeding threatened against Buyer relating to the Purchased Assets.
Section 3.25. Brokers. There are no claims for brokerage commissions,
finder's fees or similar compensation arising out of or due to any act of the
Buyer in connection with transactions contemplated by this Agreement.
ARTICLE 4
COVENANTS
---------
Section 4.l. Conduct of Business. During the period from the date of
this Agreement and continuing until the Closing. Seller agrees (except as
expressly provided in this Agreement or the Schedules hereto or to the extent
that Buyer shall otherwise consent in writing) that:
(a) Ordinary Course. Seller shall carry on the Business in the ordinary
course in substantially the same manner as presently conducted, maintain the
Records in substantially the same manner as presently and preserve the
relationships of the Business with customers, suppliers and others.
(b) No Dispositions. Seller shall not sell, lease or otherwise dispose
of, or agree to sell, lease or otherwise dispose of, any of the Purchased
Assets, except in the ordinary course of business consistent with prior
practice.
(c) Other Actions. Seller shall take no action that would or might
result in any of its representations and warranties so forth in this Agreement
becoming untrue (including the accuracy of the Schedules), in any of the
conditions to Closing set forth in Article 6 not being satisfied, or in any of
the Purchased Assets becoming materially less valuable.
(d) Compliance with Laws. Seller shall comply with all laws, rules and
regulations of any Governmental Entity applicable to the Purchased Assets or the
conduct of the Business.
(e) Advice of Changes. Seller shall promptly advise Buyer in writing of
the occurrence of any matter or event that is material to the Business, the
Purchased Assets, or to the closing conditions or the representations and
warranties in this Agreement.
Section 4.2. Access to Information. From and after the date of this
Agreement until the Closing Date, Seller shall afford to Buyer and to Buyer's
counsel, accountants and other authorized representatives, full access to the
facilities, properties, contracts, books, records, key personal, customers and
suppliers of the Business and shall allow them to examine and obtain copies of
any and all documents pertaining or relating to the Purchased Assets and Assumed
Liabilities in order that Buyer and its authorized representatives, in
conducting the Due Diligence Review, may have full opportunity to make such
reasonable investigations as they shall desire to make of the affairs of Seller.
All access will be scheduled by mutual agreement, not unreasonably refused, and
shall be scheduled so as not to unreasonably interfere with the operation of
Seller's business.
Section 4.3. Further Assurances. Seller will execute and deliver all
such other and additional instruments, notices, releases, undertakings, consents
and other documents, and do all such other acts and things, as may be reasonably
requested by Buyer as necessary to assure to Buyer all the rights and interests
granted or intended to be granted under this Agreement. Seller shall take or
shall cause to be taken such other reasonable actions as Buyer may require more
effectively to transfer, convey and assign to, and vest in, Buyer, and put Buyer
in possession of, the Purchased Assets as contemplated by this Agreement. In the
event that any Purchased Assets cannot be fully and effectively transferred to
Buyer without the consent of a third party or parties, and if at the Closing
Buyer shall have waived its right to receive at the Closing such consent, Seller
shall thereafter be obligated to use its best efforts to assure Buyer the
benefits of such contract, commitment, other arrangement or other Purchased
Asset.
Section 4.4. Passage of Title and Risk of Loss. Legal title, equitable
title, and risk of loss with respect to the property and rights to be
transferred hereunder shall not pass to Buyer until the property or right is
transferred at the Closing and possession thereof is delivered to Buyer.
Section 4.5. Allocation of Purchase Price. Within one hundred twenty
(120) days after the Closing (unless required sooner to meet the reasonable IRS
filing requirements of one of the parties) the parties agree to complete
duplicate IRS Form 8594 ("Asset Acquisition Statement") as required by Section
1060 of the Internal Revenue Code. The parties further agree to make no change
or alteration of the Form 8594 and to file no Supplement Statement Form 8594
without at least fifteen (15) days prior written notice to the other party of
the nature and extent of the changes, which notice shall include the revised or
Supplemental Statement Form 8594.
Section 4.6. Expenses. Whether or not the Closing takes place, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense. Any
sales, use or other transfer taxes applicable to the conveyance and transfer
from Seller to Buyer of the Purchased Assets and any other transfer or
documentary taxes or any filing or recording fees applicable to such conveyance
and transfer shall be paid by Seller.
