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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1998
REGISTRATION NO. 333-53501
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT
Under
the Securities Act of 1933
---------------------
NATURAL NUTRITION GROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 2000 36-4042454
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
</TABLE>
135 S. LASALLE STREET, SUITE 1134, CHICAGO, ILLINOIS 60603, (312) 578-1110
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
WILLIAM R. VOSS
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
135 S. LASALLE STREET, SUITE 1134, CHICAGO, ILLINOIS 60603, (312) 578-1110
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
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<S> <C>
KENNETH W. MILLER, ESQ. JOHN D. WATSON, JR., ESQ.
KATTEN MUCHIN & ZAVIS LATHAM & WATKINS
525 WEST MONROE STREET, SUITE 1600 1001 PENNSYLVANIA AVE., N.W., SUITE 1300
CHICAGO, ILLINOIS 60661 WASHINGTON, D.C. 20004
(312) 902-5200 (202) 637-2200
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [ ].
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ].
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ].
CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED PROPOSED
TITLE OF EACH CLASS OF TO BE MAXIMUM MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $.001 par value... 3,795,000(1) $16.00(2) $60,720,000(2) $17,913(3)
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(1) Includes 495,000 shares to be offered upon exercise of the Underwriters'
over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933, as amended.
(3) Previously paid.
---------------------
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 SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
JULY 29, 1998
3,300,000 SHARES
NATURAL NUTRITION GROUP LOGO HEALTH VALLEY LOGO
BREADSHOP NATURAL FOODS LOGO
COMMON STOCK
-------------------------------
All of the shares of Common Stock, par value $0.001 per share (the
"Common Stock"), of Natural Nutrition Group, Inc. ("NNG" or the
"Company") offered hereby are being sold by the Company. Prior to this
offering (the "Offering") there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price
will be between $14.00 and $16.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial
public offering price.
Application has been made to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol "NNGI."
-------------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
-------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.................... $ $ $
Total(3)..................... $ $ $
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</TABLE>
(1) See "Underwriting" for information relating to indemnification of
the Underwriters.
(2) Before deducting expenses of the Offering payable by the Company
estimated at $900,000.
(3) The Company has granted the Underwriters a 30-day option to purchase
up to 495,000 additional shares of Common Stock on the same terms
and conditions set forth above solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and
$ , respectively. See "Underwriting."
-------------------------------
The shares of Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by
them, and subject to the right of the Underwriters to reject any order
in whole or in part. It is anticipated that delivery of the shares of
Common Stock will be made at the offices of BT Alex. Brown Incorporated,
Baltimore, Maryland, on or about , 1998.
-------------------------------
BT ALEX. BROWN ADAMS, HARKNESS & HILL, INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
[THE INSIDE FRONT AND BACK COVER AND GATEFOLD PAGES OF THE PROSPECTUS CONTAIN
PHOTOGRAPHS OF CERTAIN OF THE COMPANY'S PRODUCTS, A DESCRIPTION OF THE HEALTH
VALLEY LOGO AND A PHOTOGRAPH OF THE COMPANY'S MANUFACTURING FACILITY IN
IRWINDALE, CALIFORNIA]
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors for each
fiscal year and will make available copies of quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
Health Valley(R) and Breadshop's(R) are registered trademarks of the
Company. The prospectus also includes tradenames and trademarks of companies
other than the Company which are the property of their respective owners.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus assumes that (i) the
290-for-1 stock split, to be effected prior to the consummation of the Offering,
has occurred, (ii) the Company's Series A Preferred Stock has been redeemed with
a portion of the net proceeds of the Offering and (iii) the Underwriters'
over-allotment option is not exercised.
The operations of Natural Nutrition Group, Inc. are conducted through its
wholly-owned subsidiary, Health Valley Company ("Health Valley"). Unless the
context otherwise requires, references in this Prospectus to the "Company" or
"NNG" include Natural Nutrition Group, Inc. and Health Valley on and after April
15, 1996. All references to "Health Valley" and the "Predecessor Company" prior
to April 15, 1996 refer to the combined operations of Health Valley Foods, Inc.,
Health Valley Manufacturing Company and their predecessors.
THE COMPANY
The Company is a leading manufacturer and marketer of premium natural and
organic food products in the United States. The Company markets (i) breakfast
cereals and granolas, (ii) granola bars, cereal bars, cookies, crackers and
other baked goods and (iii) canned and instant soups and chilis, as well as
other food products, primarily under its Health Valley(R) and Breadshop's(R)
brands. The Company's branded products are made using only natural ingredients,
without artificial flavors, colors, additives or preservatives. Many of the
Company's products are also made with "organic" ingredients, which are grown
without dependence upon artificial pesticides, chemicals or fertilizers.
The Company currently markets over 200 products and believes it has the
largest market share among marketers of natural food brands for its core product
categories -- breakfast cereals and granolas, baked goods, and soups and chilis.
Representative products of the Company include Health Valley(R) Spicy Vegetarian
Chili, Breadshop's(R) Honey Gone Nuts(R) Cereal, Health Valley(R) Apple Cobbler
Cereal Bars, Health Valley(R) Amazing Apple!(TM) Hot Breakfast Cereal and Health
Valley(R) Soy Moo(R) Non-Dairy Beverage.
The Company's products are sold primarily through natural and specialty
food distributors and ultimately to consumers through natural food retailers,
such as Whole Foods and Wild Oats, conventional grocery retailers, such as Fred
Meyer and Kroger, and other retail channels. The Company estimates that in 1997
approximately 35% of its products were sold in the natural food retail channel,
approximately 50% of its products were sold in the conventional grocery retail
channel and approximately 15% of its products were sold in other retail
channels. In 1997, the Company began to manufacture private label products for
certain of its customers.
The Company manufactures most of its products, unlike many natural food
companies that rely on contract manufacturing. The Company's manufacturing
operations are housed in a modern 150,000 square foot facility located in
Irwindale, California. The Company believes that by manufacturing most of its
products, it is able to better control the cost and quality of its products and
provide better service to its customers. The Company estimates that it is
generally utilizing less than 30% of the Irwindale facility's manufacturing
capacity. As a result, the Company believes significant operating leverage can
be achieved through growth. In addition, the Company's manufacturing capability
has enabled it to produce private label products for retailers, which increases
revenues and may also strengthen its business relationships with certain key
customers.
The natural and organic food market is highly fragmented and includes
several hundred manufacturers and marketers. The Company believes that continued
growth in this market combined with continued consolidation among retailers and
distributors will lead to consolidation among natural and organic food
manufacturers. Accordingly, a key element of the Company's growth strategy is to
pursue strategic acquisitions of natural and organic food companies with
products or brands that strengthen or complement the Company's product lines.
The Company believes that its manufacturing capability, its sophisticated
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information systems and the experience and depth of its management team will
enable the Company to identify and realize synergies in connection with
acquisitions which may give the Company advantages over other potential
acquirors.
NATURAL FOOD MARKET
According to Natural Foods Merchandiser ("NFM"), a leading industry
publication, the market for natural products grew at a rate of 20% between 1995
and 1996 and reached approximately $11.5 billion in 1996. According to NFM, the
organic food market, a segment of the natural products market, also grew at a
rate of 20% between 1995 and 1996 and was estimated at $3.0 billion in 1996. The
Company believes that growth in the natural and organic food market is being
propelled by several factors, including (i) consumers taking charge of their
health and well being through awareness of the link between diet and health and
improved eating habits, (ii) consumer concern over the purity and safety of
foods due to the presence of pesticide residues, artificial ingredients and
other chemicals and (iii) consumer awareness of environmental issues.
In recent years, changes in attitudes and beliefs have led to changes in
dietary habits. For example, from 1980 to 1995, per capita consumption of grains
and fruits -- two food groups of which the United States Department of
Agriculture recommends increased consumption -- grew by 30% and 20%,
respectively.
Demographic trends are also favorable for natural and organic foods. The
number of adults over the age of 35 is increasing rapidly. The U.S. Census
Bureau projects that between 1990 and 2000 the number of adults between the ages
of 35 and 54 will grow by 29% and the number of adults over age 54 will grow by
13%. Since these demographic groups are the most frequent purchasers of the
Company's products, the Company believes the aging population will increase the
number of ultimate consumers of the Company's products.
COMPETITIVE STRENGTHS
The Company believes that its current market position is attributable to
the following competitive strengths:
Strong Brand Name Recognition and Leading Market Shares
The Health Valley(R) and Breadshop's(R) brand names, both of which have
been marketed by the Company and its predecessors for over 25 years, are two of
the leading brand names in the natural and organic food industry. The Company
believes that the Health Valley(R)brand is one of the most recognized natural
and organic food brands in the United States.
The Company believes that it has the leading market share in the natural
food and conventional grocery retail channels in each of its three core product
categories -- (i) breakfast cereals and granolas, (ii) granola bars, cereal
bars, cookies and other baked goods and (iii) canned and instant soups and
chilis -- which accounted for over 90% of the Company's revenues in 1997.
Expertise in Natural and Organic Ingredient Sourcing and Product Development
The Company has significant expertise in the sourcing of natural and
organic food ingredients and in the formulation of innovative natural products.
The Company, together with its predecessors, has been working with natural and
organic formulations, preparations and recipes for over 25 years. The Company
has also developed proprietary techniques which increase shelf life, improve
flavor and enhance the nutritional quality of the Company's food products,
without relying on artificial ingredients or preservatives.
Substantial Infrastructure
NNG operates a modern manufacturing center in Irwindale, California which
the Company estimates is generally operating at less than 30% utilization. In
addition, the Company has sophisticated, scalable information systems capable of
absorbing future growth. The Company believes the combination of excess
manufacturing capacity and scalable information systems creates a significant
opportunity to grow existing
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brands, develop new products, build its private label and contract manufacturing
businesses and acquire complementary brands which can be manufactured by the
Company without significant capital investment or additional fixed expenses.
Experienced Management Team
The natural and organic food industry is a relatively young industry,
consisting primarily of comparatively small, privately-owned businesses. As a
result, the management of such natural food companies often lacks the training
and experience commonly found in other more mature segments of the food
industry. The Company has recruited an experienced management team to oversee
current operations and will continue to recruit seasoned management to support
future growth and acquisitions. The Company's executive officers are veteran
senior managers with extensive food industry experience. The Company believes
that its larger size relative to most natural food companies enables it to
recruit and retain more highly qualified and specialized management than many of
its competitors.
GROWTH STRATEGY
The Company's objective is to be the leading manufacturer and marketer of
premium branded natural and organic foods. The key elements of the Company's
growth strategy are as follows:
Concentrate on the Growing Natural and Organic Food Market
The natural and organic food market is growing rapidly, and the Company is
concentrating its branded marketing activities exclusively in this market
segment.
Grow the Company's Existing Brands
The Company intends to build upon its leading position in its current core
product categories through internal growth. Both the Health Valley(R) and
Breadshop's(R) brands have been marketed for more than 25 years, fostering
consumer awareness and loyalty and retail availability throughout the United
States. The Company plans to invest in trade and consumer marketing in order to
further increase the awareness and availability of its brands. Building on its
brand equities, the Company believes it can strengthen its position in current
product categories and successfully launch products in new categories.
The Company plans to continue developing new products which appeal to
consumers with respect to taste, nutrition, convenience and environmental
impact. The Company also plans to launch new products for evening meal
consumption, complementing its existing breakfast, lunch and snack products. For
example, in the third quarter of 1998, the Company plans to launch an instant
rice meal positioned to compete in the single serve home meal replacement
market. In addition, the Company plans to introduce new food products that
incorporate ingredients with specific nutritional benefits, or functional foods.
Expand Sales in Grocery Retail Channel
Complementing its ongoing efforts to increase sales in the natural food
retail channel, the Company plans to improve the scope and quality of
conventional grocery retail distribution for its brands. By informing grocery
retailers about natural and organic food markets, consumer profiles and growth
opportunities, the Company will seek to enhance conventional grocers'
understanding of the appeal of natural and organic food products and increase
their commitment to the segment. The Company believes that fostering
understanding and commitment on the part of conventional grocers will result in
improved shelf space and more effective in-store merchandising, which the
Company believes will increase its sales in the conventional grocery retail
channel.
