As filed with the Securities and Exchange Commission on January ____, 1998
Registration No. 333 -20601
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
AMENDMENT NO. 3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Butterwings Entertainment Group, Inc.
(Name of Small Business Issuer in its charter)
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) 925-0925 (847) 925-0925
(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:
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
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.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
(Registration Statement cover page cont'd)
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
Units 1,495,000 $5.00 $7,475,000 $ 2265.15
Common Stock, $.01 par
value (3) 1,495,000 (2) (2) 2
Redeemable Series A Common
Stock Purchase Warrants (3) 1,495,000 (2) (2) (2)
Common Stock, $.01 par
value (3) ( 4) 1,495,000 $6.00 $8,970,000 $2718.18
Underwriters' Warrants (5) 130,000 $.001 $130.00 $0.04
Units Underlying the
Underwriters' Warrants 130,000 $6.00 $780,000 $236.36
Common Stock, $.01 par
value (6) 130,000 (5) (5) (5)
Redeemable Series A Common
Stock Purchase Warrants(7) 130,000 (5) (5) (5)
Common Stock, $.01 par
value (4) (7) 130,000 $6.00 $780,000 $236.36
Total $5,456.09
<FN>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Included in the Units. No additional registration fee is required.
(3) Issuable upon exercise of Redeemable Series A Common Stock Purchase Warrants.
(4) 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.
(5) Underwriters' Warrants to purchase up to 130,000 Units, consisting of an aggregate of 130,000 shares of Common Stock
and 130,000 Redeemable Series A Common Stock Purchase Warrants.
(6) Included in the Units Underlying the Underwriters' Warrants. No additional
registration fee is required. (7) Issuable upon exercise of Redeemable Series A
Common Stock Purchase Warrants underlying the Underwriters' Units.
</FN>
</TABLE>
<PAGE>
Butterwings Entertainment Group, Inc.
Cross - Reference Sheet
showing location in the Prospectus of
Information Required by Items of Form SB-2
<TABLE>
Form SB-2 Item Number and Caption Location In Prospectus
<S> <C>
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...................................................Not Applicable
8. Plan of Distribution.......................................................Outside Front Cover Page; Risk actors; 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. Discirption of Securiites..................................................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 Certain Relationships and
Transactions 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
</TABLE>
PROSPECTUS
Subject to Completion, Dated January 1998
Butterwings Entertainment Group, Inc.
1,300,000 Units
Each Unit consisting of One Share of Common Stock and
One Redeemable Series A Common Stock Purchase Warrant
Butterwings Entertainment Group, Inc. (the "Company") is hereby
offering 1,300,000 Units. 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") of 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 ____ 1998 [six months after the date of this prospectus] unless
earlier separated upon three days' prior written notice from Securities
Incorporated (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 ____, 1999 [13 months
after the closing of this Prospectus] until ______, 2003, 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 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" 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 $5.00 per Unit. See "Underwriting" for information relating to the
factors to be considered in determining the initial public offering price. The
Company intends to apply for listing of the Units, the Common Stock and the
Series A Warrants on the Boston Stock Exchange subject to official notice of
issuance, under the symbols "ETS.U, "ETS" and "ETS.W" respectively and on the
NASDAQ Small Cap Market under the symbols "EATS.U", "EATS" and "EATS.W."
The Company's ability to continue as a going concern may be
dependent upon the successful completion of this offering.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION FROM THE PUBLIC OFFERING PRICE. PROSPECTIVE INVESTORS
SHOULD CAREFULLY CONSIDER THE SECTIONS ENTITLED "RISK FACTORS"BEGINNING ON PAGE
7 AND "DILUTION" CONCERNING THE COMPANY AND THIS OFFERING.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company (2) Security Holders
Per Unit (3)..........$ $ $ $
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 Centex Securities Incorporated in La Jolla, California on or
about _________.
Centex Securities Incorporated
The date of this Prospectus is _______, 1998.
(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 130,000 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 195,000 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."
<PAGE>
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 772,128 shares of
Common Stock pursuant to the Exchange Offer described elsewhere in this
Prospectus, (iii) the issuance of 330,211 shares of Common Stock upon the
automatic conversion of outstanding Convertible Preferred Stock described
elsewhere in this Prospectus, and (iv) the issuance of 55,931 shares of Common
Stock included in 55,931 Units to be issued to certain Bridge Loan Note 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") The Company
currently owns, operates and manages 12 Mrs. Fields Cookie Stores in Missouri,
Michigan and Minnesota. The Company sold one low volume Cookie Store in
Minnesota, effective June 1, 1997. The Company formerly owned and operated four
Hooters franchised restaurants but closed one restaurant in September 1996, sold
two restaurants in July 1997, and its remaining Hooters restaurant in October,
1997. The Company will not open any new Hooters restaurants
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 develops and
operates its Mrs. Fields Cookie Stores pursuant to specified standards
established by the franchisor.
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 and three additional Hooters
restaurants, all in San Diego, California, between October 1994 and May 1995,
one of which was subsequently closed. The Company sold two restaurants in July
1997 and one restaurant in October 1997.
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 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 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 operated its restaurants 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.
<PAGE>
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" or "12% Notes"), accrued interest on the Notes plus a
20% premium on the principal and interest, all divided by the proposed initial
public offering price of $5.00 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 772,128 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 330,211 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 330,211 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 were secured promissory
notes bearing interest at the LIBOR rate and 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. The Bridge Loan Notes were amended in
July 1997 to capitalize unpaid interest, extend the due date until the earlier
of the effective date of this Offering or six months from the execution of the
amended Bridge Loan Notes and to amend the interest rate to 14%. The resulting
principal amount of the Bridge Loan Notes is $574,395. The number of warrants
received by the Bridge Loan holders was reduced to 55,931 and the holders
thereof agreed that they would not sell, transfer, pledge, assign or hypothecate
the warrants or underlying units in any way for a period of one year from the
effective date of this Offering. The Bridge Loan Notes were further amended in
January 1998 solely to extend the due date until the earlier of the closing of
this Offering or six months from the date of issuance of the Amended Bridge Loan
Notes (July 1998). As consideration for extending his Bridge Loan Note, one
holder of $195,000 principal amount of Bridge Loan Notes demanded, and the
Company granted to him only, a lien on the Company's Cookie Store located in
Flint, Michigan. Such Note provides that if the Company's Bridge Loan Note to
him is not paid from the proceeds of this Offering or by December 31, 1997, he
may take over the Flint Cookie Store on January 1, 1998. The Company has the
option to repurchase the Cookie Store for a period of 12 months for $250,000
cash. In addition, Kenneth B. Drost, Vice President, Secretary and a director of
the Company, agreed to sell the Note holder 20,000 shares of his Common Stock of
the Company for $100 upon termination of a one year lock-up. By amendment dated
January 8, 1998, this Amended Bridge Loan Note was extended to December 31, 1998
and the Note holder agreed to forbear any remedies he may have under the first
Amendment to his Bridge Loan Note, including the right to take over the Flint,
Michigan Cookie Store. In consideration for the extension, the Company agreed to
pay the Note holder $100,000 on the effective date of this Offering and $6,000
monthly until the earlier of the effective date of this Offering or December 31,
1998. See Management's Discussion of Financial Condition and Results of
Operations - Bridge Financing."
<PAGE>
The Offering
Securities offered hereby1,300,000 Units, each Unit consisting of one
share of Common Stock and one Series A Warrant. See "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...................4,610,317 shares (1)
Series A Warrants to be Outstanding
after the Offering...................1,355,931 Series A Warrants (1)
Use of Proceeds........................Development and acquisition of Mrs.
Fields Cookie Stores, expansion into
other concepts, 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
Proposed Nasdaq Small Cap Market Symbols
Units....................................... EATS.U
Common Stock................................ EATS
Series A Warrants........................... EATS.W
- --------------
(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) 1,300,000 shares issuable upon the exercise of the Series A Warrants to
be sold in this Offering; (ii) up to 195,000 shares and 195,000 Series A
Warrants to purchase 195,000 shares subject to the Underwriters'
over-allotment option; (iii) 130,000 shares and 130,000 Series A Warrants
to purchase 130,000 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."
<PAGE>
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 forty week periods ended October 5,
1997 and October 6, 1996 and the summary balance sheet data as of October 5,
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.
<TABLE>
Income Statement Data:
<CAPTION>
Fiscal Years Ended 40 Weeks Ended
December 29, December 31, October 5, October 6,
1996 1995 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $8,551,033 $7,730,956 $5,316,074 $6,535,002
Operating expenses 8,317,394 7,398,898 5,341,931 6,441,186
General and administrative
expenses 996,200 566,918 890,292 570,240
Write off of franchise fee
options 145,000 -- -- --
Provisions for losses on
assets 927,148 304,474 1,025,000 928,848
Net (loss) (2,757,259) (1,153,674) (2,756,249) (1,974,801)
Net (loss) per common
share $(1.23) $ (0.51) (1.24) $ (0.87)
Common shares outstanding (1) 2,250,736 2,250,736 2,231,042 2,231,042
Pro forma:
Net (loss) (2) $(1,177,359) -- $ (1,533,778) --
Net (loss)
per common share(2) $(.25) -- $ (0.34) --
Common shares
outstanding (2) 4,633,394 -- 4,633,394 --
</TABLE>
<TABLE>
Balance Sheet Data:
<CAPTION>
December 29, October 5, 1997
------------ ---------------
1996 Actual As Adjusted (2)
---- --------- ---------------
<S> <C> <C> <C>
Current Assets $ 719,813 $ 714,943 $5,772,108
Total Assets 5,506,201 3,084,668 7,496,863
Total current liabilities 5,507,435 5,181,693 1,271,026
Total long-term debt 521,721 1,180,379 1,180,379
Redeemable Preferred Stock 1,690,000 1,690,000 1,690,000
Stockholders' equity (deficit) $ (2,212,955) $ (4,967,404) $3,355,458
- ----------------
<FN>
(1) Based on weighted average number of shares outstanding. See Note 1 to Consolidated Financial Statements for the
fiscal years ended December 29, 1996 and December 31, 1995.
</FN>
</TABLE>
<PAGE>
(2) To reflect (i) the sale of 1,300,000 Units (including 1,300,000 shares of
Common Stock) at a price of $5.00 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, and (iv) the issuance of 55,931 shares of
Common Stock to the Bridge Loan holders.
<PAGE>
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 forty weeks ended October 5, 1997,
and October 6, 1996, the Company, on a consolidated basis, incurred net losses
of $2,756,249 and $1,947,801, 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 Company's Businesses; Current and Future Profitability
The business of owning and operating a Mrs. Fields Cookie Store
involves a high degree of risk. The ultimate profitability of the Company's
business will depend upon numerous factors including, without limitation, 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 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 forty week period
ended October 5, 1997 and the year ended December 29, 1996 for the Company's
Mrs. Fields Cookie Stores have resulted in operating losses of $1,356,206 and
$881,654, respectively. 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
Expansion of Mrs. Fields Cookie Stores and Other Businesses
Since the Company will not open additional 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.
However, there is no definitive agreement for the acquisition of the micro
brewery 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 since its results for the forty-eight week period
ended October 5, 1997 and the fiscal year ended December 29, 1996 resulted in
operating losses of $1,356,206and $881,654, 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-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
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
identified and successful. See "Business and Properties "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
The franchise agreement between the Company and the Mrs. Fields
Franchisor require the Company to pay an initial franchise fee with respect to
each cookie store opened, to pay royalties based on gross sales of each cookie
store location and to spend a percentage of the gross sales of each 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 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 up to 6% to the Mrs. Fields
Franchisor. The Company currently contributes a percentage of gross sales for
certain of its Mrs. Fields Cookie Stores to the national marketing funds of the
franchisor. In addition, the Company's franchise agreements require the Company
to operate its 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 industry is 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 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."
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
The "Mrs. Fields" service marks have significant value and are
important to the marketing of the Company's Mrs. Fields Cookie Stores. The Mrs.
Fields Franchisor has enforcement policies to investigate possible violations of
its 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 Mrs. Fields
Franchisor to report any such violations to the 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, or the Mrs. Fields Franchisor will
be successful in enforcing their rights under the Mrs. Fields 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 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 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. The buyers of the three Hooters
restaurants sold, assumed the leases on the restaurants and the Company will
have no further liability therefor. See Management's Discussion and Analysis of
Financial Condition and Results of Operations-Restaurant Closing," and Notes 10
and 11 to Consolidated Financial Statements.
Geographic Concentration of Cookie Stores; Uncertainty of Market Acceptance
The Company currently operates 12 Mrs. Fields Cookie Stores, in the St.
Louis, Missouri, Minneapolis, Minnesota and Lansing/Flint, Michigan areas. The
Company's current 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 12 cookie stores, an unsuccessful new Cookie tore could
have a significant adverse impact on the Company's operations. See "Prospectus
Summary-The Company" and "Business and Properties- Expansion Strategy."
Risks Associated With 12% 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. Commencing February 1, 1998, the Company will be
required to make semi-annual interest payments of approximately $49,650 until
April 1998, and thereafter semi-annual payments of principal and interest of
$27,485, until the notes are paid in full in April 2001. On August 1, 1997, the
Company paid the Note holders who did not accept the Exchange Offer $132,491 in
past due and accrued interest through July 31, 1997, eliminating all defaults on
the 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 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 to be exchanged (estimated to be approximately $190,000) 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 $693,467 of the net proceeds of this Offering
to retire the outstanding principal and interest on 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 has been 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. With
the liquidation of NEMC and the merger of NEMC into the Company in May 1997, the
Company is no longer eligible for inclusion in NEMC's consolidated tax return
and NEMC has been relieved of any previous obligation to pay the Company the tax
benefit for any tax losses utilized under the intercorporate tax allocation
practices. However, 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 cookie businesses is subject to various federal, state and local
government regulations, including those relating to the sale of food. 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 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.