4.7. Seller's Non-Compete.
(a) Non-Competition. For a period of three (3) years from the Closing
Date, except as Buyer may otherwise consent in writing, Seller shall not,
directly or indirectly, as a principal, agent, partner, member, shareholder,
trustee, consultant, independent contractor, or otherwise: (i) own, manage,
operate, control or otherwise be in any manner affiliated or connected with, or
engage or participate in the ownership, management, operation or control of (as
independent contractor, or otherwise), any business or entity which as one of
its business activities competes, directly or indirectly, with Buyer in the
Business within Fifteen (15) miles of any location from which Seller operated
the Business on the Closing Date; (ii) attempt to sell, offer, or provide
products or services which are or are related to floral products to any person
or entity listed on the Customer List; or (iii) lend money, loans, make gifts of
money or other property, or otherwise lend financial or other assistance in any
form to any person, firm, association, partnership, venture, corporation or
other business entity who is engaged or will within the period prescribed above
engage in any of the activities prohibited by clause (i) or (ii).
(b) Confidentiality. All data and information that Seller has obtained
regarding the Business, including the Customer List, information relating to the
requirements of customers on the Customer List and all other information
regarding the affairs of the Business, shall be held in confidence by Seller,
and Seller shall not divulge any of such information to anyone except Buyer or
its representatives.
(c) Injunctive Relief. Seller acknowledges that any violation of any
provision of this Section 4.7 will cause irreparable harm to Buyer, that damages
for such harm will be incapable of precise measurement and that, as a result,
Seller will not have an adequate remedy at law to redress the harm caused by
such violations. Therefore, in the event of Seller's violation of Section 4.7,
Seller agrees that, in addition to its other remedies, Buyer shall be entitled
to injunctive relief, including but not limited to temporary restraining orders
and/or preliminary or permanent injunctions to restrain or enjoin any such
violation. Seller agrees to and hereby does submit to jurisdiction before any
state or federal court of record in Hennepin County, Minnesota, and Seller
hereby waives any right to raise the question of jurisdiction and venue in any
action that Buyer may bring in such court against Seller.
In addition to other relief to which it shall be entitled, Buyer shall
be entitled to recover from Seller the costs and reasonable attorney's fees
incurred by Buyer in seeking (i) enforcement of this Section 4.7 and (ii) relief
from Seller's violation of any restriction contained in this Section 4.7.
(d) Severability. Should any clause, portion or paragraph of this
Section 4.7 be unenforceable or invalid for any reason, such unenforceability or
invalidity shall not affect the enforceability or validity of the remainder of
this Section 4.7. Should any particular covenant or restriction, including but
not limited to the covenants and restrictions of Section 4.7(a) and 4.7(b), be
held to be unreasonable or unenforceable for any reason, including without
limitation the time period, geographical area and scope of activity covered by
such covenant, then such covenant or restriction shall be given effect and
enforced to the greatest extent that would be reasonable and enforceable.
Section 4.8. Post-Closing Access to Records. From and after the Closing
Date, Buyer shall afford Seller and Owners reasonable access to the Records
conveyed as part of the Purchased Assets for purposes of tax audit, governmental
investigation, litigation not involving (directly or indirectly) Buyer as an
adverse or conflicting party, or for any other reasonable business purpose not
involving an interest which is adverse or conflicting with the interests of
Buyer, in the discretion of Buyer. Unless otherwise consented to by Buyer in
writing, Seller shall hold in strict confidence all non-public information and
documents contained in such Records, and shall not disclose the same to any
third party except to governmental officials as may be legally required. All
access will be scheduled by mutual agreement, not to unreasonably with the
operation of Seller's business. Buyer shall maintain the Records in accordance
with its standard record retention policies, but will retain specific Records
for a longer period if reasonably required and identified by Seller in writing
(provided Buyer reserves the right to require Seller to pay the storage expense
for such longer period)
Section 4.9. Audit of Financial Statements. Buyer shall have the right,
at its expense and by an accounting firm of its election, to have an audit done
of Seller's Financial Statements, including the financial statements of Seller
ending with the Closing Date. Seller shall afford to Buyer and to Buyer's
accountants and other authorized representatives, full access to Seller's books,
records, and key personnel and shall allow and obtain copies of any and all
necessary documents in order that Buyer and its representatives can conduct the
required audit.