Pursue Strategic Acquisitions
A key element of the Company's growth strategy is to pursue strategic
acquisitions of natural and organic food companies with products or brands that
strengthen or complement the Company's product lines. The Company believes such
acquisitions may create opportunities to accelerate sales growth and leverage
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purchasing, manufacturing and operating expenses. The Company believes the
fragmented nature of the natural food industry offers numerous opportunities to
acquire companies that fit well with the Company's strategy. For example, the
Company recently entered into a non-binding letter of intent to acquire a
natural and organic food company with revenues of approximately $5.0 million and
net income of less than $20,000 in 1997. See "Business -- Growth Strategy."
Increase Private Label Business
The Company believes its private label sales activities can lead to both
increased revenues and improved relationships with key customers, thereby
improving the market for its branded products. In conventional grocery
retailing, private labels frequently account for 15% to 20% of sales. However,
until recently, there have been very few private label natural food products.
Due to the growth of the natural and organic food market, natural food marketers
have begun to establish private label programs. During 1997, the Company
established a private label division, recruited an experienced private label
sales manager and began developing private label customer relationships and
sales. The Company intends to become the supplier of choice for private label
natural and organic foods in its core product categories.
RISKS ASSOCIATED WITH THE COMPANY AND THE OFFERING
The Common Stock offered hereby involves a high degree of risk. For a
discussion of risks associated with the Company and the Offering, including the
Company's limited operating history, history of net losses and acquisition
strategy, as well as other factors that should be carefully considered by
prospective investors, see "Risk Factors."
---------------------
NNG was incorporated in Delaware in October 1995. NNG acquired Health
Valley in April 1996 and The Bread Shop, Inc. ("Breadshop") in October 1996.
NNG's principal executive offices are located at 135 South LaSalle Street, Suite
1134, Chicago, Illinois 60603 and its telephone number at that address is (312)
578-1110.
THE OFFERING
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Common Stock offered by the Company........... 3,300,000 shares
Common Stock to be outstanding after the
Offering.................................... 8,096,964 shares(1)
Use of proceeds............................... For redemption of the Company's Series A Preferred
Stock, repayment of revolving credit and term
indebtedness and general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol........ NNGI
</TABLE>
- ---------------
(1) Includes (i) 600,300 shares subject to options which will have vested within
60 days of the consummation of the Offering with a weighted average exercise
price of $0.62 per share and (ii) 40,000 shares subject to options which
will be granted and which will be exercisable on the date of consummation of
the Offering with an exercise price equal to the initial public offering
price. Excludes (i) 115,420 shares subject to unvested options with a
weighted average exercise price of $0.37 per share and (ii) 116,920 shares
subject to options which will be granted, but will not be exercisable, on
the date of consummation of the Offering with an exercise price equal to the
initial public offering price.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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<CAPTION>
PREDECESSOR COMPANY COMPANY
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JANUARY 1, APRIL 15, THREE MONTHS ENDED
YEAR ENDED 1996 TO 1996 TO YEAR ENDED MARCH 31,
DECEMBER 31, APRIL 15, DECEMBER 31, DECEMBER 31, -----------------------
1995(1) 1996(1) 1996(2) 1997 1997 1998
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STATEMENT OF OPERATIONS DATA:
Net sales............................ $73,351 $18,221 $ 39,942 $ 67,898 $ 16,299 $ 17,568
Cost of sales........................ 53,839 13,897 27,180 42,370 10,627 10,960
------- ------- --------- --------- ---------- ----------
Gross profit......................... 19,512 4,324 12,762 25,528 5,672 6,608
Marketing, selling and distribution
expenses........................... 16,651 5,563 7,177 17,366 3,832 4,891
General and administrative
expenses........................... 6,541 2,937 5,034 5,425 1,241 1,202
Amortization of goodwill and
trademarks......................... -- -- 114 334 83 90
------- ------- --------- --------- ---------- ----------
Operating income (loss).............. (3,680) (4,176) 437 2,403 516 425
Other income(3)...................... 645 169 -- -- -- --
Interest expense, net................ 1,502 476 1,052 1,911 497 458
------- ------- --------- --------- ---------- ----------
Income (loss) before income taxes.... (4,537) (4,483) (615) 492 19 (33)
------- ------- --------- --------- ---------- ----------
Provision (benefit) for income
taxes.............................. 1,137 (1,166) 13 387 17 (25)
------- ------- --------- --------- ---------- ----------
Net income (loss).................... $(5,674) $(3,317) (628) 105 2 (8)
======= =======
Preferred dividends.................. 1,330 2,082 514 571
--------- --------- ---------- ----------
Net loss attributable to common
stockholders....................... $ (1,958) $ (1,977) $ (512) $ (579)
========= ========= ========== ==========
Net loss per common share-
basic and diluted.................. $ (.62) $ (.48) $ (.13) $ (.14)
========= ========= ========== ==========
Weighted average number of common
shares outstanding................. 3,161,737 4,132,491 4,059,903 4,156,664
========= ========= ========== ==========
PRO FORMA STATEMENT OF OPERATIONS
DATA(4):
Income before income taxes........... $ 2,154 $ 333
Provision for income taxes........... $ 1,052 $ 121
--------- ----------
Net income........................... $ 1,102 $ 212
========= ==========
Net income per share................. $ 0.15 $ .03
========= ==========
Pro forma weighted average common
shares outstanding................. 7,432,491 7,456,664
========= ==========
OPERATING AND OTHER DATA:
EBITDA(5)............................ $ 333 $(3,018) $ 2,781 $ 5,848 $ 1,419 $ 1,342
Net cash provided by operating
activities......................... 5,158 1,210 2,312 268 789 2,519
Net cash used in investing
activities......................... (1,616) (115) (43,199) (857) (347) (206)
Net cash provided by (used in)
financing activities............... (3,601) (559) 40,178 277 (754) (2,313)
</TABLE>
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<CAPTION>
MARCH 31, 1998
------------------------
ACTUAL AS ADJUSTED(6)
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BALANCE SHEET DATA:
Working capital............................................. $ 1,449 $ 5,588
Plant and equipment......................................... 22,603 18,424
Total assets................................................ 48,317 48,035
Long-term debt.............................................. 17,234 --
Redeemable preferred stock and accrued dividends............ 23,550 --
Total stockholders' equity (deficit)........................ (3,172) 37,572
</TABLE>
(footnotes appear on following page)
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(footnotes from previous page)
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(1) The combined statement of operations data for the year ended December 31,
1995 and the period January 1, 1996 to April 15, 1996 represent the combined
results of Health Valley Foods, Inc. and Health Valley Manufacturing Company
(collectively, the "Predecessor Company") and exclude NNG's operating losses
for the periods, which were not material. The summary consolidated data
include certain reclassification adjustments to conform the presentation of
1995 financial data with that of the Company.
(2) The statement of operations data for the period from April 15, 1996 to
December 31, 1996 represent the results of NNG for the year ended December
31, 1996, together with the results of operations of the Predecessor Company
subsequent to its acquisition on April 15, 1996 and Breadshop subsequent to
its acquisition on October 31, 1996. The operations of NNG for the period
from January 1, 1996 to April 15, 1996 were not material. The results of the
Company are not comparable to those of the Predecessor Company in light of
the changes in the capital structure to fund the acquisitions, which
included the issuance of preferred stock and the incurrence of additional
debt. Additionally, the purchase accounting adjustments related to the
acquisitions changed the cost basis of the Company's fixed assets,
trademarks and resulting goodwill. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General."
(3) Other income for the years ended December 31, 1995 and 1996 primarily
represents revenues from the sale of cookbooks, which was discontinued in
1996.
(4) The pro forma statement of operations data reflect the elimination of the
preferred dividends and reduction of the net interest expense, and the
related income tax effect, resulting from the use of a portion of the net
proceeds of the Offering to redeem the Series A Preferred Stock and repay
certain indebtedness. See "Use of Proceeds."
(5) EBITDA represents income (loss) before income taxes, interest expense (net
of interest income), depreciation and amortization. EBITDA has been included
because management uses it as a supplementary tool to measure the Company's
ability to generate operating cash flow. Management also uses EBITDA to
establish performance goals and related bonuses for selected Company
employees. EBITDA subsequent to the acquisition of Health Valley on April
15, 1996 reflects the impact of the cost reduction efforts and overall
improved operating results. EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles and should
not be considered as a substitute for net income as an indicator of the
Company's operating performance or cash flow as a measure of liquidity.
EBITDA, as presented, may not be comparable to other similarly titled
measures of other companies.
(6) As adjusted (i) for the Offering and the application of the net proceeds
therefrom and (ii) to reflect the $7.3 million in restructuring and other
charges (before a tax benefit of $2.9 million) recorded in the second
quarter of 1998. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Operating Results."
RECENT OPERATING RESULTS
The following financial information for the quarter and the six months
ended June 30, 1998 has recently become available. The information, together
with the comparative information presented for the quarter and the six months
ended June 30, 1997, is unaudited, but, in the opinion of management, includes
all adjustments necessary for a fair presentation.
Net sales for the three months ended June 30, 1998 were approximately $15.3
million, a decrease of $0.5 million, or 3.2%, from net sales of approximately
$15.8 million for the comparable period in 1997. This decrease was primarily due
to lower sales of canned and instant soups and chilis which the Company believes
were due to exceptionally warm weather during the second quarter of 1998.
Marketing, selling and distribution expenses for the three months ended June 30,
1998 were approximately $4.4 million compared to $3.8 million for the comparable
period in 1997 and as a percentage of net sales increased 4.7% from the
comparable period in 1997, as a result of increased promotional and advertising
activities. Operating income for the second quarter of 1998, prior to the
restructuring and other charges of approximately $7.3 million recorded in that
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quarter, was approximately $19,000 compared to approximately $669,000 for the
comparable period in 1997, primarily due to the factors discussed above. After
the $7.3 million charge, the Company had an operating loss of approximately $7.3
million for the three months ended June 30, 1998. For an explanation of the
restructuring charge, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Operating Results."
Net sales for the six months ended June 30, 1998 were approximately $32.8
million, an increase of $0.8 million, or 2.4%, over net sales of approximately
$32.0 million for the comparable period in 1997. This increase was primarily due
to increased sales in the natural food channel and private label, which was
partially offset by the decrease in sales of canned and instant soups and
chilis. Marketing, selling and distribution expenses for the six months ended
June 30, 1998 were approximately $9.3 million compared to approximately $7.6
million for the comparable period in 1997 and as a percentage of net sales
increased 4.6% from the comparable period in 1997, as a result of increased
promotional and advertising activities. Operating income for the six months
ended June 30, 1998, prior to the $7.3 million charge, was approximately
$425,000 compared to approximately $1.2 million for the comparable period in
1997, primarily reflecting the factors discussed above. After the $7.3 million
charge, the Company had an operating loss of approximately $6.9 million for the
six months ended June 30, 1998.
9
<PAGE> 11
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. In addition to the other information contained
in this Prospectus, the following factors should be considered carefully before
purchasing any of the shares of Common Stock offered hereby. This Prospectus
contains certain forward-looking statements that are based on the beliefs of, as
well as assumptions made by and information currently available to, the
Company's management. The words "believe," "anticipate," "intend," "estimate,"
"expect" and similar expressions are intended to identify such forward-looking
statements, but are not the exclusive means of identifying such statements. Such
statements reflect the current views of the Company or its management and are
subject to certain risks, uncertainties and assumptions, including, but not
limited to, those set forth in the following Risk Factors. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, the Company's actual results or performance in 1998 and beyond could
differ materially from those expressed in, or implied by, such forward-looking
statements.