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.
<PAGE>
Possible Need for Additional Financing
The net proceeds of this Offering will be used to develop and acquire
cookie stores, expand into new concepts, 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 cookie stores.
The success of the Company's business will be dependent upon Messrs. Kenneth B.
Drost, Vice-President and Secretary, and Douglas E. Van Scoy, Chief Financial
Officer, respectively, of the Company and its principal shareholders and James
M. Clinton, President. 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 at that time by Kenneth B. Drost and Douglas Van Scoy,
officers and principal shareholders of the Company and Stephan S. Buckley a
former officer, director and shareholder 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 Company subsequently entered into a two
year lease for office space with an unaffiliated third party at a monthly rental
of $5,500 commencing June 1, 1997. On May 1, 1997, the assets of NEMC were
distributed to the shareholders and NEMC was merged into the Company with the
Company being the survivor. 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 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 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. 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 4,610,317shares of Common Stock
outstanding (4,805,317shares if the Underwriters' over-allotment option is
exercised). The 1,300,000 shares of Common Stock and 1,300,000 Series A Warrants
offered hereby will be freely tradable. The remaining 3,254,386 shares of Common
Stock, as well as the 55,931 shares of Common Stock, 55,931 Series A Warrants
and 55,931 shares of Common Stock issuable upon exercise of such Warrants to be
issued to the Bridge Loan holders, 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 Kenneth B. Drost
and Douglas Van Scoy, the principal shareholders of the Company, have been held
for longer than two years. However, Messrs. Drost and Van Scoy have agreed with
the Underwriters that they 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
Bridge Loan holders have agreed that they will not sell, transfer, pledge,
assign or hypothecate, in any way, their securities for a period of one year
from the effective date of this Prospectus. 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."
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 $4.10 per share or
approximately 82% 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 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.
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."
<PAGE>
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
The Company's officers and directors currently beneficially own 90.5%
of the Company's outstanding Common Stock. Upon completion of this Offering,
such shareholders will continue to own beneficially approximately 42.3 % 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."
<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 ($6,177,500 if the Underwriters
over-allotment option is exercised in full), assuming, in each case, an initial
public offering price of $5.00 per Unit. No value has been assigned to the
Series A Warrants included in the Units. 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%
and new concepts (2)
Repayment of Bridge Loan Notes, including interest (3) 693,467 10.7
Working capital and general corporate purpose 406,533 6.2
----------- ---
Totals $5,300,000 100.0%
========== ======
- --------------
<FN>
(1) The Company has paid approximately $451,000 of such offering expenses
as of October 5, 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 14% per annum and is payable
upon the earlier of the close of this Offering or six months from the date
of execution of the amended Bridge Loan Notes (December 31, 1998 for one
Note holder). The proceeds of the debt were used for normal operating
expenses and to pay professional fees and expenses in connection with this
Offering. See "Cancellation of Debt; Conversion of Preferred Stock; Bridge
Loan Financing."
</FN>
</TABLE>
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."
<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. See "Risk Factors - No Dividends on Common
Stock."
<PAGE>
DILUTION
As of October 5, 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 shares of Common Stock and
Series A Warrants to the Bridge Loan Holders, was ($1,578,879) or ($.48) 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 772,128 shares to be issued to the Note
holders, the 330,211 shares to be issued to the Convertible Preferred Stock
holders and the 55,931 shares to be issued to the Bridge Loan Holders. After
giving effect to the sale of 1,300,000 Units by the Company (comprised of
1,300,000 shares of Common Stock and 1,300,000 Series A Warrants) at an assumed
offering price per Unit of $5.00, and the application of the estimated net
proceeds therefrom, the pro forma net tangible book value per share would
increase from ($.48) to $.90. This represents an immediate increase in net
tangible book value of $1.38 per share to current holders of Common Stock and an
immediate dilution of $4.10 per share, or 82%, to new investors, as illustrated
in the following table.
Assumed public offering price per share $5.00
Net tangible book value per share before this Offering $(.48)
Increase per share attributable to new investors $1.38
Adjusted net tangible book value per share after this Offering $.90
----
Dilution per share to new investors $4.10
=====
Percentage dilution 82%
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 55,931 Shares of Common
Stock 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 $5.00 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 3,30,317 71.8% $5,415,700 45.5% $1.64
New investors 1,300,000 28.2 6,500,000 54.5 $5.00
--------- ---- --------- ----
Total 4,610,317 100.0% $11,915,700 100.0%
========= ====== =========== =====
- --------------
<FN>
The foregoing table excludes the effect of the exercise of (i) the
Underwriters' over-allotment option, (ii) the Underwriters' Warrants, (iii) the
Bridge Loan holders Series A Warrants, and (iv) 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."
</FN>
</TABLE>
<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 October 5,
1997 and the unaudited capitalization of the Company as of October 5, 1997, as
adjusted to give effect to (i) the sale of the 1,300,000 Units offered at a
price of $5.00per 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)
the issuance of 55,391 shares of Common Stock to the Bridge Loan Holders.
December 29, October 5,
1996 1997 1997
Actual Actual
As Adjusted
Current liabilities:
Current maturities of
long-term debt $4,288,063$ 3,507,406 $ 60,511
--------------------- ------
Total current liabilities: 5,507,435 5,181,693 1,271,026
--------- --------- ---------
Long-term debt:
Long-term debt less
current maturities plus
obligations relating to
closed stores (1) 521,721 1,180,379
------- ---------
1,180,379
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 1,568,500 1,568,500
--------- ---------
- --
Common Stock, $.01 par value,
10,000,000 shares authorized,
2,152,047 shares issued and
outstanding and 4,610,317 shares
issued and outstanding, as adjusted (3) 21,520 21,250
------ ------
46,103
Capital in excess of par value 1,564,979 1,467,779
--------- ---------
12,172,336
Unearned compensation expense (127,000) (28,000)
--------- --------
(28,000)
Accumulated deficit (5,240,954) (7,997,203)
----------- -----------
(8,834,981)
Total stockholders' equity (deficit) (2,212,955) (4,967,404) 3,355,458
----------- ----------- ---------
Total capitalization $5,506,201 $3,084,668
========== =========
$7,496,863
- -----------------
(1) Includes long-term lease obligations related to store closing. See Note 11
to Consolidated Financial Statements for the fiscal years ended December 29,
1996 and December 31, 1995.
(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)
1,30,000 shares issuable upon the exercise of the Series A Warrants to be sold
in this Offering; (ii) up to 195,000 shares and 195,000 Series A Warrants to
purchase 195,000 shares subject to the Underwriters' over-allotment option;
(iii) 130,000 shares and 130,000 Series A Warrants to purchase 10,000 shares
subject to the Underwriters' Warrants; (iv) 55,931 Series A Warrants to purchase
55,931 shares issuable to the Bridge Loan holders: and (v) 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 Forty Week Period Ended October 5, 1997
Compared to the Forty Week Period Ended October 6, 1996
At October 5, 1997 twelve Mrs. Fields Cookie Stores were owned by the
Company after selling one store June 1, 1997. During the corresponding period in
1996 thirteen Cookie Stores operated for the entire period and one Cookie Store
was built and became operational in July 1996. One Cookie Store was sold in
October 1996.
During the forty week period ended October 5, 1997 one Hooters
restaurant was open for the entire period. During the corresponding period in
1996 four restaurants operated for the entire period. In mid-September 1996, one
Hooters restaurant was closed. Two of the Hooters restaurants were sold as of
July 14, 1997 and the third Hooters restaurant was sold on October 26, 1997.
The Company reported a net loss of $2,756,249 for the forty week period
ended October 5, 1997 compared to a net loss of $1,947,801 in the corresponding
period in 1996. Significant factors influencing the results of operations
include:
Sales were $5,316,074 for the forty weeks ended October 5, 1997 compared
to $6,535,002 for the corresponding period in 1996. This decrease of
$1,218,928 reflects a $166,404 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
$1,385,332 from the restaurants. Same store sales for the one restaurant
that operated during the entire forty week period declined $53,964 while
the remaining decrease reflects the restaurant which was closed in
September 1996 of $492,695 and the two restaurants that were closed in July
1997 of $838,673.
Included in fiscal 1997 year to date sales are the two Hooters restaurants
sold on July 14, 1997 with sales of $1,539,085 and a net loss of $448,800,
one Hooters restaurant sold October 26, 1997 with sales of $989,810 and a
net loss of $70,514. Also included is the Minnesota Cookie Store sold June
1, 1997 with sales of $79,036 and a net loss of $85,206.
Cost of products sold was $1,548,669 for the forty weeks ended October 5,
1997 compared to $1,860,424 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 28% of sales in 1996. Comparing the 1997 period to
the 1996 period, the Cookie Store percentage increased to 26% from 24%
while the restaurant percentage increased to 33% from 31%. These increases
primarily reflect increased product costs that could not be passed on
through higher sales prices.
Salaries and benefits were $1,580,012 (approximately 30% of sales) for the
forty weeks ended October 5, 1997 compared to $1,921,514 (approximately 29%
of sales) for the corresponding period in 1996. For these same periods,
Cookie Store percentages were 28% compared to 27% and restaurant
percentages were 32% compared to 31%. The increase for the Cookie Stores
reflects increased salaries that were not absorbed through higher sales
volumes. The increase for the Hooters restaurants is due to the restaurant
that was closed in September 1996 which had a higher salary and benefit
expense as a percentage to sales as compared to the other Hooters
restaurants.
Other operating costs were $1,882,430 for the forty weeks ended October 5,
1997 compared to $2,273,596 for the corresponding period in 1996 reflecting
a decrease of $391,166. 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 $234,382 from the closing of a restaurant in
September 1996, $244,501 relating to the two restaurants closed in July
1997 partially offset by various other costs and expenses with a net
increase of approximately $94,920.
General and administrative expenses were $890,292 for the forty weeks
ended October 5, 1997 compared to $570,240 for the corresponding period in
1996. This increase of $320,052 is primarily due to compensation paid
officers of approximately $140,000 (none paid in the comparable 1996
period), stock option compensation expense of $99,000, increased salaries
and benefits for other corporate staff of approximately $123,000, decreased
consulting fees of approximately $42,000.
Provisions for losses on assets has increased $96,152 to $1,025,000 for
the forty weeks ended October 5, 1997 compared to $928,848 in the
comparable period of 1996. This is a result of the following:
(a) Management has decided to sell the Company's Hooters
restaurants since expansion of the Hooters concept by the
Company is no longer considered to be a viable alternative.
Two of these restaurants had been sold as of July 14, 1997
with the remaining restaurant sold October 26,1997. A loss on
impairment of assets of $700,000 has been provided in the
forty week period ended October 5, 1997 to record the
investment in these restaurants at their estimated net
realizable value.
(b) The sale of a cookie store located in Minnesota as of June 1,
1997 for $37,000. The carrying value of the assets of this
store at July 1, 1997 were approximately $112,000.
Accordingly, a loss on impairment of assets of $75,000 has
been recognized in the Consolidated Statements of Operations
for the forty week period ending October 5, 1997.
(c) Recognition in the second quarter 1997 of a long lived asset
charge of $250,000 related to six of its Cookie Store
locations. A loss was recognized because the carrying amount
of the equipment, building improvements, franchise fees, and
goodwill related to the Cookie Stores was estimated to exceed
their net realizable value.
(d) Provisions for losses on assets of $928,848 recorded in the
forty weeks ended October 6, 1996 reflect losses related to a
restaurant location which was closed in September 1996 and
property which the Company no longer planned to develop. See
Notes 10 and 11 to the December 29, 1996 Consolidated
Financial Statements.
Interest expense decreased $173,282 in the forty weeks ended October 5,
1997 compared to the comparable period in 1996. This decrease is due to the
expected conversion of 77.64% of the 12% Notes to equity at the of
consummation of this Offering. Interest for these Note holders is not being
accrued subsequent to March 31, 1997. Note holders representing a total of
22.36% of the principal amount of the notes did not accept the Exchange
Offer and, accordingly, interest continues to be accrued on their Notes.
Therefore, interest was accrued for only those Notes outstanding ($827,500)
after the Exchange Offer in the forty weeks period ended October 5, 1997
compared to interest being accrued for the 100% of the Note holders in the
comparable period of 1996. See Note 2 to the December 29, 1996 Consolidated
Financial Statements.
Amortization of finance costs increased $434,645 to $490,409 in the forty
weeks ended October 5, 1997 compared to the comparable period in 1996. This
increase is due to the amortization of the bridge loan financing costs. See
Note 4 to the October 5, 1997 unaudited Consolidated Financial Statements).
Financial Condition at October 5, 1997 as Compared to December 29, 1996
Cash decreased $165,731 to $368,341 from $534,072 at December 29, 1996.
As reflected in the Consolidated Statements of Cash Flows, this decrease is
primarily attributable to $785,493 used in operating activities offset by
$52,581 provided by financing activities and $567,181 provided by investing
activities. Cash flows provided by investing activities consisted primarily of
the sale of the Minnesota Cookie Store and two Hooters restaurants offset by
capital expenditures for the corporate office. Cash flows provided by financing
activities were primarily due to amounts advanced from the two principal
stockholders. Management anticipates that cash balances will continue to decline
with its current operations.
Inventory decreased $88,398 to $30,249 from $118,647 at December 29,
1996. This decrease is primarily due to the sale of two Hooter restaurants and
the reclassification of inventory to assets available for sale related to the
Hooter restaurant which management intends to sell.
Receivable from asset sales at October 5, 1997 of $50,000 represents
amounts due from the sale of two Hooters
restaurants sold on July 14, 1997.
Assets available for sale at October 5, 1997 of $232,641 represents
the net realizable value of a Hooters restaurant sold in October 1997.