ARTICLE 5
CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS
-------------------------------------------
All obligations of Buyer under this Agreement are subject to the
fulfillment, prior to or at the Closing Date, of each of the following
conditions:
Section 5.1. Representations and Warranties. All representations and
warranties of Seller contained in this Agreement shall have been true and shall
be true in all material respects at and as of the Closing Date, except as
otherwise specifically contemplated by this Agreement. Seller shall have
compiled in all material respects with all covenants and conditions required to
be performed or complied with by it prior to or at the Closing Date. Seller
shall furnish Buyer with an appropriate certificate to the foregoing effect a3
of the Closing Date.
Section 5.2. Litigation Affecting Closing. No action, suit or proceeding
shall be pending or, to the best of Seller's knowledge, threatened by or before
any court or Governmental Entity in which it is sought to restrain or prohibit
or to obtain damages or other relief in connection with this Agreement or the
consummation of the transactions contemplated hereby.
Section 5.3. Instruments of Sale, Etc. Buyer shall have received such
instruments of sale, conveyance, transfer and assignment satisfactory to counsel
for Buyer as are necessary or desirable to vest in Buyer title to all of the
Purchased Assets or to confirm the status of title to the Purchased Assets.
Section 5.4. Consents. Buyer shall have received all consents required
by this Agreement for the transfer or assignment of all of the Purchased Assets
or the transactions contemplated hereby, including but not limited to, the
consent of the Mrs. Fields Cookies franchisor to become a franchisee and to
approve the sale contemplated hereby.
Section 5.5. No Material Adverse Change. Since the date of this
Agreement, there shall not have occurred any Material Adverse Change.
Section 5.6. Employees. Seller shall have terminated, effective upon
Closing, the employment of all employees of the Business and paid all
compensation or other money due to such employees with respect to their
employment and termination by Seller, and shall have cooperated with Buyer in
Buyer's efforts to hire such employees as Buyer deems desirable for the
continuation of the Business.
Section 5.7. Satisfactory Pre-Closing Due Diligence. Buyer has concluded
its preclosing due diligence with regard to Seller and its Business, and Buyer
and Buyer's counsel have been satisfied that the same has not revealed any
problems, liabilities or obligations of Seller that would have a material
adverse impact on the financial condition, operations or property of Seller or
its Business, such due diligence and conclusion, however, shall not relieve
Seller or Owners from liability for breach of any of the representations,
covenants or warranties hereof.
Section 5.8. Satisfactory Approval of Re: Mrs. Fields Franchise. Buyer
has concluded its review of the Mrs. Fields Franchise Agreement and is satisfied
that the terms of which meet with Buyer's approval, obtaining the necessary
approvals from the Mrs. Fields Franchisor for the transaction contemplated
hereby, obtaining the necessary grant of franchise rights for Buyer to operate
the Mrs. Fields franchise, and completing the necessary training with regard to
the operation of the Mrs. Fields franchise.
ARTICLE 6
CONDITIONS PRECEDENT TO SELLER'S OBILGATIONS
--------------------------------------------
All obligations of the Seller under this Agreement are subject to the
fulfillment, prior to or at the Closing, of each of the following conditions:
Section 6. 1. Litigation Affecting Closing. No action, suit or
proceeding shall be pending or threatened by or before any court or Governmental
Entity in which it is sought to restrain or prohibit or to obtain damages or
other relief in connection with this Agreement or the consummation of the
transactions contemplated hereby.
Section 6.2. Released From Assumed Liabilities. Seller shall have
obtained a release from the liabilities and obligations of the Assumed
Liabilities, effective upon Buyer's assumption thereof from each of the other
parties to the Assumed Liabilities.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
Section 7.1. Termination Events. This Agreement may be terminated on
written notice by Buyer or Seller, if the Closing shall not have occurred on or
before May 1, 1997 (the "Termination Date"), or such other date to which this
Agreement has been extended by agreement of the parties. In addition, this
Agreement may be terminated on written notice, on or before the Closing Date:
(a) By the mutual consent of the parties hereto; or
(b) By Buyer, if the conditions set forth in Article 5 are not satisfied
(or are incapable of being satisfied) on or before the Termination Date, without
fault of Buyer; or
(c) By Seller, if the conditions set forth in Article 6 are not
satisfied (or are incapable of being satisfied) on or before the Termination
Date, without fault of Seller.
Section 7.2. Effect of Termination. In the event of termination of this
Agreement as provided in Section 7.1 hereof, this Agreement shall forthwith
become void and them shall be no liability on the part of Buyer or Seller or
their respective officers or directors, except that the agreements contained in
Section 7.6 hereof shall survive the termination hereof.