LIMITED OPERATING HISTORY
NNG was formed in late 1995 and, except for activities related to its
search for acquisition candidates, did not conduct operations until its
acquisition of Health Valley in April 1996. Consequently, NNG has a limited
operating history and limited combined historical financial information upon
which investors may base their evaluation of the Company. The disclosures
regarding the Company contained in this Prospectus must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
their early stages of development.
HISTORY OF NET LOSSES
The Company has generated a net loss attributable to common stockholders
for each of the past three fiscal years and the three months ended March 31,
1998 and had an accumulated deficit of $4.6 million at March 31, 1998. There can
be no assurance that the Company will achieve or sustain profitability. Future
results will depend on many factors, including demand for the Company's
products, the level of competition and the ability of management to implement
the Company's growth strategy.
RISKS ASSOCIATED WITH THE COMPANY'S ACQUISITION STRATEGY
A key element of the Company's growth strategy is to pursue strategic
acquisitions of natural and organic food companies with products or brands that
strengthen and complement the Company's product lines. There can be no assurance
that the Company will be able to identify or reach mutually agreeable terms with
acquisition candidates, or that the Company will be able to profitably manage
additional businesses or successfully integrate such additional businesses into
the Company without substantial costs, delays or other problems. NNG has
completed two substantial acquisitions and intends to acquire other natural food
companies whose businesses can be effectively integrated with that of the
Company. The contribution of any acquisition to the Company's future revenues
and profitability, and the realization of economies of scale from any such
acquisition, will depend to a large extent on the Company's ability to integrate
effectively the customer base, operations and personnel of the acquired company,
and there can be no assurance that the Company will be able to do so
successfully.
Acquisitions generally involve numerous other risks, including risks
associated with unanticipated problems, liabilities and contingencies, diversion
of management attention from other business concerns and possible adverse
effects on earnings resulting from increased goodwill amortization, increased
interest costs and the issuance of additional securities. Some or all of these
risks could have a material adverse effect on the Company's operations and
financial performance. In addition, the competition for attractive acquisition
candidates may result in fewer acquisition opportunities being available to the
Company as well as high acquisition prices. There can be no assurance that
businesses acquired in the future will achieve anticipated revenues or earnings.
In addition, the Company may require additional debt or equity financing for
future acquisitions, which may not be available on terms satisfactory to the
Company.
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<PAGE> 12
EVOLVING CONSUMER PREFERENCES
The Company's business is focused on the manufacturing and marketing of
food products for the natural and organic food markets. The Company is subject
to evolving consumer preferences for these products. There can be no assurance
that demand for the Company's products will continue at current levels or
increase in the future. A significant shift in consumer demand away from the
Company's products or failure to maintain its current market position would have
a material adverse effect on the Company's business, financial condition,
results of operations and cash flows.
DEPENDENCE ON RAW MATERIALS; CERTAIN RISKS ASSOCIATED WITH AGRICULTURAL PRODUCTS
The primary raw materials used in the Company's operations include flours
and grains, vegetables, fruits and fruit fillings. Frequently, the Company
utilizes organically grown ingredients in its products. Although the total
acreage devoted to organically grown crops has increased significantly in recent
years, it remains a relatively small percentage of overall crop land. As a
result, some of the Company's raw materials are available from fewer suppliers
than non-organically grown ingredients. Movement in the price of these raw
materials can have a corresponding impact on finished product costs, and hence,
gross margins. The ability of the Company to pass through increases in costs of
raw materials to its customers is dependent upon competitive conditions in the
various markets in which the Company operates.
To the extent that the Company's business relies, both directly and
indirectly, on the availability of agricultural products, the Company's results
of operations will be subject to certain risks associated with such products.
The market for agricultural products is unpredictable and volatile, and is
affected by numerous factors. The most important of such factors are weather
conditions and patterns, current and projected produce stocks and prices, and
governmental agricultural policies, including those that directly or indirectly
influence the number of acres planted, the mix of crops planted and crop prices.
Any or all of such factors could adversely affect the Company's business,
financial condition, results of operations and cash flows.
COMPETITION
The markets in which the Company competes are highly competitive. Numerous
natural and organic food companies compete with the Company, including The Hain
Food Group, Inc., Barbara's Bakery, Inc. and Fantastic Foods, Inc. The Company
believes that in the natural food sector of the food industry it competes with
more than 500 companies, most of which are small independent companies and none
of which is dominant. The Company's products also compete, from time to time,
with products of larger conventional food companies, such as ConAgra, Inc.'s
Healthy Choice line or Nabisco, Inc.'s SnackWell line. The Company competes with
these companies based upon product quality, taste and appearance, nutrition,
breadth of product offerings, customer service and price. Some of the Company's
competitors have substantially greater financial, marketing and other resources
than the Company. Additional competitors with greater resources than the Company
may enter the industry and compete effectively against the Company. To the
extent that the Company is unable to compete successfully against its existing
and future competitors, its business, operating results and financial condition
would be materially adversely affected. See "Business -- Competition."
RISKS ASSOCIATED WITH GENERAL ECONOMIC CONDITIONS
Natural and organic foods are generally priced at a premium over
conventional foods and certain economic conditions may affect the level of
consumer spending on products offered by the Company. A recession in the general
economy or decline in consumer spending in the natural foods industry could have
a material adverse effect on the Company's business, financial condition,
results of operations and cash flows.
RELIANCE ON INDEPENDENT DISTRIBUTORS AND RETAILERS
The Company distributes its products nationwide to retailers primarily
through independent food distributors. The Company relies to a large extent upon
sales efforts made by or through non-affiliated food distributors and retailers.
For 1997, sales through each of Tree of Life, Inc. and United Natural Foods,
Inc. --
11
<PAGE> 13
two large natural food distributors -- accounted for 14% and 13%, respectively,
of the Company's revenues, and the percentages may increase for the year ending
December 31, 1998. The loss of, or business disruption at, one or more
distributors or retailers may have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company owns the principal trademarks for its products, including
Health Valley(R) and Breadshop's(R), and owns a number of other trademarks used
on individual products, such as those for Honey Gone Nuts(R), Soy Moo(R) and
Fiber 7(R). The Company believes that such trademarks are important to the
marketing of the Company's products. The Company's recipes and certain
manufacturing processes also constitute proprietary information and are
important to the Company's success and competitive position. Accordingly, the
Company seeks to establish and protect its trademarks, trade secrets and other
proprietary rights. However, the actions taken by the Company may not be
sufficient to prevent imitation of its products by others or to prevent others
from claiming violations of their trademarks, trade secrets and proprietary
rights by the Company. In addition, others may assert rights in the Company's
trademarks and other proprietary rights.
GOVERNMENT REGULATION
The Company's operations are subject to extensive regulation by the United
States Food and Drug Administration ("FDA"), the United States Department of
Agriculture ("USDA") and other state and local authorities regarding the
manufacturing, packaging, storage, distribution and advertising and labeling of
the Company's products. The Company's manufacturing facilities and products are
subject to periodic inspection by federal, state and local authorities. The
Company's advertising is subject to regulation by the Federal Trade Commission
("FTC") pursuant to the Federal Trade Commission Act and regulations issued
thereunder. The Company believes that it is currently in substantial compliance
with all material governmental laws and regulations and maintains all material
permits and licenses relating to its operations. Nevertheless, there can be no
assurance that the Company is in compliance with such laws and regulations or
that it will be able to comply with any future laws and regulations. Failure by
the Company to comply with applicable laws and regulations could subject the
Company to civil remedies, including fines, injunctions, recalls or seizures, as
well as potential criminal sanctions, which could have a material adverse effect
on the Company's business, financial condition, results of operations and cash
flows.
In addition, the USDA has proposed new regulations concerning organic food
production and labeling. Although there is uncertainty as to the final form of
such regulations, there can be no assurance that the adoption of these
regulations would not limit the activities of the Company or significantly
increase the cost of regulatory compliance. See "Business -- Government
Regulation."
RISK OF PRODUCT LIABILITY
The manufacture and sale of food products for human consumption involves
the risk of injury to consumers as a result of tampering by unauthorized third
parties, product contamination or spoilage, including the presence of foreign
objects, substances, chemicals, aflatoxin and other agents, or residues
introduced during the growing, storage, handling or transportation phases. While
the Company is subject to governmental inspection and regulations and believes
its facilities comply in all material respects with all applicable laws and
regulations, there can be no assurance that consumption of the Company's
products will not cause a health-related illness in the future or that the
Company will not be subject to claims or lawsuits relating to such matters. The
Company maintains product liability insurance in an amount which the Company
believes to be adequate and requires that its co-packer maintain product
liability insurance with the Company as a co-insured. However, there can be no
assurance that the Company will not incur claims or liabilities for which it is
not insured or that exceed the amount of its insurance coverage or that the
Company will be able to maintain adequate insurance.
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<PAGE> 14
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's revenues and results of operations fluctuate with the
seasonal demand for certain of its products. The Company's revenues are affected
during the spring and summer months due to decreased sales of its canned and
instant soups and chilis and other hot food products. In addition, periods of
unusually warm weather regardless of season may further affect sales of these
products. There can be no assurance that the Company will be able to adjust its
expenses on a short-term basis to minimize the effect of these fluctuations in
revenues.
The Company's quarterly results of operations have fluctuated in the past
and will fluctuate in the future based on many factors in addition to
seasonality and weather. These factors include fluctuations in the general
economy, increased competition, changes in operating expenses, failure to
successfully integrate acquired companies, expenses related to acquisitions, the
potential adverse effect of acquisitions, the size and timing of customer
orders, new product introductions, changes in customer preferences and market
acceptance of new products. Many of these factors are outside the control of the
Company. Due to these and many unforeseen factors, it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors. In such event, the price of Common Stock
would likely be materially adversely affected.
DEPENDENCE ON CONTRACT MANUFACTURER FOR CANNED PRODUCTS
The Company currently relies and expects to continue to rely on a single
contract manufacturer, or co-packer, for the production of the Company's canned
soups and chilis, which together accounted for approximately 25% of the
Company's revenues for 1997 and the three months ended March 31, 1998. If the
Company's co-packer were unable or unwilling to produce and ship these products
in a timely manner or to produce sufficient quantities to support demand for
these products, the Company would have to identify and qualify new co-packers.
There can be no assurance that the Company would be able to identify and qualify
new co-packers in a timely manner or that such co-packers would allocate
sufficient capacity to the Company in order to meet its requirements, which
would adversely affect the Company's ability to make timely deliveries of its
products. Any significant delay in shipments of the Company's products would
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flows.
LABOR RELATIONS
Although none of the Company's employees are covered by a collective
bargaining agreement, the Company is currently negotiating with the Bakery,
Confectionary & Tobacco Workers' International Union concerning a collective
bargaining agreement covering the Company's regular production, maintenance and
warehouse employees, who represent approximately 37% of its total employees.
Depending on the outcome of these negotiations, the Company could be subject to
work stoppages and increases in labor costs, either of which could have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows.
NO DIVIDENDS
The Company has not paid any dividends on its Common Stock to date and does
not anticipate declaring or paying any dividends on its Common Stock in the
foreseeable future. The Company is prohibited from paying dividends under its
existing credit agreement.
DEPENDENCE UPON KEY PERSONNEL
The success of the Company is largely dependent upon the personal efforts
and abilities of its executive officers. The loss of the services of one or more
of its executive officers could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company does not
maintain "key person" life insurance policies covering any of its executive
officers. Other than William R. Voss, the Company's Chief Executive Officer, no
other executive officer has an employment agreement with the Company. See
"Management."
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<PAGE> 15
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of the Offering, the persons and entities listed under
"Principal Stockholders" will own, in the aggregate, approximately 55.6% of the
Company's outstanding Common Stock. Accordingly, such persons and entities, if
they acted together, would be able to elect all directors and exercise control
over the business, policies and affairs of the Company. This concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices.
The interests of such persons and entities could conflict with the interests of
the other stockholders of the Company. See "Principal Stockholders."