Leasehold improvements decreased $1,068,532 to $830,286 from $1,898,818
at December 29, 1996 while equipment decreased $597,642 to $436,926 from
$1,034,568 at December 29, 1996. These decreases are primarily attributable to
the sale of two Hooters restaurants on July 14, 1997, one Hooters restaurant
sold October 26, 1997 and a Cookie Store sold June 1, 1997.
Initial Public Offering expenses increased $210,224 to $450,632 at
October 5, 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 $237,372 to
$260,287 at October 5, 1997 from $497,659 at December 29, 1996. This decrease is
primarily due to the sale of two Hooters restaurants on July 14, 1997, one
Hooters restaurant sold in October 1997 and a Cookie Store sold June 1, 1997.
Goodwill, net of accumulated amortization decreased $304,747 to
$534,495 at October 5, 1997 from $839,242 at December 29, 1996. This decrease is
due to the sale of a Cookie Store sold on June 1, 1997, a loss on impaired asset
provision of $250,000 and 1997 amortization.
Bridge loan financing costs, net of accumulated amortization decreased
to zero at October 5, 1997 from $434,646 at December 29, 1996. This decrease is
due to the completion of the amortization of bridge loan financing costs in the
forty week period ended October 5, 1997. See Note 4 to the October 5, 1997
unaudited Consolidated Financial Statements.
Current maturities of long-term debt decreased $780,657 to $3,507,406
at October 5, 1997 from $4,288,063 at December 29, 1996. This decrease is
primarily due to the $3,700,000 of 12% Notes. The entire amount of the Notes had
been classified as current due to suspension of interest payments in 1996. In
August 1997, interest was paid to those Note holders who did not accept the
Exchange Offer. Therefore, the Notes related to those Note holders who did not
accept the exchange offer are no longer in default and the $827,500 has been
classified as long-term debt in 1997. See Note 6 to the October 5, 1997
unaudited Consolidated Financial Statements.
Capital lease obligations related to assets available for sale
increased to $45,666 at October 5, 1997 from $0 at December 29, 1996. This
increase is a result of the reclassification of these obligations from long-term
debt to reflect the sale of one Hooters restaurant October 26, 1997.
Due to shareholders increased $331,359 to $465,828 at October 5, 1997
as compared to $134,469 at December 29, 1996. This represents amounts advanced
by the Company's shareholders for operating needs.
Accounts payable increased $76,071 to $466,220 at October 5, 1997 as
compared to $390,149 at December 29, 1996. This increase reflects the
availability of cash and operating needs..
Long-term debt, less current maturities, increased $715,658 at October
5, 1997 from December 29, 1996, primarily due to the reclassification of
$825,500 of Notes related to those Note holders who did not accept the Exchange
Offer that are no longer in default., offset by the reclassification of capital
obligations related to the Hooter's restaurant sold October 26, 1997 and
scheduled payments of this debt. See Note 6 to the October 5, 1997 unaudited
Consolidated Financial Statements.
Store closing costs declined $57,000 from December 29, 1996 as a result
of scheduled lease payments relating to a Hooters restaurant closed in September
1996.
Capital in excess of par value decreased $97,200 from December 29,
1996, as a result of the bridge loan financing which was renegotiated as of July
1997. See Note 4 to the October 5, 1997 unaudited Consolidated Financial
Statements.
Unearned compensation expense decreased $99,000 to $28,000 at October
5, 1997 from $127,000 at December 29, 1996. This decrease represents the portion
of stock option compensation which has been earned in the forty week period
ended October 5, 1997. See Note 17 to the December 29, 1996 Consolidated
Financial Statements.
The Company's accumulated deficit was $7,997,203 at October 5, 1997
compared to $5,240,954 at December 29, 1996. The increase is attributable to a
$2,756,249 net loss incurred during the forty week period ended October 5, 1997.
Sales were $4,175,798 for the twenty-eight weeks ended July 13, 1997 compared
to $4,509,733 for the corresponding period in 1996. This decrease of
$333,935 reflects a $254,248 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
$588,183 from the restaurants. Same store sales for the three restaurants
declined $192,515 while the remaining decrease reflects the restaurant
which was closed in September 1996.
Costof products sold was $1,223,909 for the twenty-eight weeks ended July 13,
1997 compared to $1,271,160 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 28% of sales in 1996. Comparing the 1997 period to
the 1996 period, the cookie store percentage increased to 26% from 24%
while the restaurant percentage increased to 32% from 31%. These increases
Salaries and benefits were $1,267,036 (approximately 30% of sales) for the
twenty-eight weeks ended July 13, 1997 compared to $1,343,567
(approximately 30% of sales) for the corresponding period in 1996. For
these same periods, cookie store percentages were 31% compared to 28% and
restaurant percentages were 30% compared to 31%. The increase for the
cookie stores reflects increased salaries that were not absorbed through
higher sales volumes. The decrease
Other operating costs were $1,467,147 for the twenty-eight weeks ended July 13,
1997 compared to $1,575,839 for the General and administrative expenses were
$625,830 for the twenty-eight weeks ended July 13, 1997 compared to $360,132
for the corresponding period in 1996. This increase of $265,698 is
primarily due to compensation paid officers of approximately $100,000 (none
paid in the comparable 1996 period), stock option compensation expense of
$69,000, increased salaries and benefits for other corporate staff of
approximately $54,000, increased legal fees of approximately $17,000, and
various other costs and expenses with a net increase of approximately
$26,000.
Provisions for losses on assets increased $97,852 to $1,025,000 for the
twenty-eight weeks ended July 13, 1997 compared to $927,148 in the
comparable period of 1996. This is a result of the following:
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.
Costof 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
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.
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,
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.
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 six months from date of amendment in January 1998 (Deceber 31, 1998 for one
holder). 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
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.
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 12% 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
$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.
<PAGE>
Liquidity and Capital Resources
The following is a summary of the Company's cash flows for the forty
week period ended October 5, 1997 and for the fiscal years ended December 29,
1996 and December 31, 1995.
40 Weeks Fiscal Years Ended
Ended October 5 December 29, December 31,
1997 1996 1995
---- ---- ----
Net cash (used in)
activities $(785,493) $(580,1950) $(161,193)
Net cash (used in ) investing
activities 567,181 (204,300) (2,749,896)
Net cash provided by
Financing activities 52,581 544,410 2,493,318
------ ------- ---------
Net (decrease) in cash $(165,731) $(240,085) $ (417,771)
========== ========== ===========
The Company's cash position decreased $165,731 during the forty week period
ended October 5, 1997, due to $785,493 used in operating activities offset by
cash provided by investing activities of $567,181 and $52,581 provided by
financing activities. Cash flows provided by investing activities consisted
primarily of the sale of one cookie store and two Hooters restaurants, offset by
capital expenditures for the corporate office. Cash flows provided by financing
activities were primarily due to amounts advanced from the Company's .two
principal shareholders.
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 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 and/or sell those locations that do not generate
sufficient cash flows as was done for one location in October 1996. If
additional locations are closed and/or sold, the assets may have to be written
down and potential liabilities could result from long term lease payments. The
Company sold two Hooters restaurants in July 1997 and its remaining restaurant
in October 1997. The Company sold one Cookie Store in Minnesota in June 1997.
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.
The buyers of the three Hooters restaurants sold assumed the leases on
the restaurants and the Company will have no further liability therefor.
Sale of Hooters Restaurants
The Company sold its two Hooters restaurants in San Diego California in
July 1997 and sold its remaining restaurant in Madison, Wisconsin in October
1997. As a result, an allowance of $700,000 has been provided in the forty week
period ended October 5, 1997 to record investment in these restaurants at net
realizable value.
Sale of Cookie Store
The Company sold 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. Accordingly, a loss on impairment
of assets available for sale of approximately $75,000 has been recognized in the
Statement of Operations for the forty week period ended October 5, 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 a former officer of the Company and a former 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 October 5, 1997, Cookie Crumbs had a stockholder's deficit of
$1,144,618. 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 ($44,912 as
of October 5, 1997) 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.
12% 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. The Notes contain
certain restrictions on 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
Company will issue 772,128 shares of Common Stock to the Note holders who
accepted the Exchange Offer. On August 1, 1997 the Company paid $132,491 of
interest to the Note holders who did not accept the Exchange Offer. The $132,491
represents all past due and accrued interest through July 31, 1997 and cures all
defaults on the Notes. The $827,500 of Notes not exchanged will remain
outstanding. The Company will be required to make semi-annual 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 $190,000) 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 were amended in July
1997 to capitalize unpaid interest, extend the due date until the earlier of the
effective date of this Offering or six months from the execution of the amended
Bridge Loan Notes and to amend the interest rate to 14%. The resulting principal
amount of the Bridge Loan Notes is $574,395. The number of warrants to be
received by the Bridge Loan holders was reduced to 55,931 and the holders
thereof agreed that they would not sell, transfer, pledge, assign or hypothecate
the warrants or underlying units in any way for a period of one year from the
effective date of this Offering. The Bridge Loan Notes were further amended in
January 1998 solely to extend the due date until the earlier of the closing of
this Offering or six months from the date of issuance of the Second Amended
Bridge Loan Notes (July 1998). As consideration for extending his note, one
holder of $195,000 principal amount of Bridge Loan Notes demanded, and the
Company granted to him only, a lien on the Company's cookie store located in
Flint, Michigan. Such Note provided that if the Company's note to him is not
paid from the proceeds of this Offering or by December 31, 1997 he may take over
the Flint cookie store on January 1, 1998. The Company would have the option to
repurchase the cookie store for a 12 month period for $250,000 cash. In
addition, Kenneth B. Drost, Vice President, Secretary and a director of the
Company, agreed to sell to the Note holder 20,000 shares of his Common Stock in
the Company for $100 upon termination of a one year lock-up. By amendment dated
January 8, 1998, this amended Bridge Loan Note was extended to December 31, 1998
and the Note holder agreed to forbear any remedies he may have under the First
Amendment to his Bridge Loan Note, including the right to take over the Flint,
Michigan Cookie Store. In consideration for the extension, the Company agreed to
pay the Note holder $100,000 on the effective date of this Offering and $6,000
monthly until the earlier of December 31, 1998 or the effective date of this
Offering. The Company will utilize a portion of the net proceeds of this
Offering to repay the Bridge Loan Notes. In accordance with generally accepted
accounting principles, the fair market value of the stock has been expensed over
the period from when the Bridge Loan Note proceeds were received to March 31,
1997, the original estimated effective date of this Offering. See "Prospectus
Summary-Bridge Loan Notes and Warrants," "Use of Proceeds" and "Description of
Securities."
Net Operating Loss Carry Forwards
The Company's results were included in NEMC's consolidated tax return.
On May 1, 1997, NEMC was liquidated and merged into the Company. Intercorporate
tax allocation practices adopted by the Company and NEMC provided that the tax
benefit of the Company's losses were reflected in the Company's financial
statements and would be paid to the Company by NEMC under the following
conditions: (i) NEMC has received the benefit of such losses on a consolidated
basis, (ii) the Company would otherwise be entitled to such benefits if the
Company were filing a separate tax return, and (iii) the Company remains in the
consolidated tax group of NEMC.
As of December 29, 1996, the Company had generated net operating tax
losses of approximately $2,140,000, which were utilized by NEMC pursuant to
intercorporate tax allocation practices adopted by the Company and NEMC. As a
result of NEMC'S liquidation and merger into the Company, the Company will lose
the benefit of the $2,140,000 of tax losses and will not receive reimbursement
therefor.. However, as of December 29, 1996, the Company will have approximately
$1,330,000 of tax losses which it may utilize until their expiration in 2011.
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 development of additional Mrs. Fields Cookie Stores
and the expansion into new fields, which may include new restaurant and
entertainment concepts. See "Risk Factors-Expansion of Mrs. Fields Cookies
Stores and Other New Businesses" and" Business and Properties - General." The
Bridge Loan Notes are subordinate to the 12% Notes. If this Offering is
unsuccessful, the Company will be in default on the 12% 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), the addition of new Cookie Store locations, (iii) the sale of locations
whose operating results do not generate adequate returns, and (iv) the
development and expansion into other 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- 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
restaurant is 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.
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. There is no assurance that
low inflation will continue or that the Company will have the ability to offset
any cost increases by raising prices in the future.
<PAGE>
BUSINESS AND PROPERTIES
General
The Company is engaged in the ownership, operation and management of
Mrs. Fields Cookie Stores. The Company currently owns, operates and manages 12
Mrs. Fields Cookie Stores in Missouri, Michigan and Minnesota. The Company sold
one low income Cookie Store in Minnesota, effective June 1, 1997. The Company
formerly owned and operated four Hooters franchised restaurants but closed one
restaurant in September 1996, sold two restaurants in July 1997, and sold its
remaining Hooters restaurant in October 1997. The Company will not open any new
Hooters restaurants.
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
restaurant is a franchised business which offers 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 restaurant pursuant to
specified standards established by the franchisors. The Company believes that
the uniform operating standards of the Mrs. Fields franchisor facilitates the
efficiency of the Company's Mrs. Fields Cookie Stores and affords the Company
significant benefits, including the brand-name recognition and goodwill
associated with the franchisor.
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
and three additional Hooters restaurants, all in San Diego, California, between
September 1994 and May 1995, one of which was subsequently closed. The Company
sold two restaurants in July 1997 and sold its remaining restaurant in October
1997.
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 concepts. In this connection, the Company has had
preliminary discussions with a micro brewery 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 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 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 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
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.
<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.
Employees
In connection with its Mrs. Fields Cookie Stores, the Company employs
approximately 120 persons, of which 18 are full time and 102 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 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
Termination of Hooters Restaurant Business
The Company opened its first Hooters restaurant in Madison, Wisconsin
in April 1994 and three additional Hooters restaurants in San Diego, California
between October 1994 and May 1995. One of the San Diego restaurants was closed
in September 1996, and the Company sold the two other San Diego restaurants in
July 1997. The final restaurant in Madison, Wisconsin was sold in October 1997.