Section 7.3. Amendment. This Agreement may be amended only by the
parties hereto by an instrument in writing signed by or on behalf of each of the
parties hereto.
Section 7.4. Waiver. Any term or provision of this Agreement may at any
time be waived in writing by the party or parties who are entitled to the
benefits being waived.
Section 7.5. Return of Documents. In the event that the sale of the
Purchased Assets is not consummated for any reason whatsoever, or if this
Agreement is terminated for any reason whatsoever, each party will return to the
other party on a timely basis all documents, agreements, instruments or other
written information concerning the other party that was obtained from such other
party.
Section 7.6. Nondisclosure. In the event that this Agreement is
terminated or the sale of the Purchased Assets is not consummated for any reason
whatsoever, Buyer and Seller, and their respective employees, agents, and
assigns, agree to hold in confidence and not to disclose, furnish communicate,
make accessible to any person or use in any way for either party's own or
another's benefit any Confidential Information of the other party or permit the
same to be used in competition with the party which owns such Confidential
Information.
ARTICLE 8
MISCELLANEOUS
-------------
Section 8.1. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and delivered personally or sent by
certified mail, postage prepaid to the addresses set forth below:
To Buyer: TeNaKi Corp.
2396 East Skillman Avenue
North St. Paul, MN 55109
with copy to: Raw Lillegard Fry
2345 Rice Street, Suite 145
Roseville, MN 55113
To Seller: Butterwings Entertainment Group, Inc.
2345 Pembroke Avenue, Suite B
Hoffman Estates, Illinois 60195
Attn: Kenneth B. Drost
Section 8.2. Entire Agreement. This Agreement (including the Schedules
and Exhibits hereto) constitutes the sole understanding of the parties with
respect to the subject matter hereof.
Section 8.3. Counterparts: Expenses. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. Each party shall
pay all its own fees and bear all its own expenses incurred in connection with
this Agreement and the transactions contemplated hereby.
Section 8.4. Parties in Interest: Assignment. This Agreement shall inure
to the benefit of, and be binding upon, the parties hereto and their respective
successors and assigns, provided that any assignment of this Agreement of the
rights-hereunder by any party hereto without the written consent of the other
parties shall be void.
Section 8.5. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota.
Section 8.6. Schedules and Headings. All of Schedules and Exhibits
attached hereto are a part of this Agreement and all of the matters contained
therein are incorporated herein by reference. The descriptive headings of the
several Articles and Sections of this Agreement are inserted for convenience
only and do not constitute part of this Agreement.
Section 8.7. Indemnification by Seller. Seller agrees to indemnify and
hold Buyer harmless from and against any order, action, cost, claim, damage,
disbursement, expense, liability, loss, deficiency, obligation, penalty, fine,
assessment or settlement of any kind or nature, whether foreseeable or
unforeseeable, including, but not limited to, any and all attorney fees, costs,
and other, expenses directly or indirectly, as a result of, or upon or arising
from (i) any inaccuracy or breach or non-performance of any of the
representations, warranties, covenants or agreements made by Seller in or
pursuant to this Agreement, (ii) any order, action, cost, claim, damage,
liability or Lien arising prior to the Closing whether asserted prior to, on, or
after the Closing, (iii) any third party claims in respect to the Business or
Purchased Assets, or regarding the conduct of the Business, prior to the Closing
that are asserted prior to, on or after the Closing, or (iv) any loss or
liability by Seller's negligence or failure to comply with its obligations under
this Agreement prior to, the Closing that are asserted prior to, on or after the
Closing.
Section 8.8. Indemnification by Buyer. Buyer agrees to indemnify and
hold Seller harmless from and against any order, action, cost, claim, damage,
disbursement, expense, liability, loss, deficiency, obligation, penalty, fine,
assessment or settlement of any kind or nature whether foreseeable or
unforeseeable, including, but not limited to, any and all attorney fees, costs,
and other expenses, directly or indirectly, as a result of, or based upon or
arising from (i) and inaccuracy in or breach or non-performance of any of the
representations, warranties, covenants or agreements made with Buyer in or
pursuant to this Agreement,(ii) any order, action, cost, claim, damage liability
or Lien arising after the Closing, (iii) any third party claims in respect to
the Business or Purchased Assets, regarding the conduct of the Business, arising
after the Closing, or (iv) any loss or liability caused by Buyer's negligence or
failure to comply with its obligations under this Agreement, which arise after
the Closing.