NO PRIOR MARKET
There has been no public market for the Company's Common Stock prior to
this Offering and there can be no assurance that an active public market will
develop or be sustained after this Offering. The initial public offering price
will be determined by negotiations among the Company and the representatives of
the Underwriters, and may bear no relationship to the price at which the Common
Stock will trade after the Offering. See "Underwriting" for the factors to be
considered in determining the initial public offering price. After the Offering,
the market price of the Common Stock may be subject to significant fluctuations
in response to numerous factors, including variations in the annual or quarterly
financial results of the Company or its competitors, changes by financial
research analysts in their estimates of the earnings of the Company or the
failure of the Company to meet such estimates, conditions in the economy in
general or in the markets in which the Company competes, unfavorable publicity
or changes in applicable laws and regulations (or judicial or administrative
interpretations thereof) affecting the Company or the natural and organic food
industry. From time to time, the stock market experiences significant price and
volume volatility, which may affect the market price of the Common Stock for
reasons unrelated to the Company's performance.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of approximately $11.82 per share (assuming an initial public offering
price of $15.00). In the event the Company issues additional Common Stock in the
future, including shares which may be issued in connection with future
acquisitions or upon exercise of outstanding options, purchasers of Common Stock
in this Offering may experience further dilution. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock in the market following the
Offering. Upon consummation of the Offering, 4,156,664 shares may be deemed
"restricted securities" as that term is defined under the Securities Act of
1933, as amended (the "Securities Act"). In addition, upon consummation of the
Offering, 1,200,000 shares will be reserved for issuance under the Incentive
Plan and Purchase Plan. Of the currently outstanding options to purchase Common
Stock and options to be granted upon consummation of the Offering, options to
purchase 640,300 shares of Common Stock will be exercisable within 60 days of
the consummation of the Offering, subject to lock-up agreements. See
"Underwriting." Prior to the expiration of the lock-up period, the Company
intends to file a registration statement on Form S-8 covering shares issuable
upon exercise of stock options granted under the Company's stock option plans.
Such shares, upon issuance, will be immediately available for resale (in the
case of holders who are affiliates of the Company, subject to certain
limitations of Rule 144 under the Securities Act), subject to lock-up
agreements. Following the expiration or release of lock-up agreements,
"restricted securities" held by certain stockholders will be available for
public resale in accordance with Rule 144 under the Securities Act. See "Shares
Eligible for Future Sale."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors of the Company is authorized to issue preferred
stock in one or more series without stockholder action. The members of the Board
of Directors of the Company serve staggered terms. The existence of this
"blank-check" preferred stock and the staggered Board of Directors could render
more difficult or discourage an attempt to obtain control of the Company by
means of a tender offer, merger, proxy contest or otherwise. Certain provisions
of the Delaware General Corporation Law may also discourage takeover attempts
that have not been approved by the Board of Directors. See "Management -- Board
of Directors" and "Description of Capital Stock."
14
<PAGE> 16
HISTORY OF THE COMPANY
FORMATION OF NNG
NNG was formed in 1995 by William R. Voss, an experienced food industry
executive, and Frontenac Company, a Chicago-based private equity firm
specializing in the consumer, health care and technology industries, to acquire
and develop natural and organic food companies. NNG believed that the natural
and organic food industry presented attractive investment opportunities for the
following reasons (i) the market was experiencing rapid growth, (ii) the large
number of small, undercapitalized privately owned companies presented
acquisition opportunities and (iii) economies of scale were achievable through
combining companies and brands. During 1995 and early 1996, NNG's sole activity
was to identify and evaluate acquisition candidates. NNG completed its first
acquisition, the Health Valley acquisition, in April 1996 for a purchase price
of approximately $34 million.
HEALTH VALLEY PRIOR TO ACQUISITION BY NNG
Health Valley commenced operations in 1971. During the 1970s and 1980s,
Health Valley introduced numerous innovative products such as low sodium
products and products made with oat bran and organic ingredients. During that
period, the Health Valley(R) brand developed into one of the leading natural
food brands, especially within the then-emerging natural food retail channel of
distribution. In the late 1980s, Health Valley created a line of fat-free
products which gained mainstream acceptance. In order to accelerate growth,
Health Valley expanded its distribution into mass merchandise and club wholesale
channels in addition to the natural food and grocery retail channels where it
had traditionally sold its products.
Due in large part to the success of its fat-free line, Health Valley's
sales grew rapidly from 1990 to a peak of approximately $123 million in 1993. By
1993, over one-third of Health Valley's total sales were to mass merchandisers
and club wholesalers. In order to handle increasing sales and prepare for future
growth, Health Valley invested approximately $40 million to equip the
manufacturing facility in Irwindale, California with new equipment capable of
handling production far in excess of its requirements at that time. Much of the
cost of acquiring this equipment was financed through debt and capital leases.
Beginning in late 1993 and continuing through early 1996, sales declined as a
result of (i) increased competition in the fat-free segment, (ii) changing
customer preferences from fat-free to low-fat foods and (iii) the reduction or
elimination of Health Valley products sold by some natural food retailers and
conventional grocery retailers due to the lack of differentiation in the
products sold through warehouse clubs. As sales declined, Health Valley became
unprofitable and experienced cash flow problems.
HEALTH VALLEY TURNAROUND
Upon acquiring Health Valley, NNG took immediate steps to eliminate Health
Valley's negative cash flow by implementing cost controls and other measures. By
the end of 1996, the Health Valley business began to generate positive operating
cash flow. Shortly after the acquisition, the Company commenced its search for a
management team to work with William R. Voss in completing the turnaround of the
Health Valley business and in implementing its plan for future growth of the
business. Beginning in June 1996, the Company hired Michael D. de Boom as Senior
Vice President-Operations, Diane J. Beardsley as Senior Vice President and Chief
Financial Officer and William J. Nictakis as Senior Vice President-Sales and
Marketing, as well as additional management personnel. As the Company's
management team was completed, the Company developed plans to grow the Health
Valley business.
During the second half of 1996, NNG redirected the Company's sales focus
away from the mass merchandise and club wholesale channels that accelerated
Health Valley's growth in the early 1990s and towards the natural food and
conventional grocery channels, which NNG believed were the keys to the long-
term development of the Company's brands. In addition, the Company initiated a
comprehensive repositioning of the Health Valley(R) brand.
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<PAGE> 17
HEALTH VALLEY(R) BRAND REPOSITIONING
When the Company acquired Health Valley in 1996, its products were
positioned primarily as "fat-free," despite the products' numerous other
benefits such as natural and organic ingredients, moderate sodium, high fiber
and natural vitamins. Moreover, in order to make many of its products without
fat, Health Valley sometimes compromised on flavor. Although most of the Health
Valley product packaging clearly indicated that the products were fat-free,
there was no unifying design or color scheme to identify the brand and
communicate its positioning to consumers.
Early in 1997, the Company initiated a comprehensive review of the Health
Valley(R) brand to determine how to best position the brand in the market. As a
result of this review, the Company determined that instead of continuing to
position Health Valley(R) as "America's No. 1 Fat-Free Brand," Health Valley(R)
should be positioned as the leading brand for great tasting, premium natural and
organic foods for people interested in taking charge of their health and well
being.
In support of the new brand positioning, the Company decided to reformulate
certain products to improve taste, appearance and texture and also to redesign
its packaging in order to:
- Unify the brand under a common package design system incorporating
consistent logo placement and treatment, consistent type faces, color
schemes and artwork.
- Emphasize the broad nutritional advantages of Health Valley(R) products
compared with other brands.
- Increase awareness of product quality and taste.
Throughout 1997 and early 1998, the Company directed significant management
attention and research and development effort to the reformulation of its
products in support of the new brand positioning. Additionally, the Company
engaged a leading design firm early in 1997 to develop the package designs for
the Health Valley(R) brand. A design system was approved by the Company in June
1997 and, since then, the Company has been designing and producing the new
packages. As a result of these efforts, the Company began introducing
reformulated and repackaged products in the first half of 1998.
THE BREADSHOP ACQUISITION
In October 1996, the Company acquired Breadshop for a purchase price of
approximately $9 million, which significantly enhanced the Company's market
share in the natural cereal and granola segment of the natural food industry.
Following this acquisition, the Company integrated Breadshop's operations with
those of Health Valley.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,300,000 shares of
Common Stock offered hereby (at an assumed initial public offering price of
$15.00 per share less underwriting discounts and commissions and estimated
offering expenses) are estimated to be approximately $45.1 million ($52.0
million if the Underwriters' over-allotment option is exercised in full). The
net proceeds will be used to (i) redeem all of the outstanding shares of the
Company's Series A Preferred Stock (approximately $23.6 million) and (ii) repay
indebtedness under an existing revolving credit facility and two existing term
loans (Term Loan A and Term Loan B) with LaSalle National Bank ("LaSalle")
(approximately $20.1 million). The remaining $1.4 million will be available for
general corporate purposes. Pending such uses, the net proceeds will be invested
in short-term, interest-bearing, investment grade securities. Certain holders of
the Series A Preferred Stock are affiliates of the Company. See "Certain
Transactions." The borrowings under the LaSalle revolving credit facility and
term loans, which were incurred to finance the acquisitions of Health Valley and
Breadshop, accrue interest, at the Company's option, at either LaSalle's prime
rate plus 0.25% per annum, or the London InterBank Offered Rate (LIBOR) plus
2.50% per annum. The revolving credit facility expires on June 30, 1999 and Term
Loan A and Term Loan B mature on June 30, 2003 and October 31, 2002,
respectively. As of March 31, 1998, the weighted average interest rates for the
revolving credit facility, Term Loan A and Term Loan B were 8.31%, 8.16% and
8.13%, respectively.
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<PAGE> 18
DIVIDEND POLICY
The Company intends to retain its earnings, if any, to finance the
expansion of its business and for general corporate purposes and therefore does
not anticipate paying any cash dividends on its Common Stock in the foreseeable
future. Any payment of future dividends will be at the discretion of the Board
of Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions with respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant. Additionally, the Company's
existing credit agreement with LaSalle prohibits the Company from paying
dividends and it is likely that future credit agreements will contain a similar
restriction.
DILUTION
The net tangible book deficit of the Company as of March 31, 1998 (after
giving effect to $7.3 million of restructuring and other charges (before a tax
benefit of $2.9 million) recorded in the second quarter of 1998) was
approximately $(21.4 million), or $(5.15) per share of Common Stock. After
giving effect to the sale of the 3,300,000 shares of Common Stock offered hereby
(at an assumed initial public offering price of $15.00 per share less the
underwriting discounts and commissions and estimated offering expenses) and the
application of the net proceeds therefrom, the Company's pro forma net tangible
book value at March 31, 1998 would have been approximately $23.7 million, or
$3.18 per share. This represents an immediate increase in pro forma net tangible
book value of $8.33 per share to existing stockholders and an immediate dilution
of $11.82 per share to new investors purchasing the shares in the Offering. The
following table illustrates this pro forma dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $15.00
Net tangible book deficit per share before the Offering... $(5.15)
Increase per share attributable to new investors.......... 8.33
------
Pro forma net tangible book value per share after the
Offering.................................................. 3.18
------
Dilution per share to new investors......................... $11.82
======
</TABLE>
The following table summarizes as of March 31, 1998, after giving effect to
the Offering, the number of shares of Common Stock purchased from the Company,
the total consideration paid therefor, and the average price per share paid by
the existing stockholders and by the new investors purchasing shares of Common
Stock in the Offering before deduction of the underwriting discounts and
commissions and estimated offering expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 4,156,664 55.7% $ 1,433,333 2.8% $ 0.34
New investors................ 3,300,000 44.3 49,500,000 97.2 $15.00
--------- ----- ----------- -----
Total.............. 7,456,664 100.0% $50,933,333 100.0%
========= ===== =========== =====
</TABLE>
The above computations assume no exercise of the Underwriters'
over-allotment option and no exercise of options to purchase (i) 600,300 shares
subject to options which will have vested within 60 days of the consummation of
the Offering with a weighted average exercise price of $0.62 per share, (ii)
40,000 shares subject to options which will be granted and which will be
exercisable on the date of consummation of the Offering with an exercise price
equal to the initial public offering price, (iii) 115,420 shares subject to
unvested options with a weighted average exercise price of $0.37 per share and
(iv) 116,920 shares subject to options which will be granted, but will not be
exercisable, on the date of consummation of the Offering with an exercise price
equal to the initial public offering price. To the extent options are exercised,
there will be further dilution to new investors.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 and as adjusted to give effect to the Offering and the
application of the estimated net proceeds therefrom to redeem all of the
outstanding shares of the Company's Series A Preferred Stock and to repay the
outstanding indebtedness under the LaSalle credit agreement. See "Use of
Proceeds." This table should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto included elsewhere in
this Prospectus. See also "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Description of Capital Stock."