While it operated the Hooters restaurants, the Company 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. Options to open additional restaurants lapsed and the
Hooters Franchisor advised the Company that it would not allow the Company to
build additional restaurants under such options. Because of its inability to
open new Hooters restaurants and losses from operations of its then existing
Hooters restaurants, the Company decided to divest itself of its existing
Hooters restaurants and concentrate on its Mrs. Fields Cookie Store
Insurance and
Indemnification
The Company's franchise agreement with the Hooters Franchisor
and the lease agreement for the restaurant required 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 restaurant. The Company currently retains a $2,000,000
aggregate liability policy for each state in which 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 $2,225,500. 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.
Properties
Butterwings/California 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. 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.
In connection with the sale of the Company's three Hooters
restaurants in July and October 1997, under the terms of sale, the buyer
assumed all liability under the leases for the restaurants and the
Company has no further obligations under the leases. As part of the sale
of the Madison, Wisconsin Hooters restaurant, an $83,000 security deposit
was returned to the Company.
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 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.
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 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.
The Company believes that it has no prospective liability for
actions or proceedings involving Hooters restaurants but that it could
have possible exposure regarding past events with respect to Hooters
restaurants, although there is no known or pending litigation at the date
of this Prospectus.
<PAGE>
MANAGEMENT
Directors and Executive
Officers
The following table sets forth certain information regarding the
Company's directors and executive officers.
Name
Title
Age
James M. Clinton
President
39
Kenneth B. Drost
Vice President,
Secretary and
Director
42
Douglas E. Van
Scoy*
Chief Financial
Officer and
Director
55
Jeffrey A.
Pritikin
*Director
42
Arthur P. Sundry,
Jr.*
Director
39
------------------------
* Member of Audit Committee
James M. Clinton
was elected President of
the Company on August 11,
1997. Mr. Clinton was
President of Clinton
Consulting Ltd. from March
1993 until his election as
President of the Company,
Clinton Consulting Ltd. was
a wholesaler of various
securities products to
broker/dealers in the
Eastern United States.
With Clinton Consulting, he
was a registered broker and
conducted broker seminars
throughout the United
States. Mr. Clinton was
National Sales Manager for
Computer Rental
Corporation, a computer
leasing company, from 1991
until he established
Clinton Consulting. Mr.
Clinton holds a degree in
Business Administration
with emphasis in Marketing
from Northern Illinois
University.
Kenneth B. Drost
has served as Vice
President, Secretary and
Director of the Company
since August 1993. Mr.
Drost also served as Vice
President, Secretary and
Director of NEMC from
March, 1993 until it merged
with the Company in May
1997. Prior to his
association with NEMC, 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 also served as Chief
Financial Officer and
Director of NEMC from
March, 1993 until it merged
with the Company in May
1997. Prior to his
association with NEMC, 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.
Arthur P. Sundry,
Jr. was appointed to the
Board of Directors and a
member of the Audit
Committee in October 1997.
Mr. Sundry is President,
founder and sole
shareholder of Montauk
Investment Corporation, a
real estate investment and
development firm in
Riverside, Illinois, which
he founded in February
1988. Prior to founding
Montauk Investment
Corporation, Mr. Sundry was
engaged in the banking
industry in New York City
where he was Vice President
of Finance for Weinstein
Development Corporation,
Portfolio Manager in the
Private Banking and
Investment Division of
Citibank, New York, and
Credit Analyst for Chase
Manhattan Bank. Mr. Sundry
obtained a Master's Degree
in International Management
from the American Graduate
School of International
Management where he
graduated with honors in
1982 and a Bachelor of
Science Degree in Business
Administration from the
University of South
Carolina in 1980.
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.
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 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, exercisable at $5.00 per share until November 14,
2006. Of such options, 20,000 were canceled in July upon the resignation
of the former President of the Company. No options were granted during
the twenty-eight week period ended October 5, 1997
<PAGE>
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
In November 1996,
the Board of Directors
granted stock options under
the 1996 Stock Compensation
Plan to its then 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. Mr. Buckley's
options were canceled when
he resigned in July 1997.
At October 5,1997, the
Company was indebted to Mr.
Drost and Mr. Van Scoy, its
two principal stockholders,
for advances in the amount
of $459.520.
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, former President
and a director of the Company was the sole shareholder, an officer and
director of ASA at the time of the transaction.. 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 was owned equally by Stephan S. Buckley, former President and
director of the Company, and Messrs. Drost and Van Scoy who are officers
and directors of the Company. The assets of NEMC were distributed to its
shareholders on May 1, 1997 and NEMC was merged into the Company. Mr.
Drost purchased Mr. Buckley's stock in the Company in June 1997. As a
consequence, Messrs. Drost and Van Scoy owned approximately 90% of the
Company's outstanding Common Stock prior to the Offering and will own
approximately 42% after the Offering. See "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. With the
liquidation of NEMC, and merger with the Company on May 1, 1997, NEMC
will be relieved from any obligation to pay the Company the tax benefit
attributable to the Company's tax losses utilized in consolidation. 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 at that time, 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, then 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 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
terminated the Agreement with Mr. Lipinski in July, 1997 and he is no
longer associated with 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.
<PAGE>
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 BeneficialAmount Percent ofPercent of
Owner Beneficially OwnershipOwnership
Owned PriorPrior to theAfter the
to OfferingOfferingOffering
Kenneth B. Drost (1)..............
1,298,402.........................
60.3%.............................28.2%
Douglas E. Van Scoy( 1)649,20130.214.1
Jeffrey Steiner (2)
204,444
9.5
5.0
All Officers and Directors
as a group (five
persons).....................
1,947,603....................
90.5%........................
42.3%
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 Messrs.
Drost and Van Scoy is
2345 Pembroke Avenue,
Hoffman Estates,
Illinois 60195.
(2) The address
of Mr. Steiner is 6 Cheyne
Walk, London, England.
<PAGE>
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 330,211 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.
<PAGE>
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 _______, 1998 [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
Prior to this Offering, there were 2,152,047 shares of Common
Stock outstanding. At the effective date hereof, the Company is required
to issue 772,128 shares issued to the Note holders, 330,211 shares issued
to the Convertible Preferred Stock holders and 55,931 shares issued to
the Bridge Loan Note holders. Including the 1,300,000 shares offered
hereby, there will be 4,610,317 shares issued and outstanding upon
conclusion of this Offering, (4,805,317 if the Over-allotment option is
exercised).
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 1,355,931 shares of Common Stock (not including 195,000 Series A
Warrants which may be issued pursuant to the Underwriters' Over-allotment
Option, and 130,000 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
------------------------,
1999 [thirteen months after
the closing of this
Offering], until
______________, 2003,
unless earlier redeemed.
The Series A Warrants will
not become separately
traded until
------------------------,
1998 [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 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 Notes were
amended in July 1997 to capitalize unpaid interest, extend the due date
until the earlier of the effective date of this Offering or six months
from execution of the amended Bridge Loan Notes and to increase the
annual interest rate to 14%. The resulting principal amount of the
amended Bridge Loan Notes is $574,395. The number of warrants to be
issued to the Bridge Loan holders was reduced to 55,931 and the holders
agreed that they would not sell, transfer, assign or hypothecate the
warrants or underlying units in any way for a period of one year from the
effective date of this Offering. The Bridge Loan Notes were further
amended in January 1998 solely to extend the due date until the earlier
of the closing of this Offering or six months from the date of issuance
of the Amendment to the Bridge Loan Notes (July 1998). As consideration
for extending his note, one holder of $195,000 principal amount of Bridge
Loan Notes demanded, and the Company granted to him only, a lien on the
Company's cookie store located in Flint, Michigan. Such Note provides
that if the Company's Bridge Loan Note to him is not paid from the
proceeds of this Offering or by December 31, 1997 he may take over the
Flint cookie store on January 1, 1998. The Company will have the option
to repurchase the cookie store for a period of 12 months for $250,000
cash.. Kenneth B Drost, Vice President, Secretary and a director of the
Company, agreed to sell to the note holder for $100, 20,000 of his shares
of the Company's Common Stock upon termination of a one year lock-up. By
amendment dated January 8, 1998, this Amended Bridge Loan Note was
extended until December 31, 1998 and the Note holder agreed to forbear
any remedies he may have under the first Amendment to his Bridge Loan
Note, including the right to take over the Flint, Michigan Cookie Store.
In consideration for the extension and forbearance, the Company agreed to
pay the Note holder $100,000 upon the effective date of this Offering and
$6,000 monthly until the earlier of December 31, 1998 or the effective
date of this Offering. See "Cancellation of Debt; Conversion of Preferred
Stock; Bridge Loan Financing - Bridge Loan Notes and Warrants" and
"Management's Discussion of Financial Condition and Results of
Operations-Bridge Financing."
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.
<PAGE>
SHARES ELIGIBLE
FOR FUTURE SALE
Upon completion of this Offering, the Company will have
4,610,317shares of Common Stock outstanding (4,805,317 shares if the
Underwriters' over-allotment option is exercised in full). Of the
4,610,317 shares of Common Stock to be outstanding, the 1,300,000 shares
to be sold in this Offering (1,495,000 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, 3,310,317 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. Messr.s Drost and Van
Scoy, executive officers of the Company , who hold 1,947,603 shares of
Common Stock, have agreed that they 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 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 40,560 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 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 330,211 shares of Common Stock to be received by the holders
of the Convertible Preferred Stock and the 772,128 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 until at
least 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. The Bridge Loan holders, who hold units
which include 55,931 shares of Common Stock and 55,931 Series A Warrants
to purchase 55,931 shares of Common Stock, have agreed that they will not
sell, transfer, pledge, assign or hypothecate their units, Common Stock
or Series A Warrants for one year from the date of this Prospectus.
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.
<PAGE>
UNDERWRITING
Pursuant to the terms and subject to the conditions contained in
the Underwriting Agreement, the Company has agreed to sell on a firm
commitment basis to the Underwriters named below, and each of the
Underwriters, for whom Tejas Securities Group, Inc. 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
Securities, Inc.
-----------
Total
1,300,000
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 195,000 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 1,300,000 Units offered
hereby. If purchased, such additional Units will be sold by the
Underwriters on the same terms as those on which the 1,300,000 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 ($162,500) 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, Messrs. Drost and Van Scoy have agreed to vote their 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 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.
<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.
CONTENTS
FINANCIAL STATEMENTS
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-21
Consolidated Balance Sheets as of October 5,1997 (Unaudited)
And December 29,1996.......................................................F-22
Consolidated Statements of Operations for the Forty
Week Period Ended October 5, 1997 (Unaudited) and October 6, 1996
(Unaudited)................................................................ F-24
Consolidated Statement of Stockholders' Equity (Deficit) for
The Forty Week Period Ended October 5, 1997............................... F-25
Consolidated Cash Flows For the Forty Week Periods Ended
October 5, 1997 (Unaudited) and October 6,1996 (Unaudited) ................ F-26
Notes to the Consolidated Financial Statements (Unaudited)................. F-28
PRO FORMA FINANCIAL STATEMENTS............................................. F-30
Pro Forma Consolidated Balance Sheets as
of October 5, 1997 (Unaudited).............................................F-31
Pro Forma Consolidated Statements of Operations
for the Forty Weeks Ended October 5, 1997 (Unaudited).....................F-33
Pro Forma Consolidated Statements of Operations
for the Fiscal Year Ended December 29,1996 (Unaudited)....................F-34
<PAGE>
BUTTERWINGS ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 29, 1996
<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
F-34
CONSOLIDATED BALANCE SHEETS
December 29, 1996 December 31, 1995
---------------- -----------------
ASSETS
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
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 29, 1996 December 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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
========== =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended
December 29, December 31,
1996 1995
---- ----
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
========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Unearned Total
Preferred Common Compensation Accumulated Stockholders'
Stock Stock Expense Deficit Equity
Equity (Deficit)
In
Par Excess
Value Of Par
<S> <C> <C> <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.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended
December 29, December 31,
1996 1995
---- ----
Cash Flows from Operating Activities:
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)
------- ------------
Continued on page F-9
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued from page F-8)
For the Fiscal Years Ended
December 29, December 31,
1996 1995
---- ----
Cash Flows from Financing Activities:
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 expense (240,408) -
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
===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
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.
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
(continued)
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.
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.
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (continued)
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.
Note 2. Long-Term Debt
Long-term debt consists of the following at
December 29, 1996 December 31,1995
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
=========== ===========
(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.)
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.
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Long-Term Debt (continued)
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:
As of
December 29, 1996 December 31, 1995
----------------- -----------------
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
========= =========
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.
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
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Non-redeemable Preferred Stock Offering (continued)
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.
Future minimum rentals under these leases are as follows:
As of
December 29, 1996(a) December 31, 1995
-------------- ------------
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
========== ==========
(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 totaled $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.
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:
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Deferred Income Taxes (continued)
December 29, 1996 December 31, 1995
----------------- -----------------
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
=============== ============
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 approximately $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
============
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Related Party Transactions (continued)
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.
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.
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.
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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:
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Stock Compensation Plan (continued)
Net (loss) applicable to common stockholders , as reported $(2,757,259)
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.
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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note
19. Litigation (continued)
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 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,
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.