Section 8.9. Survival. The representation and warranties contained in
Article 3, the covenants contained in Article 4 (with the exception of Section
4.7), and indemnification provisions contained in Section 8.7 and 8.8 shall
survive the Closing for a period of one (1) year following the Closing Date. The
covenants in Section 4.7 shall survive the Closing for the periods stated
therein.
Section 8.10. Public Announcement. No public announcement or other
public disclosure shall be made, prior to the Closing, of this transaction or
the terms and conditions thereof, except as mutually agreed by the parties or as
may be required by applicable law.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first above written.
BUTTERWINGS ENTERTAINMENT GROUP, INC. TENAKI CORP.
By: /s/ Steve Buckley By:_________________________
- ---------------------
Its President Its
------------- ----------------
CONSENTED TO:
MRS. FIELDS DEVELOPMENT CORPORATION
By: __________________________
Its ____________________
<PAGE>
SCHEDULE 1A
ASSUMED LIABILITIES
Lease for premises located at 3001 White Bear Ave., Maplewood, Minnesota, dated
April 5, 1991.
SCHEDULE 1B
PURCHASED ASSETS
I. Purchased Assets
The Purchased Assets include all of assets of any kind or nature, used
or useful in the Business, including, without limitation, the following assets,
but excluding the assets described below as "Excluded":
a. Tangible Property/Equipment
All tangible personal property and fixtures of every kind, nature and
description, including without limitation, all machinery, equipment, computers,
parts, furniture, trade fixtures and general supplies, located at 3001 White
Bear Ave., Maplewood, Minnesota;
b. Inventory
All inventory, including prepaid and in-transit items, of materials and
supplies, spare parts, shipping containers and materials, packaging, and
finished products relating to the Seller's Business, located at 3001 White Bear
Ave., Maplewood, Minnesota;
c. Contracts
All customer contracts, agreements, and engagements, the lease for the
premises at 3001 White Bear Ave., Maplewood, Minnesota and all other contracts,
agreements, leases and licenses relating to the Business ("Contracts"),
including, without limitation, all of the contracts, etc. listed on Schedule
3.17 of the Asset Purchase Agreement, together with all claims or rights of
action now existing or hereinafter arising out of such contracts or agreements
or the performance thereof, the benefit of all open orders placed with Seller,
the benefit of all purchase orders placed by Seller for products of the type
included in the inventory being acquired hereunder, all warranties extended and
representations made to Seller by third parties to the extent assignable, and
all rights, remedies, setoffs, allowances, reworkings, discount;
d. General Intangibles
All claims and rights against third parties relating to, or arising out
of the Business, together with any and all security interests, liens of
mortgages granted or otherwise available to Seller as security for the
collection of any of the Purchased Assets; security deposits, investment
securities; permits; approvals; variances provider numbers; Seller's existing
telephone numbers; trademarks, service marks, and all substantially similar
names and marks; and all copyrights, patents, trade secrets, inventions,
discoveries, know-how and other Intellectual Property rights relating to the
Business;
e. Records
All logs, books, records, files, customer lists, and histories, supplier
lists, and files, engineering and design drawings, and all sales literature and
sales aids, product sheets and documentation, product displays, advertising
materials, manuals, computer and electronic data processing materials and
programs, correspondence, and all other Records as defined in Asset Purchase
Agreement;
f. Goodwill
All of the know-how and goodwill of the Business, including, without
limitation, the exclusive right for Buyer to hold itself out as the successor to
the Business of Seller.
II. Excluded Assets
a. Accounts Receivable.
b. Cash on hand and in bank accounts.
c. Corporate records of Seller.
<PAGE>
SCHEDULE 3.17
MATERIAL CONTRACTS
Party Date Agreement Type
REAL ESTATE LEASES
Date Premises Description
4/5/91 3001 White Bear Ave., Maplewood, Minnesota, legally described as:
<PAGE>
EXHIBIT A
BILL OF SALE, ASSIGNMENT AND CONVEYANCE
Effective as of _____________
WHEREAS, TeNaKi Corp. ("Buyer") and Butterwings Group, Inc., an Illinois
corporation ("Seller"), have entered into an Asset Purchase Agreement dated as
of __________(which, together with the Exhibits thereto. is hereinafter referred
to as the "Asset Purchase Agreement"); and
WHEREAS, the Asset Purchase Agreement contemplates and provides for the
assignment, transfer and conveyance to Buyer of the assets of Seller used or
useful in the business of the Seller (the "Business);
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Seller does hereby grant, bargain, sell, transfer, convey, assign
and deliver to Buyer, as of the date, first above appearing, all of Seller's
right, title and interest whatever kind and character, in and to the assets
described on Schedule 1B hereto (the "Purchased Assets"):
TO HAVE AND TO HOLD unto Buyer. its successors and assigns forever all
of the Purchased Assets hereby granted, bargained, sold, transferred, conveyed,
assigned and delivered.