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------
ACTUAL AS ADJUSTED(1)(2)
------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt........................................... $ 2,866 $ --
======= =======
Long-term debt, less current maturities........................................ $17,234 $ --
Series A Preferred Stock, par value $.001 per share, 35,000 shares authorized;
19,566.667 shares issued and outstanding, actual; no shares authorized,
issued and outstanding, as adjusted.......................................... 23,550 --
Stockholders' equity:
Preferred Stock, par value $.001 per share, 2,000,000 shares authorized; no
shares issued and outstanding............................................. -- --
Common Stock, par value $.001 per share, 50,000,000 shares authorized;
4,156,664 shares issued and outstanding, actual; 7,456,664 shares issued
and outstanding, as adjusted.............................................. 4 7
Additional paid-in-capital..................................................... 1,429 46,561
Accumulated deficit............................................................ (4,605) (8,996)
------- -------
Total stockholders' equity (deficit)................................. (3,172) 37,572
------- -------
Total capitalization................................................. $37,612 $37,572
======= =======
</TABLE>
(1) Adjustment has been made to reflect $7.3 million in restructuring and other
charges (before a tax benefit of $2.9 million) recorded in the second
quarter of 1998.
(2) Excludes options to purchase (i) 600,300 shares subject to options which
will have vested within 60 days of the consummation of the Offering with a
weighted average exercise price of $0.62 per share, (ii) 40,000 shares
subject to options which will be granted and which will be exercisable on
the date of consummation of the Offering with an exercise price equal to the
initial public offering price, (iii) 115,420 shares subject to unvested
options with a weighted average exercise price of $0.37 per share and (iv)
116,920 shares subject to options which will be granted, but will not be
exercisable, on the date of consummation of the Offering, with an exercise
price equal to the initial public offering price.
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The statement of operations data for the year ended December 31, 1995, the
period January 1, 1996 to April 15, 1996, the period April 15, 1996 through
December 31, 1996 and the year ended December 31, 1997 and the balance sheet
data at December 31, 1996 and 1997 are derived from the Consolidated Financial
Statements of the Company and the Predecessor Company, which have been audited
by Deloitte & Touche LLP, independent auditors, and which are contained
elsewhere in this Prospectus. The balance sheet data at December 31, 1995 have
been derived from audited financial statements of the Company, which are not
included herein. The statement of operations data for each of the two years
ended December 31, 1994, and the balance sheet data at December 31, 1993 and
1994, are derived from the financial statements of the Company, which have not
been audited. Such unaudited financial statements for 1993 and 1994, along with
the financial data as of March 31, 1998 and for the three months ended March 31,
1997 and 1998, are unaudited but, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such data. The results of operations for the three months
ended March 31, 1998 are not necessarily indicative of the results to be
expected for the entire year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality." The selected pro
forma income statement data set forth below are for informational purposes only
and may not necessarily be indicative of the results of operations of the
Company in the future. The following selected financial data should be read in
conjunction with the Company's financial statements and the related notes
thereto, which are included elsewhere in this Prospectus, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PREDECESSOR COMPANY COMPANY
--------------------------------------------- -----------------------------------------------------
JANUARY 1, APRIL 15, THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1996 TO 1996 TO YEAR ENDED MARCH 31,
-------------------------------- APRIL 15, DECEMBER 31, DECEMBER 31, -----------------------
1993(1) 1994(1) 1995(2) 1996(2) 1996(3) 1997 1997 1998
-------- -------- ---------- ---------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................ $123,418 $105,088 $ 73,351 $ 18,221 $ 39,942 $ 67,898 $ 16,299 $ 17,568
Cost of sales............ 81,071 69,239 53,839 13,897 27,180 42,370 10,627 10,960
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............. 42,347 35,849 19,512 4,324 12,762 25,528 5,672 6,608
Marketing, selling and
distribution
expenses............... 23,968 20,629 16,651 5,563 7,177 17,366 3,832 4,891
General and
administrative
expenses............... 6,259 9,990 6,541 2,937 5,034 5,425 1,241 1,202
Amortization of goodwill
and trademarks......... -- -- -- -- 114 334 83 90
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss)................. 12,120 5,230 (3,680) (4,176) 437 2,403 516 425
Other income(4).......... 69 1,581 645 169 -- -- -- --
Interest expense, net.... 1,252 1,291 1,502 476 1,052 1,911 497 458
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... 10,937 5,520 (4,537) (4,483) (615) 492 19 (33)
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Provision (benefit) for
income taxes........... 4,467 2,100 1,137 (1,166) 13 387 17 (25)
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........ $ 6,470 $ 3,420 $ (5,674) $ (3,317) (628) 105 2 (8)
======== ======== ========== ==========
Preferred dividends...... 1,330 2,082 514 571
---------- ---------- ---------- ----------
Net loss attributable to
common stockholders.... $ (1,958) $ (1,977) $ (512) $ (579)
========== ========== ========== ==========
Net loss per common share
-- basic and diluted... $ (.62) $ (.48) $ (.13) $ (.14)
========== ========== ========== ==========
Weighted average number
of common shares
outstanding............ 3,161,737 4,132,491 4,059,903 4,156,664
========== ========== ========== ==========
PRO FORMA STATEMENT OF
OPERATIONS DATA(5):
Income before income
taxes.................. $ 2,154 $ 333
Provision for income
taxes.................. 1,052 121
---------- ----------
Net income............... $ 1,102 $ 212
========== ==========
Net income per share..... $ 0.15 $ .03
========== ==========
Pro forma weighted
average common shares
outstanding............ 7,432,491 7,456,664
========== ==========
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
PREDECESSOR COMPANY COMPANY
--------------------------------------------- -----------------------------------------------------
JANUARY 1, APRIL 15, THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1996 TO 1996 TO YEAR ENDED MARCH 31,
-------------------------------- APRIL 15, DECEMBER 31, DECEMBER 31, -----------------------
1993(1) 1994(1) 1995(2) 1996(2) 1996(3) 1997 1997 1998
-------- -------- ---------- ---------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND OTHER DATA:
EBITDA(6)................ $ 15,816 $ 10,177 $ 333 $ (3,018) $ 2,781 $ 5,848 $ 1,419 $ 1,342
Net cash provided by
operating activities... 5,391 5,623 5,158 1,210 2,312 268 789 2,519
Net cash used in
investing activities... (6,463) (4,561) (1,616) (115) (43,199) (857) (347) (206)
Net cash provided by
(used in) financing
activities............. 846 (1,042) (3,601) (559) 40,178 277 (754) (2,313)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1998
----------------------------------------------- ------------------------
1993 1994 1995 1996 1997 ACTUAL AS ADJUSTED(7)
------- ------- ------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $ 397 $ 1,525 $(6,764) $ (443) $ 2,347 $ 1,449 $ 5,588
Plant and equipment.............. 21,948 23,858 25,240 26,374 23,358 22,603 18,424
Total assets..................... 43,197 43,421 38,578 53,330 50,212 48,317 48,035
Long-term debt................... 5,761 5,637 5,398 19,304 18,835 17,234 --
Redeemable preferred stock and
accrued dividends.............. 19,997 22,979 23,550 --
Total stockholders' equity
(deficit)...................... 16,938 20,358 13,745 (716) (2,593) (3,172) 37,572
</TABLE>
- ---------------
(1) The combined statement of operations data for the years ended December 31,
1993 and 1994 represent the combined results of the Predecessor Company. The
selected consolidated data include certain reclassification adjustments to
conform the presentation of the 1993 and 1994 financial data with that of
the Company.
(2) The combined statement of operations data for the year ended December 31,
1995 and the period January 1, 1996 to April 15, 1996 represent the combined
results of the Predecessor Company and exclude NNG's operating losses for
the periods, which were not material. The selected consolidated data include
certain reclassification adjustments to conform the presentation of 1995
financial data with that of the Company.
(3) The statement of operations data for the period from April 15, 1996 to
December 31, 1996 represent the results of NNG for the year ended December
31, 1996, together with the results of operations of the Predecessor Company
subsequent to its acquisition on April 15, 1996 and Breadshop subsequent to
its acquisition on October 31, 1996. The operations of NNG for the period
from January 1, 1996 to April 15, 1996 were not material. The results of the
Company are not comparable to those of the Predecessor Company in light of
the changes in the capital structure to fund the acquisitions, which
included the issuance of preferred stock and the incurrence of additional
debt. Additionally, the purchase accounting adjustments related to the
acquisitions changed the cost basis of the Company's fixed assets,
trademarks and resulting goodwill. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General."
(4) Other income for the years ended December 31, 1993, 1994, 1995 and 1996
primarily represents revenues from the sale of cookbooks, which was
discontinued in 1996.
(5) The pro forma statement of operations data reflect the elimination of the
preferred dividends and reduction of the net interest expense, and the
related income tax effect, resulting from the use of a portion of the net
proceeds of the Offering to redeem the Series A Preferred Stock and repay
certain indebtedness. See "Use of Proceeds."
(6) EBITDA represents income (loss) before income taxes, interest expense (net
of interest income), depreciation and amortization. EBITDA has been included
because management uses it as a supplementary tool to measure the Company's
ability to generate operating cash flow. Management also uses EBITDA to
establish performance goals and related bonuses for selected Company
employees. EBITDA subsequent to the acquisition of Health Valley on April
15, 1996 reflects the impact of the cost reduction efforts and overall
improved operating results. EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles and should
not be considered as a substitute for net income as an indicator of the
Company's operating performance or cash flow as a measure of liquidity.
EBITDA as presented may not be comparable to other similarly titled measures
of other companies.
(7) As adjusted (i) for the Offering and the application of the net proceeds
therefrom and (ii) to reflect the $7.3 million in restructuring and other
charges (before a tax benefit of $2.9 million) recorded in the second
quarter of 1998. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Operating Results."
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and related notes thereto of the Company included elsewhere
in this Prospectus.
GENERAL
NNG was founded in 1995 by current Chairman, Chief Executive Officer and
President William R. Voss and Frontenac Company to acquire and develop natural
and organic food companies. The Company sells natural and organic breakfast
cereals and granolas, baked goods and soups and chilis primarily under its
Health Valley(R) and Breadshop's(R) brands, to natural food and specialty food
distributors and, in certain instances, directly to retailers, including natural
food retailers, grocery chains and warehouse clubs. The Company operates out of
a modern facility located in Irwindale, California, which houses its
manufacturing and administrative functions.
NNG completed its first acquisition, the Health Valley acquisition, in
April 1996. Prior to the acquisition, Health Valley experienced significant
business and financial difficulties. NNG took immediate steps to resolve Health
Valley's difficulties by implementing cost controls and other measures.
The Health Valley acquisition provided NNG with an operating and
manufacturing platform for future acquisitions. NNG's second acquisition, the
Breadshop acquisition, was completed in October 1996. The manufacturing and
distribution operations of Breadshop were integrated into the Company's
Irwindale facility in January 1997. This consolidation produced significant
operating efficiencies in the manufacturing and distribution of Breadshop's
cereal and granola products.