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
<PAGE>
CONSOLIDATED FINANCIAL REPORT
October 5, 1997
(UNAUDITED)
<PAGE>
CONSOLIDATED BALANCE SHEETS
October 5, 1997 December 29, 1996
(Unaudited)
ASSETS
Current Assets $ 368,341 $ 534,072
Accounts receivable 6,377 3,137
Inventories 30,249 118,647
Prepaid expenses 9,410 46,032
Receivable from asset sales 50,000 -
Assets available for sale 232,641 -
Income tax receivable 17,925 17,925
------- ------
Total current assets 714,943 719,813
------- -------
Leasehold Improvements and Equipment
Leasehold improvements 830,286 1,898,818
Equipment 436,926 1,034,568
------- ---------
1,267,212 2,933,386
Less accumulated depreciation and
amortization 522,755 619,141
------- -------
744,457 2,314,245
------- ---------
Other Assets
Initial public offering expenses 450,632 240,408
Deposits 106,593 124,437
Franchise costs, net of accumulated amortization
of $39,713 and $52,341, respectively 260,287 497,659
Finance costs, net of accumulated amortization
of $249,977 and $194,213, respectively 253,976 309,740
Organization costs, net of accumulated amortization
of $22,585 and $15,859, respectively 19,285 26,011
Goodwill, net of accumulated amortization
of $125,493 and $79,320, respectively 534,495 839,242
Bridge loan financing costs, net of
accumulated amortization of $641,476
and $206,831, respectively 434,646
$ 3,084,668 5,506,201
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
October 5, 1997 December 29, 1996
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt $ 3,507,406 $ 4,288,063
Capital lease obligations related to
assets available for sale 45,666 -
Due to stockholders 465,828 134,469
Accounts payable 466,220 390,149
Accrued liabilities 696,573 694,754
--------- ------
Total current liabilities 5,181,693 5,507,435
----------- ---------
Long-term debt, less current maturities 844,379 128,721
Store closing costs 336,000 393,000
--------- -------
1,180,379 521,721
--------- -------
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 1,467,779 1,564,979
Unearned compensation expense (28,000) (127,000)
Accumulated deficit (7,997,203) (5,240,954)
---------- ----------
(4,967,404) (2,212,955)
---------- ----------
$ 3,084,668 $ 5,506,201
============ ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Forty Week Period Ended
October 5, 1997 October 6, 1996
Sales $ 5,316,074 $ 6,535,002
Costs and expenses:
Cost of products sold 1,548,669 1,860,424
Salaries and benefits 1,580,012 1,921,514
Other operating costs 1,882,430 2,273,596
Depreciation and amortization 330,820 385,652
General and administrative expenses 890,292 570,240
Provisions for losses on assets 1,025,000 928,848
--------- -------
Total costs and expenses 7,257,223 7,940,274
Operating (Loss) (1,941,149) (1,405,272)
---------- ----------
Financial income (expense):
Interest income 5,822 16,402
Interest expense (200,868) (374,150)
Amortization of finance costs (490,409) (55,764)
-------------- ------
(685,455) (413,512)
-------- --------
Net (Loss) (Income taxes $0 for all periods
presented) before redeemable preferred
stock dividends of subsidiary (2,626,604) (1,818,784)
---------- ----------
Redeemable preferred stock dividends
of subsidiary (129,645) (129,017)
-------- --------
Net (Loss) $(2,756,249) $ (1,947,801)
============ =============
Net (loss) per common share $ (1.24) $ (.87)
======== ======
Weighted average number of
shares outstanding 2,231,042 2,231,042
=========== =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Unearned Total
Preferred Common Compensation
Accumulated Stockholders'
Stock Stock Expense Deficit Equity (Deficit)
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) - - - 99,000 - 99,000
Renegotiated bridge loan - - (97,200) - - (97,200)
(Unaudited)
Net (loss) (Unaudited) (2,756,249) (2,756,249)
------------ ------------ ----------- ----------- ---------- ----------
- - - -
---- ---- ----- -
Balance, October 5, 1997 (Unaudited) $1,568,500 $21,520 $1,467,779 $(28,000) $(7,997,203) $(4,967,404)
========== ========= ============ ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Forty Week Period Ended
October 5, 1997 October 6, 1996
Cash Flows from Operating Activities:
Net (Loss) $ (2,756,249) $(1,947,801)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization 831,355 448,429
Provisions for losses on assets 1,025,000 928,848
Compensation for bridge loans 18,194 -
Contributed Services - 77,000
Changes in operating assets and liabilities:
Accounts receivable (53,240) 64,616
Inventories 64,108 335
Prepaid expenses 36,622 (104,971)
Income taxes - 7,925
Accounts payable 70,898 (85,086)
Accrued liabilities (22,181) (34,576)
Income taxes payable (17,150)
----- --------
Net cash (used in) operating activities (785,493) (662,431)
--------- --------
Cash Flows from Investing Activities:
Sale of cookie store & Hooter restaurants 598,624 -
Deposits 17,844 1,651
Leasehold improvements and equipment (296,295)
Franchise costs (49,287) (75,000)
------- --------
Net cash provided by (used in) investing activities 567,181 (369,644)
-------- ---------
Cash Flows from Financing Activities:
Due to stockholders 331,533 12,513
Proceeds from long-term debt - 304,532
Payments of long-term debt and store
closing cost (67,728) (61,056)
Proceeds from issuance of preferred stock, net - 307,100
Unearned compensation expense 99,000 -
99
Proceeds from sale of common stock - 130,000
Borrowings from sole stockholder - 100,000
Dividends paid - -
Payments of initial public offering expenses(210,224)
----- -------
Net cash provided by financing activities 793,089
------- -------
52,581
Net (decrease) in cash (165,731) (238,986)
Cash:
Beginning of period 534,072 774,157
------------ -------
Ending of period $ 368,341 $ 535,171
=============== ============
Continued on Page F-27
The accompanying notes are an integral part of these financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Continued from Page F-26
For the Forty Week Period Ended
October 5, 1997
Supplemental Schedule of Non Cash Investing
and Financing Activity
Transfer to Assets Available For Sale
Leasehold improvements and equipment, net $414,479
Franchise costs, net 63,678
Inventory 24,290
Provision for losses on assets (269,806)
---------
Assets Available For Sale $232,641
The accompanying notes are an integral part of these financial statements.
<PAGE>
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 for a fair presentation of financial
condition and results of operations. The results of the interim period
ending October 5, 1997 are not necessarily indicative of the results
expected for the year ended December 28, 1997.
Note 2. Liquidation of Parent
On May 31, 1997, the Shareholders and Board of Directors of New Era
Management Corporation (NEMC) resolved that the assets of NEMC be
distributed to the Shareholders and NEMC merged with Butterwings
Entertainment Group, Inc. (the "Company") with the Company being the
survivor.
Note 3. Losses on Assets
Disposal of Assets
An allowance of $700,000 was provided in the sixteen week period ended
April 20, 1997, to record the investment in the three Hooters Restaurants
at their net realizable value. On July 14, 1997, the Company sold two
Hooters Restaurants for $657,370. All proceeds from the sale have been
received by the Company except for approximately $50,000 pending completion
of a sales tax audit by the California State Board of Equalization. The
remaining restaurant was sold October 26, 1997. The net realizable value of
the assets of this remaining restaurant of $232,641 is recorded as assets
available for sale at October 5, 1997. Included in the statements of
operations for the forty week periods ending October 5, 1997 and October 6,
1996 are sales of $2,528,895 and $3,421,532, respectively, and income from
operations of $98,076 and $267,523, respectively, attributable to the three
restaurants.
On June 1, 1997 the Company sold a cookie store for $37,000. The carrying
value of the assets of this store were approximately $112,000. Accordingly,
a loss of $75,000 was recognized in the statement of operations for the
forty week period ending July 13, 1997. Included in the statements of
operations for the forty week periods ending October 5, 1997 and October 6,
1996 are sales of $79,036 and $132,256, respectively, and loss from
operations of $73,743 and $17,580, respectively, attributable to this
store.
Impairment of Assets
During the second quarter 1997, the Company recognized a long lived asset
charge of $250,000 related to five of its Mrs. Fields Cookie Stores. A loss
was recognized because the carrying amount of the goodwill related to these
cookie stores was estimated to exceed their net realizable value.
Note 4. Renegotiation of Bridge Loans
As of July 1,1997, bridge loan financing terms were renegotiated to
increase the outstanding principal from $483,000 to $574,395 and the
interest rate from 5.75% to 14% per annum. Principal plus accrued interest
is payable on the earlier of the closing of the initial public offering or
six months from July 1, 1997. In conjunction with this refinancing, the
Company will reduce the number of units in the Company's common stock and
warrants issued as compensation to the lenders by 35,069. In addition,
these units can no longer be sold at the time of the initial public
offering since they are restricted for a one year period, after which the
common stock attaching to these units will be eligible for registration for
free trading. The bridge loan notes were further amended in January 1998
solely to extend the due date until the earlier of the closing of the
Company's initial public offering or six months from the date of issuance
of the amended bridge loan notes (July 1998).
As part of the renegotiation of the terms of the bridge loans, a bridge
loan note holder received additional collateral. This collateral is in the
form of a lien on one of the Company's Mrs. Field's cookie stores. The
bridge loan note holder agreed to extend his note to the Company until
December 31, 1997 in exchange for the Company agreeing to abide by the
terms of the amended promissory note. If the amended promissory note
remains unpaid, he will take over ownership of the Mrs. Fields cookie store
on January 1, 1998. In the event this occurs, the Company will have the
right, for a period of 12 months to repurchase the store at a price of
$250,000. Should the Company go public before the December 31, 1997 date,
the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 4. Renegotiation of Bridge Loans (continued)
Company's obligation to repay the amended promissory note will be
immediate, and the lien on the Mrs. Fields cookie store removed. By
amendment dated January 8, 1998, this amended bridge loan note holder
agreed to forbear any remedies he may have under the first amendment to his
bridge loan note, including the right to take over the Flint, Michigan
cookie store. In consideration for the extension, the Company agreed to pay
the note holder $100,000 on the effective date of its initial public
offering and $6,000 monthly until the earlier of the effective date of such
offering or December 31, 1998.
Further, the aforementioned bridge loan note holder obtained an agreement
from a current stockholder of the Company to acquire 20,000 shares of the
Company's common stock from the stockholder for $100.00. This transaction
will not be consummated until the conclusion of any unconditional lock up
agreement required by the Securities Exchange Commission or the National
Association of Securities Dealers. This transaction is further subject to
all applicable securities laws, and any rules or regulations promulgated by
the Securities and Exchange Commission and the National Association of
Securities Dealers or any state regulatory authority.
Note 5. FAS 128 - Earnings Per Share
The FASB has issued Statement No. 128, Earnings per Share, which supersedes
APB Opinion No. 15. Statement No. 128 requires presentation of earnings per
share by all entities that have common stock or potential common stock,
such as options, warrants and convertible securities, outstanding that
trade or may trade in the public market. Those entities that have only
common stock outstanding are required to present basic earnings per share
amounts. All other entities are required to present basic and diluted per
share amounts. Diluted per share amounts assume the conversion, exercise or
issuance of all potential common stock instruments unless the effect is to
reduce a loss or increase the income per common share from continuing
operations. All entities required to present per-share amounts must
initially apply Statement No. 128 for annual and interim periods ending
after December 15, 1997. Earlier application is not permitted.
If Statement No. 128 were applied to the accompanying consolidated
financial statements, basic net (loss) per common share for the forty week
periods ended October 5, 1997 and October 6, 1996 would be ($1.28) and
($.88), respectively.
Diluted per share amounts would be equal to the basic per share amounts.
Note 6. Payment of Interest to Noteholders
On August 1, 1997, the Company paid the Noteholders who did not accept the
Exchange Offer $132,490 in past due and accrued interest through July 31,
1997, eliminating all defaults on the Notes. At the same time, these
Noteholders agreed to semi-annual interest payments. See Note 18 to the
December 29, 1996 Consolidated Financial Statements.
Note 7. Due to Stockholders
Due to stockholders represents amounts advanced from the two principal
stockholders for operating needs. These amounts are non interest bearing
and unsecured.
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The following unaudited consolidated pro forma balance sheets at
October 5, 1997 and the statements of operations for the 40 weeks ended October
5, 1997 and the fiscal year ended December 29, 1996 (collectively, the "Proforma
Statements") were prepared to illustrate the estimated 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 assets sold prior
to October 5, 1997 or available for sale at October 5, 1997 as if those
transactions had occurred for statement of operations purposes as of January 1,
1996 and for balance sheet purposes as of October 5,1997. 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.
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 5, 1997
ACTUAL PRO FORMA PRO FORMA
ADJUSTMENTS
<S> <C> <C> <C> <C>
Current Assets
Cash $ 368,341 $ 5,750,632 (2)
(693,467) (3) $ 5,425,506
Accounts receivable 6,377 6,377
Inventories 30,249 30,249
Prepaid expenses 9,410 9,410
Receivable from asset sales 50,000 50,000
Assets available for sale 232,641 232,641
Income tax receivable 17,925 17,925
------------- ----------
Total current assets 714,943 5,772,108
------------- ---------------
Leasehold improvements and Equipment
Leasehold improvements 830,286 830,286
Equipment 436,926 436,926
-------------- ---------------
1,267,212 1,267,212
Less accumulated depreciation and amortization 522,755 522,755
------------- --------------
744,457 744,457
-------------- ---------------
Other Assets
Initial public offering expense 450,632 (450,632) (2) -
Deposits 106,593 106,593
Franchise costs, net of accumulated amortization 260,287 260,287
Finance costs, net of accumulated amortization 253,976 (194,338) (1) 59,638
Organization costs, net of accumulated amortization 19,285 19,285
Goodwill, net of accumulated amortization 534,495 534,495
------------- ----------------
1,625,268 980,298
------------ ----------------
$3,084,668 $7,496,863
=========== ===================
<FN>
(1) Represents write-off of debt issue costs on retirement of 12% Notes
exchanged for Common Stock. (See (5) below).
(2) Represents the proceeds to the Company from this Offering of
$5,000,000 net of $1,050,000
($450,632 included in other assets) of offering costs.
(3) Represents repayment of Bridge Loan Notes and interest.
(4) Represents the conversion of Convertible Preferred Stock to Common
Stock at
the time of the Offering.