Seller hereby irrevocably makes, constitutes and appoints Buyer the true
and lawful Attorney of Seller, with full Power of substitution, for and in the
name and stead of Seller but on behalf and for the benefit of Buyer, to demand
and receive from time to time any and all property, tangible and intangible,
constituting any of the Purchased Assets and to give receipts and releases for
and in respect of the same and any part thereof and, from time to time, to
institute and prosecute in the name of Seller, but at the expense and for the
benefit of Buyer, any and all proceedings at law, in equity or otherwise which
Buyer may deem proper to collect, assert or enforce any claim, right or title of
any kind in of any of the Purchased Assets and to defend and compromise any and
all actions, suits or proceedings hereafter instituted in respect of any of the
Purchased Assets and to do all such acts and things in relation to the Purchased
Assets as Buyer shall deem desirable, except in all cases as otherwise
contemplated by the Asset Purchase Agreement.
Seller hereby covenants and agrees to execute and deliver to Buyer such
other instruments of conveyance, assignment and transfer as Buyer may reasonably
request in order to more fully vest in Buyer all and singular the rights and
properties hereby granted, bargained, sold, transferred , conveyed, assigned and
delivered.
This Bill of Sale, Assignment and Conveyance shall be deemed to have
been executed and delivered in the State of Minnesota and shall be governed by
and construed in accordance with the internal laws, as opposed to the rules
governing conflicts of laws, of the State of Minnesota.
The Bill of Sale, Assignment and Conveyance shall be binding upon Seller
and its successors and assigns.
IN WITNESS WHEREOF, Seller has caused this instrument to be signed in
its name by its proper and duly authorized corporate officer as of the _________
day of ____________, 19__.
BUTTERWINGS ENTERTAINMENT GROUP
By: /s/ Steve Buckley
---------------------
Its President
-------------
Consent of Independent Accountants
We consent to the use in this Registraion Statement on Form SB-2 (No. 333-20601)
of our report dated March 6, 1997, relating to the consolidated financial
statements of Butterwings Entertainment Group, Inc. and Subsidiaries. We also
consent to the reference to our firm under the caption "expert" in the
prospectus.
/s/ McGladrey & Pullen LLP
Schaumburg, Illinois
May 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001030988
<NAME> Butterwings Entertainment Group, Inc
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-29-1996 DEC-28-1997
<PERIOD-START> JAN-01-1996 DEC-30-1996
<PERIOD-END> DEC-29-1996 APR-04-1997
<CASH> 534,072 132,536
<SECURITIES> 0 0
<RECEIVABLES> 3,137 3,676
<ALLOWANCES> 0 0
<INVENTORY> 118,647 37,182
<CURRENT-ASSETS> 719,813 1,126,497
<PP&E> 2,933,386 1,235,578
<DEPRECIATION> 619,141 391,107
<TOTAL-ASSETS> 5,506,201 3,872,779
<CURRENT-LIABILITIES> 5,507,435 5,714,392
<BONDS> 0 0
0 0
1,568,500 1,568,500
<COMMON> 21,520 21,520
<OTHER-SE> (3,802,975) (5,493,270)
<TOTAL-LIABILITY-AND-EQUITY> 5,506,201 3,872,779
<SALES> 8,551,033 2,428,091
<TOTAL-REVENUES> 8,551,033 2,428,091
<CGS> 2,454,078 693,645
<TOTAL-COSTS> 10,385,742 3,515,379
<OTHER-EXPENSES> (279,324) (456,950)
<LOSS-PROVISION> 927,148 775,000
<INTEREST-EXPENSE> 493,279 135,126
<INCOME-PRETAX> (2,757,259) (1,729,295)
<INCOME-TAX> (2,757,259) (1,729,295)
<INCOME-CONTINUING> (2,757,259) (1,729,295)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,757,259) (1,729,295)
<EPS-PRIMARY> (1.23) (0.76)
<EPS-DILUTED> (1.23) (0.76)
</TABLE>