Following these two acquisitions, the Company focused on cost-reduction and
efficiency improvements in order to generate funds to support increased
marketing expenditures and investments in the Health Valley(R) and
Breadshop's(R) brands, as well as to service acquisition debt. Cost-reduction
initiatives included (i) more efficient purchasing, (ii) the reformulation of
certain products and reengineering of certain packaging and (iii) workforce
reductions.
The following table sets forth certain statement of operations data of the
Company for each of the periods presented and pro forma data for 1996. This
table should be read in conjunction with the financial statements and related
notes thereto appearing elsewhere in the Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
----------------------------- MARCH 31,
1996 -------------------
1995 PRO FORMA 1997 1997 1998
---- --------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales..................................... $73,351 $58,163 $67,898 $16,299 $17,568
Cost of sales................................. 53,839 41,077 42,370 10,627 10,960
------- ------- ------- ------- -------
Gross profit.................................. 19,512 17,086 25,528 5,672 6,608
Marketing, selling and distribution
expenses.................................... 16,651 12,740 17,366 3,832 4,891
General and administrative expenses........... 6,541 7,971 5,425 1,241 1,202
Amortization of goodwill and trademarks....... -- 114 334 83 90
------- ------- ------- ------- -------
Operating income (loss)....................... (3,680) (3,739) 2,403 516 425
Other income.................................. 645 169 -- -- --
Interest expense, net......................... 1,502 1,528 1,911 497 458
------- ------- ------- ------- -------
Income (loss) before income taxes............. (4,537) (5,098) 492 19 (33)
Provision (benefit) for income taxes.......... 1,137 (1,153) 387 17 (25)
------- ------- ------- ------- -------
Net income (loss)............................. $(5,674) $(3,945) $ 105 $ 2 $ (8)
======= ======= ======= ======= =======
</TABLE>
21
<PAGE> 23
The results of operations data for 1996 set forth in the table above
represent the pro forma combined results of the Predecessor Company for the
period January 1, 1996 to April 15, 1996 and the Company for the year ended
December 31, 1996. The statement includes the pro forma adjustments to reflect
changes in depreciation and interest expense, income tax benefits at statutory
rates and the amortization expense associated with goodwill resulting from the
acquisition. The results of operations for 1995 reflect the results of the
Predecessor Company for 1995. NNG's operating results for 1995 subsequent to its
formation in October 1995 were immaterial. The results of operations for 1995
are not comparable to subsequent periods because they reflect the operation of
Health Valley by prior management before the Health Valley acquisition. In
addition, the results of the Company are not comparable to those of the
Predecessor Company in light of the changes in the capital structure to fund the
acquisitions, which included the issuance of the Series A Preferred Stock and
the incurrence of additional debt. Additionally, the purchase accounting
adjustments related to the acquisitions changed the cost basis of the Company's
fixed assets, trademarks and resulting goodwill.
Sales are reported net of cash discounts and product returns. The Company's
cost of sales consists primarily of raw materials, packaging, labor and overhead
costs. Raw material costs are the single largest component of the cost of sales.
Selling and marketing expenses are comprised of the cost of the Company's sales
force, broker commissions, and promotional and other marketing expenses. As is
customary in the industry, marketing expenses include (i) trade promotions,
which are directed at obtaining retail display support, achieving desired retail
prices and securing retail shelf space, (ii) participation in customers'
advertising and (iii) consumer promotions, which include Company mailings,
nutritional publications and "on-product" promotions. In addition, the
Predecessor Company provided rebates to retail consumers who mailed to the
Company a specified number of proof-of-purchase labels. This rebate program, the
cost of which was included in marketing expenses, was discontinued early in
1996. The Company intends to shift the emphasis of its marketing programs from
"trade push" to "consumer pull." Accordingly, an increasing percentage of
planned marketing expenditures will be directed toward advertising and consumer
promotions, and a decreasing percentage toward promotional programs.
RECENT OPERATING RESULTS
The following financial information for the quarter and the six months
ended June 30, 1998 has recently become available. The information, together
with the comparative information presented for the quarter and the six months
ended June 30, 1997, is unaudited but in the opinion of management includes all
adjustments necessary for a fair presentation.
Net sales for the three months ended June 30, 1998 were approximately $15.3
million, a decrease of $0.5 million, or 3.2%, from net sales of approximately
$15.8 million for the comparable period in 1997. This decrease was primarily due
to lower sales of canned and instant soups and chilis which the Company believes
were due to exceptionally warm weather during the second quarter of 1998.
Marketing, selling and distribution expenses for the three months ended June 30,
1998 were approximately $4.4 million compared to $3.8 million for the comparable
period in 1997 and as a percentage of net sales increased 4.7% from the
comparable period in 1997, as a result of increased promotional and advertising
activities. Operating income for the second quarter of 1998, prior to the
restructuring and other charges of approximately $7.3 million recorded in that
quarter as described below, was approximately $19,000 compared to approximately
$669,000 for the comparable period in 1997, primarily due to the factors
discussed above. After the $7.3 million charge, the Company had an operating
loss of approximately $7.3 million for the three months ended June 30, 1998.
Net sales for the six months ended June 30, 1998 were approximately $32.8
million, an increase of $0.8 million, or 2.4%, over net sales of approximately
$32.0 million for the comparable period in 1997. This increase was primarily due
to increased sales in the natural food channel and private label, which was
partially offset by the decrease in sales of canned and instant soups and
chilis. Marketing, selling and distribution expenses for the six months ended
June 30, 1998 were approximately $9.3 million compared to approximately $7.6
million for the comparable period in 1997 and as a percentage of net sales
increased 4.6% from the comparable period in 1997, as a result of increased
promotional and advertising activities. Operating income for the six months
ended June 30, 1998, prior to the $7.3 million charge, was approximately
$425,000
22
<PAGE> 24
compared to approximately $1.2 million for the comparable period in 1997,
primarily reflecting the factors discussed above. After the $7.3 million charge,
the Company had an operating loss of approximately $6.9 million for the six
months ended June 30, 1998.
In the second quarter of 1998, the Company recorded a $7.3 million charge
to operations (before a tax benefit of $2.9 million) reflecting its decision to
restructure certain operations of the Company in light of revisions in its
business strategies, and for certain litigation in which it is involved.
Approximately $5.3 million was recorded as a restructuring charge comprised of
the following components (i) a $2.1 million noncash charge for the write-off of
the leasehold improvements in the Company's distribution warehouse as a result
of the Company's decision to outsource this function and not renew the lease on
the warehouse, (ii) a $2.1 million noncash charge for the writedown to net
realizable value of certain manufacturing assets which the Company is holding
for sale and other assets whose values have been impaired by the Company's
revised product offering and (iii) a $1.1 million noncash charge for the
writedown of inventory resulting from the Company's decision to accelerate the
introduction of new products and packaging.
A charge of $2.0 million relates to certain litigation with respect to
which the Company entered into an agreement in principle to settle, subject to
final documentation and court approval, during the second quarter of 1998. See
"Business -- Legal Proceedings." It is anticipated that the settlement and
resulting legal expenses will be paid out commencing in the second half of 1998
and continue through the first half of 1999.
The $7.3 million charge to operations has caused defaults under the net
worth, leverage ratio and fixed charge covenants of the Company's existing
credit agreement with LaSalle, which existing covenant defaults LaSalle has
agreed to waive.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data of the
Company expressed as a percentage of net sales for each of the periods
presented. This table should be read in conjunction with the financial
statements and related notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------- MARCH 31,
1996 -------------
1995 PRO FORMA 1997 1997 1998
----- --------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
PERCENTAGES OF NET SALES:
Net sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....................................... 73.4 70.6 62.4 65.2 62.4
----- ----- ----- ----- -----
Gross profit........................................ 26.6 29.4 37.6 34.8 37.6
Marketing, selling and distribution expenses........ 22.7 21.9 25.6 23.5 27.9
General and administrative expenses................. 9.0 13.7 8.0 7.6 6.8
Amortization of goodwill and trademarks............. -- 0.2 0.5 0.5 0.5
----- ----- ----- ----- -----
Operating income (loss)............................. (5.1) (6.4) 3.5 3.2 2.4
Other income........................................ 0.8 0.3 -- -- --
Interest expense, net............................... 2.0 2.6 2.8 3.0 2.6
----- ----- ----- ----- -----
Income (loss) before income taxes................... (6.3) (8.7) 0.7 (0.2) (0.2)
Provision (benefit) for income taxes................ 1.6 (2.0) 0.6 0.2 (0.2)
----- ----- ----- ----- -----
Net income (loss)................................... (7.9)% (6.7)% 0.1% -- --
===== ===== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Net sales for the three months ended March 31, 1998 increased $1.3 million,
or 7.8%, from the comparable period in 1997. Excluding the impact of wholesale
club sales, net sales for the first quarter of 1998 increased $1.7 million, or
10.9%, from the first quarter of 1997. The increase was primarily due to
increased sales in the natural food channel and private label, which the Company
began to actively pursue in the second half of 1997. The increase in sales in
the natural food channel was substantially attributable to cereal and canned
soup sales which increased primarily due to additional promotional activities.
The approximately
23
<PAGE> 25
$400,000 decline in the wholesale club channel was due to the Company's decision
to increase emphasis on the natural food channel.
The gross margin percentage for the three months ended March 31, 1998
increased 2.8% from 34.8% for the comparable period in 1997, principally due to
the benefits derived from the Company's efforts to reduce material and
manufacturing costs and, to a lesser extent, increased sales volumes which
leveraged fixed costs.
Marketing, selling and distribution expenses as a percentage of net sales
for the three months ended March 31, 1998 increased 4.4% from the comparable
period in 1997, as a result of increased promotional and advertising activities.
These activities increased as the Company began changing its marketing strategy
to lessen emphasis on trade promotions in favor of a multi-faceted program which
includes new packaging, product reformulations to improve taste and nutritional
value, and increased brand advertising including increased participation in
customers' advertising. Implementation of the new marketing strategy is expected
to continue throughout 1998.
General and administrative expenses as a percentage of net sales for the
three months ended March 31, 1998 decreased 0.8% from the comparable period in
1997 as a result of increased sales volumes.
Amortization of goodwill and trademarks as a percentage of net sales for
the three months ended March 31, 1998 was level with the comparable period in
1997, despite an increase in the goodwill resulting from the acquisition of
Health Valley. This increase resulted from the final allocation of the purchase
price of the Health Valley acquisition, which closed in April 1996.
Operating income as a percentage of net sales for the three months ended
March 31, 1998 decreased 0.8% from the comparable period in 1997 primarily
reflecting the factors discussed above.
Interest expense for the three months ended March 31, 1998 decreased
$39,000 from the comparable period in 1997 as cash generated by operations
enabled the Company to decrease its outstanding debt.
Due to a pre-tax loss for the three months ended March 31, 1998, the tax
benefit for such period was $25,000 compared to a provision for income taxes of
$17,000 for the comparable period in 1997.
The Company incurred a net loss of $8,000 in the three months ended March
31, 1998 compared to net income of $2,000 for the comparable period in 1997,
primarily reflecting the factors discussed above.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales for 1997 increased $9.7 million, or 16.7%, from 1996. Excluding
wholesale club channel sales, net sales for 1997 increased $12.3 million, or
24.0%, from 1996. This increase was substantially attributable to the inclusion
of a full year of sales of Breadshop's(R) products, which accounted for $10.6
million of the increase, as well as an increase of private label sales of
approximately $923,000. The approximately $2.6 million decline in the wholesale
club channel sales was due to the Company's decision to increase the Company's
emphasis on the natural food channel.
The gross margin percentage for 1997 increased 8.2% from 1996, primarily
due to the benefits derived from the Company's efforts to reduce material and
manufacturing costs and, to a lesser extent, the leveraging of fixed costs
resulting from the relocation of Breadshop's manufacturing operations to the
Company's Irwindale location.