(5) Pursuant to the results of the Exchange Offer, the
Company will exchange 772,128 shares of its Common Stock for
$2,872,500 principal amount of its 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 $194,338 at October 5, 1997 related to the debt
exchanged will be written off.
(6) Represents the 55,931 shares of Common Stock related to the Bridge
Loan Notes.
</FN>
</TABLE>
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEETS
October 5, 1997
<TABLE>
<CAPTION>
ACTUAL PRO FORMA PRO FORMA
ADJUSTMENTS
<S> <C> <C> <C>
Current Liabilities
Current maturities of long term debt $ 3,507,406 (574,395) (3)
(2,872,500) (5) 60,511
Capital lease obligations related to
assets available for sale 45,666
45,666
Due to parent 465,828 465,828
Accounts payable 466,220
466,220
Accrued liabilities 696,573 (344,700) (5)
(119,072) (3) 232,801
-------- ---------------------------
Total current liabilities 5,181,693
1,271,026
Long term debt, less current maturities 844,379
844,379
Store closing costs 336,000
336,000
Total non current liabilities 1,180,379 1,180,379
---------- --------------------------
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 4,610,317 issued and outstanding on a pro
forma basis 21,520 3,302 (4)
560 (6)
13,000 (2)
7,721 (5) 46,103
Capital in excess of par value 1,467,779 1,565,198 (4)
(560) (6)
5,287,000 (2)
3,852,919 (5) 12,172,336
Unearned compensation expense (28,000) -
(28,000)
Accumulated deficit (7,997,203) (643,440) (5)
________________ (194,338) (1) (8,834,981)
-------------------
(4,967,404) 3,355,458
------------------------- ---------------
$ 3,084,668 $ 7,496,863
<FN>
======================= =========================
(1) Represents write-off of debt issue costs on
retirement of 12% Notes exchanged for Common Stock.
(See (5) below).
(2) Represents the proceeds to the Company from this
Offering of $5,000,000 net of $1,050,000 ($450,632 included
in other assets) of offering costs. (3) Represents
repayment of Bridge Loan Notes and interest. (4) Represents
the conversion of Convertible Preferred Stock to Common
Stock at the time of the Offering.
(5) 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 its 12% Notes. The
Exchange Offer is based upon the principal amount of the
Note 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 $194,338 at October 5,
1997 related to the debt exchanged will be written off.
(6)Represents the 55,931 shares of Common Stock related to
the Bridge Loan Notes
</FN>
</TABLE>
<PAGE>
PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
40 Weeks Ended October 5, 1997
<TABLE>
<CAPTION>
Less:
OPERATIONS
RELATED TO
OTHER
ASSETS AVAILABLE OTHER PROFORMA PROFORMA
PRO FORMA
ACTUAL FOR SALE (d) ADJUSTMENTS ADJUSTMENTS
ADJUSTMENTS ADJUSTED
<S> <C> <C> <C> <C> <C>
Sales $5,316,074 $2,607,932 $2,708,142 $2,708,142
Costs and expenses:
Cost of products sold 1,548,669 843,031 705,638 705,638
Salaries and benefits 1,580,012 822,498 757,514 757,514
Other operating costs 1,882,430 714,084 1,168,347 1,168,347
Depreciation and amortization 330,820 49,726 281,094 281,094
General and administrative expenses 890,292 - 890,292 890,292
Provision for losses on impairment of assets 1,025,000 763,537 261,463 261,463
---------- --------- -------- --------
Total costs and expenses 7,257,223 3,192,875 4,064,349 4,064,349
---------- ---------- ---------- ---------
Operating (loss) (1,941,149) (584,944) (1,356,206) (1,356,206)
----------- ---------- ----------- ------------
Financial income (expense):
Interest income 5,822 2,325 3,497 3,497
Interest expense (200,868) (200,868) 104,067 (b) (96,801)
Amortization of finance costs (490,409) (490,409) 476,892 (a) 13,517)
---------- ---------- ----------
(685,455) 2,325 (687,780) (106,821)
---------- ------ ---------- ---------
(Loss) before income taxes (2,626,604) (582,619) (2,043,986) 1,463,027)
Income taxes
Net (loss) before redeemable preferred
stock dividends of subsidiary (2,626,604) (582,619) (2,043,986) (1,463,027)
Redeemable preferred stock dividends
of subsidiary (129,645) - (129,645) (90,751)
Net (Loss) $(2,756,249) $(582,619) $(2,173,631) $(1,553,778)
=========== =========== ============ =============
Net (Loss) per common share $(1.24) $(0.97) $(0.34)
======== ======== ========
Weighted average number of common
shares outstanding 2,231,042 2,231,042 4,633,394 (c)
========== ========== ==========
<FN>
(a) To remove amortized bridge loan financing costs ($434,645) and debt issue
costs related to the exchange of 12% Notes ($42,247).
(b) To remove interest expense related to the exchange of 12% Notes ($84,995 )
and Bridge Loan Notes ($19,072 ). (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 12%
Notes to Common Stock, the conversion of Convertible Preferred Stock to Common
Stock, Bridge Loan Units, and this Offering.
(d) To remove statement of operations amounts related to the Hooters
restaurants and Mrs. Fields Cookies store being held for sale or sold as of
October 5, 1997.
(e) When this Offering is completed, the unamortized finance costs ($194,338)
and the 20% premium ($643,440) related to the 12% Notes exchanged for
Common Stock will be charged.
</FN>
</TABLE>
<PAGE>
PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended December 29, 1996
<TABLE>
<CAPTION>
Less:
OPERATIONS
RELATED TO OTHER
ASSETS AVAILABLE OTHER PROFORMA PROFORMA
ACTUAL FOR SALE (d) ADJUSTMENTS ADJUSTED
ADJUSTMENTS
<S> <C> <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 1,605,267 1,306,187 1,306,187
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 assets 927,148 927,148 0
----------- ---------------- ---------- 0
Total costs and expenses 10,385,742 5,958,609 4,427,133 4,427,133
------------ ----------- ------------
Operating (loss) (1,834,709) (953,055) (881,654) (881,654)
-------------- -------------- ---------- -----------------
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) (1,624,555) (1,009,449)
Income taxes
Net (loss) before redeemable preferred stock
dividends of subsidiary $ (2,589,349) $ (964,794) (1,624,555) $ (1,009,449)
Redeemable preferred stock
dividends of subsidiary (167,910) - (167,910) (167,910)
--------------------------------------------------------------------------------
Net (Loss) $ (2,757,259) (964,794) $(1,792,465) $ (1,177,359)
==================== ============ ==================== ================
Net (Loss) per common share $ (1.23) (0.80) $ (0.25)
======================= ============== ==============
Weighted average number
of common shares outstanding 2,250,736 2,250,736 4,633,394 (c)
==================== ================== ================
<FN>
(a) To remove amortized bridge loan financing costs ($206,831 ) and debt issue
costs related to the exchange of 12% Notes ($54,921 ). (b) To remove interest
expense related to the exchange of 12% Notes ($344,700) and Bridge Loan Notes
($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 12% Notes
to Common Stock, the conversion of Convertible Preferred Stock to
Common Stock, and this Offering.
(d) To remove statement of operations amounts related to the Hooters
restaurants and Mrs. Fields Cookies store being held for sale or sold as of
October 5, 1997. (e) When this Offering is completed, the unamortized finance
costs ($240,467) and the 20% premium ($643,440) related
to the 12% Notes exchanged for Common Stock will be charged to the
Consolidated Statement of Operations.
</FN>
</TABLE>
<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 NUMBER
Prospectus Summary........................
Risk Factors..............................
Use of Proceeds...........................
Dividend Policy...........................
Dilution..................................
Capitalization............................
Management's Discussion and
Analysis of Financial Condition
and Results of Operation.................
Business and Properties...................
Management................................
Certain Relationships
and Related Transactions...............
Principal Stockholders....................
Description of Securities.................
Shares Eligible For Future Sale...........
Underwriting..............................
Legal Matters.............................
Experts...................................
Additional Information....................
Index to Financial Statements............. F-1
.........Until , 1998 (25 days from the date of this Prospectus),
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.
1,300,000 UNITS
Each Unit Consisting of
One Share of Common Stock
and
One Redeemable Series A
Common Stock Purchase Warrant
OFFERING PRICE
$5.00
PER UNIT
Butterwings
Entertainment
Group, Inc.
Prospectus
Centex Securities Incorporated
<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.
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 162,500.00
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(5.00 per share). 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.
Holders of $2,872,500of the 12% Notes accepted the Exchange Offer and the
registrant will issue 772,128 shares of its common stock to the holders who
accepted the Exchange Offer at the consummation of this Offering. The change in
the Offering price of the Units did not affect the number of shares to be
issued.
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 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 were automatically convertible into Units identical to the Units
offered pursuant to this registration statement at the time the registration
statement is declared effective.
The Bridge Loan Notes were amended in July through September 1997 to
comply with certain listing requirements of The Nasdaq Stock Market for listing
the Company's securities on the Small Cap Market. Unpaid interest was
capitalized, the interest rate was amended to 14% per annum and the due date was
extended to the earlier of six months from the effective dated of this offering
or six months from the date of execution. The resulting principal amount of the
Notes is $574,395. The number of warrants to be acquired by the Bridge Loan
holders was reduced to 55,931 and the holders agreed that they would not sell,
transfer, pledge, assign or hypothecate the warrants or the underlying units for
a period of one year from the effective date of this offering. The Bridge Loan
Notes were further amended in January 1998 solely to extend the due date until
the earlier of the closing of this Offering or six months from the date of
issuance of the Amended Bridge Loan Notes (July 1998). As consideration for
extending his Bridge Loan Note, one holder of $195,000 principal amount of
Bridge Loan Notes demanded, and the Company granted to him only, a lien on the
Company's cookie store located in Flint, Michigan. Such Note provides that if
the Company's Bridge Loan Note to him is not paid from the proceeds of this
Offering or by December 31, 1997, he may take over the Flint Cookie Store on
January 1, 1998. The Company will has the option to repurchase the Cookie Store
for a period of 12 months for $250,000 cash. In addition, Kenneth B. Drost, Vice
President, Secretary and a director of the Company, agreed to sell the Note
holder 20,000 shares of his Common Stock of the Company for $100 upon
termination of a one year lock-up. By amendment dated January 8, 1998, this
Amended Bridge Loan Note was extended to December 31, 1998 and the Note holder
agreed to forbear any remedies he may have under the first Amendment to his
Bridge Loan Note, including the right to take over the Flint, Michigan Cookie
Store. In consideration for the extension, the Company agreed to pay the Note
holder $100,000 on the effective date of this Offering and $6,000 monthly until
the earlier of the effective date of this Offering or December 31, 1998. The
registrant relied on the exemption from registration contained in Section 4(2)
of the Securities Act for transactions not involving a public offering about
both amendments. No underwriter was involved in the amendments and no
compensation was paid to an underwriter.
Item 27. Exhibits
Exhibit No. Item
- ----------- ----
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 (4)
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 10.7.1 Termination of Lipinski Consulting Agreement (1)
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 Form of First Amended Bridge Loan Note (1)
Exhibit 10.11 Form of Second Amended Bridge Loan Note (1)
Exhibit 10.12 Amended Bridge Loan Note; John McGinnis. (1)
Exhibit 10.13 Second Amended Bridge Loan Note; John McGinnis (1)
Exhibit 21.1 Subsidiaries of the Registrant.(3)
Exhibit 24.1 Consent of McGladrey & Pullen, LLP Certified Public
Accountants. ( 1)
Exhibit 24.2 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)_______________
- -----------------------
(1) Filed herewith
(2) To be filed by amendment
(3) Previously filed
<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.
<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 January 23, 1998.
BUTTERWINGS ENTERTAINMENT GROUP, INC.
By: James M .Clinton
James M. Clinton, President and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose
signature appears below constitutes and appoints James M. Clinton 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/_ James M. Clinton__________
James M. Clinton President and Director January 26, 1998
Executive Officer)
/s/_Douglas_E._Van_Scoy_________ Chief Financial Officer January 26, 1998
Douglas E. Van Scoy (Principal Financial
and Accounting Officer)
/s/ Kenneth B .Drost Director January 26, 1998
- --------------------
Kenneth B. Drost
/s/_Jeffrey_A._Pritikin___________ Director January 26, 1998
Jeffrey A. Pritikin
/s/ Arthur P. Sundry
Arthur P. Sundry Director January 26, 1998
* By: James M. Clinton,
As Attorney in Fact
James M. Clinton
<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 January 26, 1998.
BUTTERWINGS ENTERTAINMENT GROUP, INC.
By: _______________________
James M. Clinton, President and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the person whose
signature appears below constitutes and appoints James M. Clinton 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
- ------------------------
James M. Clinton President and Director January 26, 1998
(Principal Executive Officer)
____________________ Chief Financial Officer January 26, 1998
Douglas E. Van Scoy (Principal Financial
and Accounting Officer)
____________________ Director January 26, 1998
Kenneth B. Drost
____________________ Director January 26, 1998
Jeffrey A. Pritikin
- ---------------------
Arthur P. Sundry Director January 26, 1998
* By: James M. Clinton,
As Attorney in Fact
- ----------------------
James M. Clinton
Butterwings Entertainment Group, Inc.
2345 Pembroke Avenue, Suite 8
Hoffman Estates, IL 601 95
(847) 925-0925 (800) 381-4554
Fax (847) 925-1265
July 23, 1997
BY HAND
Butterwings Entertainment Group, Inc.
Attn: Stephan S. Buckley
2345 Pembroke Avenue
Hoffman Estates, IL 60195
Re: Letter Dated June 25, 1997
Dear Steve:
By this letter, I acknowledge the termination of my Independent
Contractor Agreement between myself and Butterwings Entertainment Group,
effective June 25, 1997. 1 understand that my termination was preceded by a vote
of the majority of the Board authorizing the termination, and such Board
authorized you to accept and sign on behalf of the Board my termination,
effective this date, June 25, 1997.