Marketing, selling and distribution expenses as a percentage of net sales
for 1997 increased 3.7% from 1996 due to increased promotional and advertising
activities for the Health Valley(R) brand and the traditionally higher level of
spending in this area by Breadshop, which was acquired in October 1996.
General and administrative expenses as a percentage of net sales for 1997
decreased 5.7% from 1996, as lower general and administrative expenses were
spread over a larger sales base. General and administrative expenses in 1997
were lower partially as a result of the realization of a full year of benefits
associated with a smaller workforce, and the absence of certain nonrecurring
charges included in 1996 associated with Health Valley prior to its acquisition
by NNG.
24
<PAGE> 26
Amortization of goodwill and trademarks as a percentage of net sales for
1997 increased 0.3% from 1996. The increase was due to the full year impact of
the amortization of the goodwill and trademarks resulting from the Health Valley
acquisition in April 1996 and the Breadshop acquisition in October 1996.
Operating income as a percentage of net sales for 1997 was 3.5% compared to
operating loss as a percentage of net sales of 6.4% in 1996, primarily
reflecting the factors discussed above.
Interest expense for 1997 increased $383,000 from 1996 due to the full year
impact of the debt incurred in connection with the acquisitions of Health Valley
and Breadshop.
The provision for income taxes for 1997 was $387,000 compared to a tax
benefit of $1.2 million in 1996 due to improved operating results. The
non-deductibility of the amortization of goodwill and trademarks for income tax
purposes significantly affected the Company's effective income tax rate.
Net income for 1997 was $105,000 compared to a net loss of $3.9 million in
1996, primarily reflecting the factors discussed above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales for 1996 decreased $15.2 million, or 20.7%, from 1995, primarily
due to a $13.4 million decrease in sales in the wholesale club channel which was
due to overall decreased consumer demand for fat-free products and the Company's
decision to increase emphasis on the natural food channel.
The gross margin percentage for 1996 increased 2.8% from 1995 primarily due
to cost reductions implemented by the Company and reduced sales to the
lower-margin wholesale club channel.
Marketing, selling and distribution expenses as a percentage of net sales
for 1996 decreased 0.8% from 1995 due to the reduction of promotional and
advertising spending subsequent to the Company's acquisition of Health Valley.
General and administrative expenses as a percentage of net sales for 1996
increased 4.7% from 1995, due to higher general and administrative expenses
being spread over a lower sales base. General and administrative expenses were
higher in 1996 partially due to certain nonrecurring charges in 1996 associated
with Health Valley prior to its acquisition by NNG.
Amortization of goodwill and trademarks was $114,000 for 1996. The
amortization is attributable to the goodwill and trademarks resulting from the
acquisitions of Health Valley and Breadshop in 1996.
Operating loss as a percentage of net sales for 1996 increased 1.3% from
1995, primarily reflecting the factors discussed above.
Interest expense for 1996 increased $26,000 from 1995. Although the overall
debt level for 1996 increased $6.9 million from 1995 primarily as a result of
the acquisition of Health Valley and Breadshop in 1996, the impact of the
interest expense was minimized due to the refinancing of debt at lower effective
interest rates.
The income tax benefit of $1.2 million in 1996 compares to a provision for
income tax of $1.1 million in the prior year, due to the lower operating results
for 1996 and the inability of the Predecessor Company to file consolidated
returns prior to the Health Valley acquisition.
Net loss for 1996 was $3.9 million, a decrease of $1.7 million from 1995,
primarily reflecting the factors discussed above.
UNAUDITED QUARTERLY RESULTS
The following table presents unaudited quarterly financial information for
the last three quarters of 1996, 1997 and the first quarter of 1998. This
information has been prepared by the Company on a basis consistent with the
Company's audited financial statements and includes all adjustments (consisting
only of normal
25
<PAGE> 27
recurring adjustments) which management considers necessary for a fair
presentation of the results for such quarters.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
1996 1997 1998
---------------------------------- --------------------------------------- --------
JUNE 30(1) SEPT. 30 DEC. 31(2) MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
---------- -------- ---------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $10,141 $13,097 $16,704 $16,299 $15,767 $17,025 $18,807 $17,568
Cost of sales............... 6,822 8,737 11,621 10,627 9,830 10,517 11,396 10,960
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................ 3,319 4,360 5,083 5,672 5,937 6,508 7,411 6,608
Marketing, selling and
distribution.............. 1,876 2,228 3,073 3,832 3,812 4,356 5,366 4,891
General and
administrative............ 1,500 1,653 1,721 1,241 1,371 1,360 1,453 1,202
Amortization................ 6 21 87 83 83 83 85 90
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)..... $ (63) $ 458 $ 202 $ 516 $ 671 $ 709 $ 507 $ 425
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes the results of operations of Health Valley subsequent to its
acquisition in April 1996.
(2) Includes the results of operations of Breadshop subsequent to its
acquisition in October 1996.
SEASONALITY
The Company's historical net sales have exhibited seasonality with the
first and fourth quarters having the highest net sales. These two quarters
reflect higher sales of the Company's instant and canned soups and chilis as
well as other hot food products, as these products are most frequently consumed
during the fall and winter seasons. The Company's quarterly results of
operations have fluctuated in the past and will fluctuate in the future based on
many factors in addition to seasonality. See "Risk Factors -- Seasonality and
Quarterly Fluctuations."
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash provided by operating activities totaled $2.5
million for the three months ended March 31, 1998, compared to $0.8 million for
the three months ended March 31, 1997. The increase of $1.7 million was due to
reductions in net working capital investments. During this period, the Company
was able to reduce inventory levels and accounts receivable through enhanced
collection efforts. Working capital reductions, together with cash generated by
operating activities, during the three months ended March 31, 1998 enabled the
Company to reduce its outstanding debt by $1.6 million during the first quarter
of 1998. Net cash provided by operating activities totaled $0.3 million and $2.3
million for the years ended December 31, 1997 and December 31, 1996,
respectively. The decrease of $2.0 million was attributable to an increase in
net working capital investments, partially offset by the improved performance of
the Company's operations. During 1997, the Company's working capital position
improved by approximately $2.7 million, from a working capital deficit of
$443,000 at December 31, 1996 to working capital of approximately $2.3 million
at December 31, 1997. The improvement in the Company's working capital position
resulted from the cash generated by operating activities which enabled the
Company to fund certain accrued liabilities assumed or incurred in connection
with the acquisitions of Health Valley and Breadshop.
Cash used in investing activities has totalled $0.2 million and $0.3
million for the three months ended March 31, 1998 and 1997, respectively, and
$0.9 million and $43.2 million for the years ended December 31, 1997 and 1996.
Cash used in investing activities in the years ended December 31, 1997 primarily
relates to the completion of the Health Valley and Breadshop acquisitions.
Capital expenditures have totaled approximately $760,000 since the acquisition
of Health Valley in April 1996 through March 31, 1998. Capital expenditures have
been modest due to significant underutilized manufacturing capacity in the
Company's facility acquired as part of the Health Valley acquisition in 1996.
The Company's capital expenditure plan for the remainder of 1998 totals $1.2
million. From the date of acquisition of Health Valley in April 1996 through
March 31, 1998, capital expenditures were partially funded by the sale of
certain excess equipment.
26
<PAGE> 28
Cash used in financing activities for the three months ended March 31, 1998
and 1997 totaled $2.3 million and $0.8 million, respectively. The increase of
$1.5 million was primarily due to the higher repayments of the Company's
borrowings in 1998. Cash provided by financing activities totalled $0.3 million
and $40.2 million for the years ended December 31, 1997 and 1996, respectively.
The decrease of $39.9 million is primarily due to the issuance in 1996 of $0.8
million of Common Stock and $18.7 million of Series A Preferred Stock and
borrowings of $19.0 million primarily under the Company's term loan facilities
to finance the Health Valley and Breadshop acquisitions.
As a part of its growth strategy, the Company seeks to acquire competing
and complementary natural food brands. The Company believes that its capital
structure following the Offering will enable it to expand its credit facilities
to fund the purchase price of future acquisitions or the operations of any
acquired businesses. There can be no assurance, however, that the Company will
be successful in increasing its credit facilities or that it will obtain such
facilities on terms acceptable to the Company.
The Company's credit agreement with LaSalle presently includes a $6.5
million revolving credit facility of which approximately $4.7 million was
available at March 27, 1998, based on eligible receivables and inventory. The
credit agreement also includes two term loan facilities (Term Loan A and Term
Loan B) which had outstanding borrowings of $10.3 million and $5.7 million,
respectively, as of March 31, 1998. The revolving credit facility expires on
June 30, 1999. Term Loans A and B mature on June 30, 2003 and October 31, 2002,
respectively, and each requires quarterly repayments of principal. Interest on
borrowings under these agreements accrue, at the Company's option, at either
LaSalle's prime rate plus 0.25% per annum, or the London Interbank Offered Rate
(LIBOR) plus 2.5% per annum. As of March 31, 1998, the weighted average interest
rate on the revolving credit facility was 8.31%, and the weighted average
interest rates on Term Loan A and Term Loan B were 8.16% and 8.13%,
respectively. The credit agreement contains various restrictive covenants that
include a prohibition on payment of dividends, specified minimum net worth and
current ratio levels, and specific limitations on leverage ratios and capital
expenditure amounts. The credit agreement also contains a mandatory requirement
to make accelerated payments on the term debt in the event that a significant
sale or disposition of fixed assets occurs. The borrowings under the credit
agreement are secured by all of the Company's assets. The $7.3 million charge to
operations has caused defaults under the net worth, leverage ratio and fixed
charge covenants of this credit agreement with LaSalle, which existing covenant
defaults LaSalle has agreed to waive.
The Company intends to redeem all of the outstanding shares of Series A
Preferred Stock with a portion of the proceeds of the Offering. The Company also
intends to use net proceeds of the Offering to repay outstanding borrowings
under the revolving credit facility and term loans.
At December 31, 1997, the Company had a net operating loss carryforward of
approximately $5.2 million for federal income tax purposes. The net operating
loss carried forward principally from the operations of Health Valley prior to
its acquisition by NNG. Subject to certain limitations, the Company expects this
net operating loss carryforward will be available to offset future taxable
income.
The Company believes that the cash flow from operations and borrowings
under the current credit agreement will be sufficient to meet the Company's
presently anticipated working capital needs, for at least the next 12 months.
EFFECT OF INFLATION
Historically, inflation has not had a material effect on the Company, other
than to increase its cost of borrowing. However, the Company cannot predict
accurately the effect of inflation on future operating results. If faced with
increasing raw material prices, the Company would attempt to increase its
selling prices or realize offsetting manufacturing efficiencies. The Company
anticipates, however, that the implementation of any such actions would lag
behind the price increases in the Company's raw material cost.
27
<PAGE> 29
RECENTLY ISSUED ACCOUNTING STANDARDS
For the fiscal year ending after January 1, 1999, the Company will adopt
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information and SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits. The Company is reviewing the impact of the adoption of
these pronouncements on its consolidated financial statements.
YEAR 2000
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates that have been
stored as two digits rather than four. On January 1, 2000, any clock or date
recording mechanism, including date sensitive software, which uses only two
digits to represent the year may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices or perform similar
tasks.
The Company has assessed the Year 2000 issue with respect to the software
used by the Company in providing its services and with respect to its
computerized information systems. NNG expects to complete all Year 2000
modifications by the fourth quarter of 1998, leaving adequate time to assess and
correct any significant issues that may materialize. The Company does not
believe that the costs to resolve the Company's Year 2000 issues will be
material to the Company. NNG is also discussing the Year 2000 issue with its
significant customers and suppliers to determine the extent to which the Company
is vulnerable to those third parties' failures to remediate their own Year 2000
issues. The Company is not yet certain as to the extent to which the computer
software and business systems of its customers and suppliers are Year 2000
compliant. Based upon the nature of the Company's business, however, management
believes that the Company is not likely to experience material business
interruption due to the impact of Year 2000 compliance on its customers and
vendors.