I wish you and the company much success in the future. Should you have
any questions regarding this letter, please do not hesitate to contact me.
yours,
Accepted:
Stephan S. Buckle
President
Butterwings Enter
AMENDED PROMISSORY NOTE
Dated as of July 23,1997
$89,000.00
This AMEMED PROMISSORY NOTE replaces and amends that certain
Promissory Note in the original principal amount of $78,000.00. FOR VALUE
RECEIVED, the Undersigned, Butterwings Entertainment Group, Inc., an Illinois
corporation ("Maker"), promises to pay to the order of Sunset Bridge Fund III
('Lender'), the principal sum of $88.000-00. or such other sum as shall have
been advanced by Under pursuant hereto, (the "Amount Advanced")on or before six
months from the date of execution hereof.
1. Interest Rate
The unpaid Amount Advanced under this Promissory Note shall bear interest
at the rate of fourteen percent (I 4 %) per annum.
2. Computation.
Interest chargeable hereunder shall be calculated from the date each
incremental Advance shall have been made, on the basis of three hundred sixty
(360) day year for the actual number of days elapsed. Interest not paid when due
shall be added to the unpaid principle balance and shall thereafter bear
interest at the same rate as principal. All payments (including prepayments)
hereunder are to be applied first to the payment of accrued interest and then
balance remaining applied to the payment of principal.
3. Payments
Except as otherwise set forth in the Bridge Loan and Security Agreement,
by and betweenMaker and Lander ("Bridge Loan and Security Agreement"), and as
set forth herein, the unpaid Amount Advanced under this Promissory Note plus all
accruedbut unpaid interest thereon shall be payable on the earlier of the
closing of an initial public offering by Maker or six months from the date of
issuance of this Amended Note ("Maturity Date").
In addition to the payments set forth above, Lender shall be entitled to
12,320 warrants for units in Butterwings Entertainment Group, Inc's public
offering, which warrants are restricted for a period of one year, after which
the warrants will be eligible for registration for free trading.
4. Voluntary Prepayment.
Maker may, at any time, upon five (5) Business Days prior written notice to
Lender, prepay the unpaid Amount Advanced evidenced by this Promissory Note, in
whole or in Part, without penalty or premium, by paying to Lender, in cash or by
wire transfer or immediately available federal funds, the amount of such
prepayment. If any such prepayment is less than a full prepayment, then such
prepayment shall be applied to the unpaid Amount Advanced hereunder.
<PAGE>
5. Lawful Money, Designated Places of Payment
All principal and interest due hereunder in payable in lawful money of the
United States of America, in immediately available funds, at Lender's designated
address of record (or at such other location as may be designated from time to
time in writing by Lender).
6. Loan and Security Agreement
The obligations evidenced by this Amended Promissory Note are secured by
certain collateral as set forth in the Bridge Loan and Security Agreement. In
addition, appropriate UCC Statements will be filed in favor of Lender to further
secure this Note.
7. Waivers
Except as set forth elsewhere herein or In the Bridge Loan and Security
Agreement, Maker, for itself and its legal representatives, successors, and
assigns, expressly waives presentment, protest, demand, notice of dishonor,
notice of nonpayment, notice of maturity, notice of protest, notice of intent to
accelerate, notice of acceleration, presentment for the purpose of accelerating
maturity, and diligence in collection.
8. DEFALT: SECURITY INTERESTS.
IT IS EXPRESSLY AGREED THAT, UPON THE OCCURRENCE OF AN EVENT OF DEFAULT
UNDER THE BRIDGE LOAN AND SECURITY AGREEMENT. 'I'HE UNPAID PRINCIPAL BALANCE OF
THIS PROMISSORY NOTE, TOGETHER WITH INTEREST ACCRUED HEREON, SHALL BE DUE AND
PAYABLE AS PROVIDED IN THE LOAN AND SECURITY AGREEMENT, WITHOUT PRESENTMENT,
DEMAND, PROTEST, OR NOTICE OF PROTEST, OF ANY KIND, ALL OF WHICH ARE HEREBY
EXPRESSLY WAIVED. IT IS FURTHER UNDERSTOOD THAT THIS NOTE IS SECURED BY, AMONG
OTHER THING, ANY OF THE SECURITY INTEREST GRANTED TO LENDER UNDER THE LOAN AND
SECURITY AGREEMENT AND UNDER ANY OTHER AGREEMENT BETWEEN LENDER AND MAKER WHICH
IS EXECUTED IN CONNECTION WITH THE LOAN AND SECURITY AGREEMENT, IN CONNIRCNON
HEREWITH, OR IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREUNDER
(OCOUATERAL DOCUMENTS). ALL OF THE COVENANTS, CONDITIONS, WARRANTIES,
REPRESENTATIONS AND AGREEMENTS CONTAINED IN SUCH COLLATERAL DOCUMENTS, ARE
HEREBY INCORPORATED HEREIN AND MADE A PART HEREOF,
<PAGE>
9. Maximum interest Rate.
Notwithstanding anything to the contrary contained in this Promissory Note,
Maker shall not be obligated to pay, and the holder hereof shall not be entitled
to change, collect, receive, reserve, or take interest("interest" being defined,
for purposes of this paragraph, as the aggregate of all charges which constitute
interest under applicable law that are contracted for, charged, reserved,
received, or paid under this Promissory Note) in excess of the maximum rate
allowed by applicable law. During any period of time which the interest rate
specified herein exceeds such maximum rate, Interest shall accrue and be payable
at such maximum rate: provided however, that if the interest rate declines
below such maximum rate, interest shall continue to accrue and be payable at
such maximum rate (so long as there remains any unpaid Principal balance
due under this Note) until the interest that has been paid on this Note equals
the amount of interest that would have been paid if interest had at all
times accrued and been payable at the interest rate specified in this Note.
For purposes of this Promissory Note, the term "applicable law"
shall mean that law in effect from time to item and applicable to the loan
transaction between Maker and the holder of this Promissory Note which lawfully
permits the charging and collection of the highest permissible, lawful,
non-usurious rate of interest on such loan transaction and this Promissory Note,
including laws of the State of California and, to the extent controlling, laws
of the United States of America.
10. Capitalized Terms.
Any and all capitalized terms used in this Promissory Note
and not separately defined herein shall have the meaning ascribed thereto in
the Bridge Loan and Security Agreement.
11. Section Headings.
Headings and numbers have been set forth for convenience
only. Unless the contrary is compelled by the context,
Everything contained in each paragraph applies equally to
this entire Promissory Note.
12. Amendments in Writing.
This Promissory Note nay not be changed, modified,
amended, or terminated orally.
13. CHOICE OF LAW: WAIVER OF TRIAL BY JURY.
THIS PROMISSORY NOTE AND ALL TRANSACNONS HEREUNDER AND/OR
EVIDENCED HEREBY SHALL BE GOVERNED BY, CONSTRUED UNDER, AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. MAKER HEREBY WAIVES, TO
THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING RELATING T0 THIS PROMISSORY NOTE.
<PAGE>
Made and Executed at
Hoffman Estates, Illinois.
Butterwings Entertainment Group, Inc.,
an Illinois corporation
BY:
AGREED AND ACCEPTED THIS______DAY OF______1997
By: Sunset Bridge Fund III
By: Palisades Capital group, L.L.C., general partner
By: ____________________________
John W. Barrett, Manager
Butterwings Entertainment group, Inc.
BY: ________________________
Stephan S. Buckley, President
SECOND AMENDED PROMISSORY NOTE
Dated as of January '7, 1998
$42,246-00
This SECOND AMENDED PROMISSORY NOTE replaces and
amends that certain promissory Note in the original principal amount of
$42,246.00. FOR VALUE RECEIVED, the undersigned, Butterwings
Entertainment Group, Inc., an Illinois corporation ("Marker") , promises
to pay to the order of Ken Cattell ("Lender"), the principal sum of
$42,246.00, or such other sum as shall have been advanced by Lander pursuant
hereto, (the "Amount Advanced") on or before six months from the
date of execution hereof.
1. Interest Rate
The unpaid Amount Advanced under this Promissory Note shall bear
interest at the rate of fourteen percent (14%) per annum.
2. Computation.
Interest chargeable hereunder shall be calculated from the date each
incremental Advance shall have been made, on the basis of three hundred sixty
(360) day year for the actual number of days elapsed. Interest not paid when
due shall be added to the unpaid principal balance and shall thereafter bear
interest at the same rate as principal. All payments (including prepayments)
hereunder are to be applied first to the payment of accrued interest and then
balance remaining applied to the payment of principal.
3. Payments.
Except as otherwise set forth in the Bridge Loan and Security
Agreement, by and between Maker and Lender ("Bridge Loan and Security
Agreement"), and as set forth herein, the unpaid Amount Advanced under this
Promissory Note plus all accrued but unpaid interest thereon shall be payable on
the earlier of the closing of an initial public offering by Maker or six months
from the date of issuance of this Amended Note ("Maturity Date").
In addition to the payments set forth above, Lender shall be
entitled to 4,225 warrants f or units in Butterwings
Entertainment Group, Inc.'s public offering, which warrant's
are restricted for a period of one year, after which the
warrants will be eligible for registration for free trading.
<PAGE>
4. Voluntary Prepayment.
Maker may, at any time, upon (5) Business Days prior written notice to Lender,
prepay the unpaid Amount Advanced evidence by this Promissory Note, in whole
or in part, without penalty or premium, by paying to Lender, in cash or by
wire transfer or immediately available federal funds, the amount of such
prepayment. If any such prepayment is less that a full prepayment, then such
prepayment shall be applied to the unpaid Amount Advanced hereunder.
5. Lawful Money, Designated Places of Payment.
All principal and interest due hereunder is payable in lawful
money of ;*p+12Xthe United States of America, in immediately available funds, at
Lender's designated address of record (or at such other location as may be
designated from time to time in writing by Lender).
6. Loan and Security Agreement,
The obligations evidenced by this Amended Promissory Note are
secured by certain collateral as set forth in the Bridge Loan and Security
Agreement. In addition, appropriate UCC statements will be filed in favor of
Lender to further secure this Note.
7. Waivers.
Except as set forth elsewhere herein or in the Bridge Loan and
Security Agreement, Maker, for itself and its legal representatives, successors,
and assigns, expressly waives presentment, protest, demand, notice of dishonor,
notice of nonpayment, notice of maturity, notice of protest, notice of intent to
accelerate, notice of acceleration, presentment for the purpose of accelerating
maturity, and diligence in collection.
8. DEFAULT:SECURITY INTERESTS.
IT IS EXPRESSLY AGREED THAT, UPON THE OCCURRENCE OF AN EVENT OF
DEFAULT UNDER THE BRIDGE LOAN AND SECURITY AGREEMENT, THE UNPAID PRINCIPAL
BALANCE OF THIS PROMISSORY NOTE, TOGETHER WITH INTEREST ACCRUED HEREON, SHALL BE
DUE AND PAYABLE AS PROVIDED IN THE LOAN AND SECURITY AGREEMENT, WITHOUT
PRESENTMENT, DEMAND, PROTEST, OR NOTICE OF PROTEST, OF ANY KIND, ALL OF WHICH
ARE HEREBY EXPRESSLY WAIVED. IT IS FURTHER UNDERSTOOD THAT THIS NOTE IS SECURED
BY, AMONG OTHER THINGS, ANY OF THE SECURITY INTEREST GRANTED TO LENDER UNDER THE
LOAN AND SECURITY AGREEMENT AND UNDER ANY OTHER AGREEMENT BETWEEN LENDER AND
MAKER WHICH IS EXECUTED IN CONNECTION WITH THE LOAN AND SECURITY AGREEMENT, IN
CONNECTION HEREWITH, OR IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED
HEREUNDER ("COLLATERAL DOCUMENTS"). ALL OF THE COVENANTS, CONDITIONS,
WARRANTIES, REPRESENTATIONS AND AGREEMENTS CONTAINED IN DOCUMEVTS, ARE HZPEBY
INCORPOPATED HEREIN AND MADE A PART HEREOF.
<PAGE>
9. Maximum Interest Rate.
Notwithstanding anything to the contrary contained in this
Promissory Note, Maker shall not be obligated to pay, and the holder hereof
shall not be entitled to change, collect, receive, reserve, or take interest
("interest" being defined, for purposes of this paragraph, as the aggregate of
all charges which constitute interest under applicable law that are contracted
for, charged, reserved, received, or paid under this Promissory Note) in excess
of the maximum rate allowed by applicable law. During any period of time which
the interest rate specified herein exceeds such maximum rate, interest shall
accrue and be payable at such maximum rate; provided, however, that, if the
interest rate declines below such maximum rate, interest shall continue to
accrue and be payable at such maximum rate (so long as there remains any unpaid
principal balance due under this Note) until the interest that has been paid on
this Note equals the amount of interest that would have been paid if interest
had at all times accrued and been payable at the interest rate specified in this
Note.
For purposes of this Promissory Note, the term "applicable law"
shall mean that law in effect from time to item and applicable to the loan
transaction between Maker and the holder of this Promissory Note which lawfully
permits the charging and collection of the highest permissible, lawful,
non-usurious rate of interest on such loan transaction and this Promissory Note,
including laws of the State of California and, to the extent controlling, laws
of the United States of America.
10. Capitalized Terms.
Any and all capitalized terms used in this Promissory Note and
not separately defined herein shall have the meaning ascribed thereto in the
Bridge Loan and Security Agreement.
11. Section Headings.
Headings and numbers have been get forth for convenience only.
Unless the contrary is compelled by the context, everything
contained in each paragraph applies equally to this entire
Promissory Note.
12. Amendments in Writing.
This Promissory Note may not be changed, modified, amended, or
terminated orally. This note supersedes the Amended Promissory Note dated July
23, 1997.
<PAGE>
13. CHOICE OF LAW; WAIVER OF TRIAL BY JURY,
THIS PROMISSORY NOTE AND ALL TRANSACTIONS HEREUNDER
AND/OR EVIDENCED HEREBY SHALL BE GOVERNED BY, CONSTRUED UNDERT AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. MAKER HEREBY WAIVES, TO THE
EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT TO TRIAL BY JURY IN ANY ACTION
OR PROCEEDING RELATING TO THIS PROMISSORY NOTE.
Made and executed at
Hoffman Estates, Illinois.
Butterwings Entertainment Group, Inc.,
an Illinois corporation
By:_____________________________
Title: President
AGREED AND ACCEPTED THIS 9th DAY OF January, 1998
By:_______________________
Ken Cattell
Butterwings Entertainment Group, Inc.
By:__________________________
AMENDED PROMISSORY NOTE
Dated as of July 23, 1997
$225,864.62
This AMENDED PROMISSORY NOTE replaces and amends that certain
Promissory Note dated as of December 2, 1996 in the original principal amount of
$195,000.00. FOR VALUE RECEIVED, the undersigned, Butterwings Entertainment
Group, Inc., an Illinois corporation ("Maker'), promises to pay to the order of
John M. McGinnis ("Lender'), the principal sum of $225,864.62, (the "Amount
Advanced') on or before January 31, 1998.
1. Payments,
Except as otherwise set forth in the Bridge Loan and
Security Agreement, by and between Maker and Lender, dated December 2, 1996
("Bridge Loan and Security Agreement"), and as set forth herein, the unpaid
Amount Advanced under this Promissory Note plus all accrued but unpaid interest
thereon shall be payable on the earlier of the closing of an initial public
offering by Maker or January 31, 1998 ("Maturity Date").
In addition to the payments set forth above, Lender shall be
entitled to 21,078 warrants for units (which units consist of one share of
common stock and one warrant) in Butterwings Entertainment Group, Inc-'s public
offering, which warrants are restricted for a period of one year, after which
the warrants will be eligible for registration for free trading. During the
restriction period of one year, neither the warrants nor the underlying units
may be sold, transferred, pledged, assigned, or hypothecated in any manner.
2. Voluntary Prepayment
Maker may, at any time, upon five (5) Business Days prior
written notice To Lender, prepay the unpaid Amount Advanced evidenced by this
Promissory Note, in whole or in part, without penalty or premium, by paying to
Under, in cash or by wire transfer or immediately available federal funds, the
amount of such prepayment. If any such prepayment is less that a full
prepayment, then such prepayment shall be applied to the unpaid Amount Advanced
hereunder.
3. Lawful Money. Designated Places of Payment
All principal and interest due hereunder is payable in lawful
money of the United States of America, in immediately available funds, at
Lender's designated address of record (or at such other location as may be
designated from time to time in writing by Lender).
<PAGE>
4. Loan and Security Agreement,
The obligations evidenced by this Amended Promissory Note
are secured by certain collateral as set forth in the Bridge Loan and Security
Agreement. In addition, appropriate UCC statements will be filed in favor of
Lender no later than September 30, 1997, to further secure this Note.
5. Waivers,
Except as set forth elsewhere herein or in the Bridge Loan and
Security Agreement, Maker, for itself and its legal representatives,
successors, and assigns, expressly waives presentment, protest, demand, notice
of dishonor, notice of nonpayment, notice of maturity, notice of protest,
notice of intent to accelerate, notice of acceleration, presentment for the
purpose of accelerating maturity, and diligence in collection.
6. DEFAULT: SECURITY INTERESTS,
IT IS EXPRESSLY AGREED THAT, UPON THE OCCURRENCE OF AN EVENT
OF DEFAULT UNDER THE BRIDGE LOAN AND SECURITY AGREEMENT, THE UNPAID PRINCIPAL
BALANCE OF THIS PROMISSORY NOTE. TOGETHER WITH INTEREST ACCRUED HEREON, SHALL
BE DUE AND PAYABLE AS PROVIDED IN THE LOAN AND SECURITY AGREEMENT, WITHOUT
PRESENTMENT, DEMAND, PROTEST, OR NOTICE OF PROTEST, OF ANY KIND, ALL OF WHICH
ARE HEREBY EXPRESSLY WAIVED. IT IS FURTHER
UNDERSTOOD THAT THIS NOTE IS SECURED BY, AMONG OTHER THINGS, ANY OF THE
SECURITY INTEREST GRANTED TO LENDER UNDER THE LOAN AND SECURITY AGREEMENT AND
UNDER ANY OTHER AGREEMENT BETWEEN LENDER AND MAKER WHICH IS EXECUTED IN
CONNECTION WITH THE LOAN AND SECURITY AGREEMENT, IN CONNECTION HEREWITH, OR IN
CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREUNDER ("COLLATERAL
DOCUMENTS"). ALL OF THE COVENANTS, CONDITIONS, WARRANTIES, REPRESENTATIONS AND
AGREEMENTS CONTAINED IN SUCH COLLATERAL DOCUMENTS, ARE HEREBY INCORPORATED
HEREIN AND MADE A PART HEREOF.
7. Maximum Interest Rate
Notwithstanding anything to the contrary contained in this
Promissory Note, Maker shall not be obligated to pay, and the holder hereof
shall not be entitled to change, collect, receive, reserve, or take interest
("interest" being defined, for purposes of this paragraph, as the aggregate of
all charges which constitute interest under applicable law that are contracted
for, charged, reserved, received, or paid under this Promissory Note) in excess
of the maximum rate allowed by applicable law. During any period of time which
the interest rate specified herein exceeds such maximum rate, interest shall
accrue and be payable at such maximum rate; provided- however, that, if the
interest rate declines below such maximum rate, interest shall continue to
accrue and be payable at such maximum rate (so long as there remains any unpaid
principal balance due under this Note) until the interest that has been paid on
this Note equals the amount of interest that would have been paid if interest
had at all times accrued and been payable at the interest rate specified in this
Note.
<PAGE>
For purposes of this Promissory Note, the term "applicable
law" shall mean that law in effect from time to item and applicable to the
loan transaction between Maker and the holder of this Promissory Note which
lawfully permits the charging and collection of the highest permissible,
lawful, non-usurious rate of interest on such loan transaction and this
Promissory Note, including laws of the State of California and, to the extent
controlling, laws of the United States of America.
8. Capitalized Terms
Any and all capitalized terms used in this Promissory Note
and not separately defined herein shall have the meaning ascribed thereto in
the Bridge Loan and Security Agreement.
9. Section Headings,
Headings and numbers have been set forth for convenience
only. Unless the contrary is compelled by the context, everything contained in
each paragraph applies equally to this entire Promissory Note.
10. Amendments in Writing.
This Promissory Note may not be changed, modified, amended,
or terminated orally.
11. Binding Arbitration
The parties agree that any disputes regarding the terms and
conditions of this Note will be subject to binding arbitration in accordance
with the rules of the American Arbitration Association. Reasonable attorneys
fees shall be awarded to Lender if it becomes necessary to pursue collection
of this Note.
<PAGE>
Made and Executed at
Hoffman Estates, Illinois.
Butterwings Entertainment Group, Inc.,
an Illinois corporation
By:_____________________
Title: Vice President
AGREED AND ACCEPTED THIS 22 DAY OF SEPTEMBER, 1997
- --------------------------
John M. Mc.Ginnis
<PAGE>
Butterwings Entertainment Group, Inc.
2345 Pembroke Avenue, Suite B
Hoffman Estates, IL 60195
(847) 925-0925 (800) 381-4554
Fax (847) 925-1265
September 11, 1997
VIA FACSIMILE AND REGULAR MAIL (619) 552-8997
Mr. John McGinnis
4332 La Jolla Village Drive # 244
San Diego, CA 92122
Dear John,
Per our recent discussion, Butterwings Entertainment Group acknowledges
that tile company is in default on a promissory note in the amount of S 1
95,000. As you are concerned about collateral for the granting of an extension
of time on the note, Butterwings Entertainment Group proposes the following...
John McGinnis will have as additional collateral, a lien on (he Mrs.
Fields Cookie store, currently owned by Butterwings Entertainment Group, located
in Flint, Michigan. Financials on the location are included as an addendum to
this letter.
John McGinnis agrees to extend his note to the company until December
31, 1997 in exchange for Butterwings Entertainment Group agreeing to abide by
the terms of tile amended promissory note. If the amended promissory note
remains unpaid, he will take over ownership on January 1, 1998, of the Mrs.
Fields store in Flint, Michigan, and ill cash flow and expenses associated with
the location. In the event this occurs, Butterwings will have tile right for a
period of 12 months to repurchase the store from John McGinnis, for a price of
$250,000 cash.
Should Butterwings Entertainment Group go public before the December 3
1, 1997 date, Butterwings Entertainment Group's obligation to repay the amended
promissory note will be immediate, and the lien will be removed from the Flint,
Michigan location. Nothing contained herein shall mitigate the fights of either
party under the amended promissory note.
Agreed: Agreed:
By:_____________________ By:_____________________
John McGinnis Ken Drost
Subscribed and sworn to before me this 11th day of September, 1997.
<PAGE>
Butterwings Entertainment Group , Inc.
2345 Pembroke Avenue, Suite 8
Hoffman Estates, IL 60195
(847) 925-0925 (800) 381-4554
Fax (847) 925-1265
September 11, 1997
John M. McGinnis
4320 LaJoila Village Drive
#255
San Diego, CA 92122
Re: Butterwings Entertainment Group
Dear Mr. McGinnis:
This will confirm my agreement to sell to you 20,000 shares of
Butterwings Entertainment Group, Inc. for the sum of$100.00. which transaction
will not be consummated until the conclusion of any unconditional lock up
agreement required by the Securities Exchange Commission or the National
Association of Securities Dealers. This transaction is further subject to all
applicable securities laws, and any rules or regulations promulgated by the
Securities and Exchange Commission and the National Association of Securities
Dealers or any state regulatory authority.
Please signify your agreement to these terms by executing and
returning one copy of this letter.
Very truly yours,
Kenneth B. Drost, P.C.
Accepted:
- ----------------------------
John M. McGinnis
Exhibit 10.13
VIA FACSIMILE (619) 522-8997 & REGULAR MAIL
Mr. John M. McGinnis
4320 LaJolla Village Drive, #255
San Diego, CA 92122
Dear John:
This will confirm our agreement regarding an extension of your
amended promissory note.
1. The terms of your amended promissory note will be extended until
December 31,1998 under the terms required by the national Association
of security Dealers.
2. Butterwings Entertainment Group will pay you the sum of
$6,000.00 monthly, beginning January 1, 1998 and continuing
on the first of each month thereafter until December 31,
1998 or the effective date of Butterwings' Initial Public
Offering, whichever comes first.
3. On the Effective Date of our initial Public Offering,
Butterwings will pay you the sum of $100,000.00, in addition
to the sums payable under your amended promissory note and any
stock or warrants to which you are entitled under our
agreement
4.
In consideration of these payments, you agree to forehear from
the enforcement of any remedies provided in the letter of
September 11, 1997 until December 31, 1998 9in the event that
the Initial Public Offering is not consummated). In addition,
the payments provided herein are in lieu of any other cash
payments provided in that letter
5. With each payment pursuant to paragraph 2 hereof, Butterwings
will provide two pounds of Mrs. Field's chocolate chip
cookies.
Accepted: Accepted:
- --------------------- ----------------------
John M. McGinnis Kenneth B. Drost
Subscribed and sworn to before me this 8th day of January, 1998
SUSAN R. ANTARIA
NOTAAY PU8L]C. STATE OF ILLINOIS
MY commission Expires @in-M
2345 Pembroke Avenue a Suite B a Hoffman Estates IL 60195
Voice: 847-925-0925 Fm 847.9251265
Consent of Independent Accountants
We consent to the use in this Amendment No. 3 to the Registration 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
January 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001030988
<NAME> Butterwings Entertainment Group, Inc
<S> <C> <C>
<PERIOD-TYPE> YEAR 10-MOS
<FISCAL-YEAR-END> DEC-29-1996 DEC-28-1997
<PERIOD-START> DEC-30-1996 DEC-29-1996
<PERIOD-END> DEC-29-1996 OCT-05-1997
<CASH> $534,072 $368,341
<SECURITIES> 0 0
<RECEIVABLES> $31187 $56,377
<ALLOWANCES> 0 0
<INVENTORY> $118,647 $30,249
<CURRENT-ASSETS> $719,813 $714,943
<PP&E> $2,933,386 $1,267,212
<DEPRECIATION> $619,141 $522,755
<TOTAL-ASSETS> $5,506,201 $3,084,668
<CURRENT-LIABILITIES> $5,507,435 $5,181,693
<BONDS> 0 0
$1,690,000 $1,690,000
$1,568,500 1,568,500
<COMMON> $21,520 21,520
<OTHER-SE> $(3,802,975) $(6,535,904)
<TOTAL-LIABILITY-AND-EQUITY> $5,506,201 $3,084,668
<SALES> $8,551,033 $5,316,074
<TOTAL-REVENUES> $8,551,033 $5,316,074
<CGS> $2,454,078 $1,548,669
<TOTAL-COSTS> $10,385,742 $7,257,223
<OTHER-EXPENSES> $(754,640) $(685,455)
<LOSS-PROVISION> $927,148 $1,025,000
<INTEREST-EXPENSE> $493,279 $200,868
<INCOME-PRETAX> $(2,757,259) $(2,756,249)
<INCOME-TAX> $(2,757,259) $(2,756,249)
<INCOME-CONTINUING> $(2,757,259) $(2,756,249)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> $(2,757,259) $(2,756,249)
<EPS-PRIMARY> (1.23) (1.24)
<EPS-DILUTED> (1.23) (1.24)
</TABLE>