28
<PAGE> 30
BUSINESS
GENERAL
The Company is a leading manufacturer and marketer of premium natural and
organic food products in the United States. The Company markets (i) breakfast
cereals and granolas, (ii) granola bars, cereal bars, cookies, crackers and
other baked goods and (iii) canned and instant soups and chilis, as well as
other food products, primarily under its Health Valley(R) and Breadshop's(R)
brands. The Company's branded products are made using only natural ingredients,
without artificial flavors, colors, additives or preservatives. Many of the
Company's products are also made with "organic" ingredients, which are grown
without dependence upon artificial pesticides, chemicals or fertilizers.
The Company currently markets over 200 products and believes it has the
largest market share among marketers of natural food brands for its core product
categories -- breakfast cereals and granolas, baked goods, and soups and chilis.
Representative products of the Company include Health Valley(R) Spicy Vegetarian
Chili, Breadshop's(R) Honey Gone Nuts(R) Cereal, Health Valley(R) Apple Cobbler
Cereal Bars, Health Valley(R) Amazing Apple!(TM) Hot Breakfast Cereal and Health
Valley(R) Soy Moo(R) Non-Dairy Beverage.
The Company's products are sold primarily through natural and specialty
food distributors and ultimately to consumers through natural food retailers,
such as Whole Foods and Wild Oats, conventional grocery retailers, such as Fred
Meyer and Kroger, and other retail channels. The Company estimates that in 1997
approximately 35% of its products were sold in the natural food retail channel,
approximately 50% of its products were sold in the conventional grocery retail
channel and approximately 15% of its products were sold in other retail
channels. In 1997, the Company began to manufacture private label products for
certain of its customers.
The Company manufactures most of its products, unlike many natural food
companies that rely on contract manufacturing. The Company's manufacturing
operations are housed in a modern 150,000 square foot facility located in
Irwindale, California. The Company believes that by manufacturing most of its
products, it is able to better control the cost and quality of its products and
provide better service to its customers. The Company estimates that it is
generally utilizing less than 30% of the Irwindale facility's manufacturing
capacity. As a result, the Company believes significant operating leverage can
be achieved through growth. In addition, the Company's manufacturing capability
has enabled it to produce private label products for retailers, which increases
revenues and may also strengthen its business relationships with certain key
customers.
The natural and organic food market is highly fragmented and includes
several hundred manufacturers and marketers. The Company believes that continued
growth in this market combined with continued consolidation among retailers and
distributors will lead to consolidation among natural and organic food
manufacturers. Accordingly, a key element of the Company's growth strategy is to
pursue strategic acquisitions of natural and organic food companies with
products or brands that strengthen or complement the Company's product lines.
The Company believes that its manufacturing capability, its sophisticated
information systems and the experience and depth of its management team will
enable the Company to identify and realize synergies in connection with
acquisitions which may give the Company advantages over other potential
acquirors.
NATURAL FOOD MARKET
According to NFM, the market for natural products grew at a rate of 20%
between 1995 and 1996 and reached approximately $11.5 billion in 1996. According
to NFM, the organic food market, a segment of the natural products market, also
grew at a rate of 20% between 1995 and 1996 and was estimated at $3.0 billion in
1996. The Company believes that growth in the natural and organic food market is
being propelled by several factors, including (i) consumers taking charge of
their health and well being through awareness of the link between diet and
health and improved eating habits, (ii) consumer concern over the purity and
safety of foods due to the presence of pesticide residues, artificial
ingredients and other chemicals and (iii) consumer awareness of environmental
issues.
29
<PAGE> 31
In recent years, changes in attitudes and beliefs have led to changes in
dietary habits. For example, from 1980 to 1995, per capita consumption of grains
and fruits -- two food groups of which the United States Department of
Agriculture recommends increased consumption -- grew by 30% and 20%,
respectively.
Demographic trends are also favorable for natural and organic foods. The
number of adults over the age of 35 is increasing rapidly. The U.S. Census
Bureau projects that between 1990 and 2000 the number of adults between the ages
35 to 54 will grow by 29% and the number of adults over age 54 will grow by 13%.
Since these demographic groups are the most frequent purchasers of the Company's
products, the Company believes the aging population will increase the number of
ultimate consumers of the Company's products.
COMPETITIVE STRENGTHS
The Company believes that its current market position is attributable to
the following competitive strengths:
Strong Brand Name Recognition and Leading Market Shares
The Health Valley(R) and Breadshop's(R) brand names, both of which have
been marketed by the Company and its predecessors for over 25 years, are two of
the leading brand names in the natural and organic food industry. The Company
believes that the Health Valley(R) brand is one of the most recognized natural
or organic food brands in the United States.
The Company believes that it has the leading market share in the natural
food and conventional grocery retail channels in each of its three core product
categories -- (i) breakfast cereals and granolas, (ii) granola bars, cereal
bars, cookies and other baked goods and (iii) canned and instant soups and
chilis -- which accounted for over 90% of the Company's revenues in 1997.
Expertise in Natural and Organic Ingredient Sourcing and Product Development
The Company has significant expertise in the sourcing of natural and
organic food ingredients and in the formulation of innovative natural products.
The Company, together with its predecessors, has been working with natural and
organic formulations, preparations and recipes for over 25 years. The Company
has also developed proprietary techniques which increase shelf life, improve
flavor and enhance the nutritional quality of the Company's food products,
without relying on artificial ingredients or preservatives.
Substantial Infrastructure
NNG operates a modern manufacturing center in Irwindale, California which
the Company estimates is generally operating at less than 30% utilization. In
addition, the Company has sophisticated, scalable information systems capable of
absorbing future growth. The Company believes the combination of excess
manufacturing capacity and scalable information systems creates a significant
opportunity to grow existing brands, develop new products, build its private
label and contract manufacturing businesses and acquire complementary brands
which can be manufactured by the Company without significant capital investment
or additional fixed expenses.
Experienced Management Team
The natural and organic food industry is a relatively young industry
consisting primarily of comparatively small, privately-owned businesses. As a
result, the management of such natural food companies often lacks the training
and experience commonly found in other more mature segments of the food
industry. The Company has recruited an experienced management team to oversee
current operations and will continue to recruit seasoned management to support
future growth and acquisitions. The Company's executive officers are veteran
senior managers with extensive food industry experience. The Company believes
that its larger size
30
<PAGE> 32
relative to most natural food companies enables it to recruit and retain more
highly qualified and specialized management than many of its competitors.
GROWTH STRATEGY
The Company's objective is to be the leading manufacturer and marketer of
premium branded natural and organic foods. The key elements of the Company's
growth strategy are as follows:
Concentrate on the Growing Natural Food Market
The natural and organic food market is growing rapidly, and the Company is
concentrating its branded marketing activities exclusively in this market
segment.
Grow the Company's Existing Brands
The Company intends to build upon its leading position in its current core
product categories through internal growth. Both the Health Valley(R) and
Breadshop's(R) brands have been marketed for more than 25 years, fostering
consumer awareness and loyalty and retail availability throughout the United
States. The Company plans to invest in trade and consumer marketing in order to
further increase the awareness and availability of its brands. Building on its
brand equities, the Company believes it can strengthen its position in current
product categories and successfully launch products in new categories.
The Company plans to continue developing new products which appeal to
consumers with respect to taste, nutrition, convenience and environmental
impact. The Company also plans to launch new products for evening meal
consumption, complementing its existing breakfast, lunch and snack products. For
example, in the third quarter of 1998, the Company plans to launch an instant
rice meal positioned to compete in the single serve home meal replacement
market. In addition, the Company plans to introduce new food products that
incorporate ingredients with specific nutritional benefits, or functional foods.
Expand Sales in Grocery Retail Channel
Complementing its ongoing efforts to increase sales in the natural food
retail channel, the Company plans to improve the scope and quality of
conventional grocery retail distribution for its brands. By informing grocery
retailers about natural and organic food markets, consumer profiles and growth
opportunities, the Company will seek to enhance conventional grocers'
understanding of the appeal of natural and organic food products and increase
their commitment to the segment. The Company believes that fostering
understanding and commitment on the part of conventional grocers will result in
improved shelf space and more effective in-store merchandising, which the
Company believes will increase its sales in the conventional grocery retail
channel.
Pursue Strategic Acquisitions
A key element of the Company's growth strategy is to pursue strategic
acquisitions of natural and organic food companies with products or brands that
strengthen or complement the Company's product lines. The Company believes such
acquisitions may create opportunities to accelerate sales growth and leverage
purchasing, manufacturing and operating expenses. The Company believes the
fragmented nature of the natural food industry offers numerous opportunities to
acquire companies that fit well with the Company's strategy. For example, the
Company recently entered into a non-binding letter of intent to acquire a
natural and organic food company with revenues of approximately $5.0 million and
net income of less than $20,000 in 1997. There can be no assurance, however,
that the Company will decide to proceed with this acquisition after completion
of due diligence or that this acquisition can be consummated on terms acceptable
to the Company.
Increase Private Label Business
The Company believes its private label sales activities can lead to both
increased revenues and improved relationships with key customers, thereby
improving the market for its branded products. In conventional grocery
retailing, private labels frequently account for 15% to 20% of sales. However,
until recently, there have
31
<PAGE> 33
been very few private label natural food products. Due to the growth of the
natural and organic food market, natural food marketers have begun to establish
private label programs. During 1997, the Company established a private label
division, recruited an experienced private label sales manager and began
developing private label customer relationships and sales. The Company intends
to become the supplier of choice for private label natural and organic foods in
its core product categories.
PRODUCTS
The Company markets over 200 products under the Health Valley(R) and
Breadshop's(R) brand names and also manufactures products under brand names
owned by private label customers. Examples of the Company's branded products are
set forth in the table below:
<TABLE>
<CAPTION>
CATEGORY BRANDS PRODUCTS
-------- ------ --------
<S> <C> <C>
Cereals and Granola Health) Banana Gone Nuts(TM) Hot Breakfast Cereal
Valley(R Organic Oat Bran Flakes Breakfast
Cereal
Organic Fiber 7(R) Flakes Breakfast
Cereal
Golden Flax Breakfast Cereal
Raisin Cinnamon Granola
Breadshop's(R) Honey Gone Nuts(R) Breakfast Cereal
Baked Goods Health) Moist & Chewy Granola Bars
Valley(R Original Amaranth Graham Crackers
Original Oat Bran Crackers
Breadshop's(R) Animal Crackers
Soups and Chilis Health) Spicy Vegetarian Chili
Valley(R
14 Garden Vegetable Soup
Zesty Black Bean with Rice Instant
Soup
Garden Split Pea with Carrots Instant
Soup
Organic Vegetable Soup
Organic Tomato Soup
Organic Minestrone Soup
</TABLE>
One of the Company's main objectives is to market natural and organic foods
that promote good health. The Health Valley(R) and Breadshop's(R) branded
products are produced without synthetic colors, flavors, sweeteners or
preservatives and use minimally processed ingredients whenever possible. The
Company also uses organic ingredients when available and cost effective. In
general, the Company's branded products are formulated to be high in complex
carbohydrates, low in fat and, where appropriate, to contain soy or other
vegetable, rather than animal, proteins. Whenever possible, the Company uses
unbleached whole grain flours and other minimally processed grains to increase
the fiber and nutritional content of its products.
A majority of the Company's products qualify for the "healthy" designation
in accordance with FDA guidelines. In order to use "healthy" as a description
under federal guidelines, one serving of food product must fulfill the following
criteria:
- Each serving must not contain more than: 3 grams of total fat; 1 gram of
saturated fat; 60 milligrams of cholesterol; and 480 milligrams of sodium
- In addition, each serving must provide at least 10% of the daily value of
at least one of the following nutrients: Vitamin A (500 IU minimum);
Vitamin C (6 milligrams minimum); Iron (1.8 milligrams minimum); Calcium
(100 milligrams minimum); protein (5 grams minimum); or fiber (3 grams
minimum)
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<PAGE> 34
Health Valley(R) products, in particular, compare favorably with leading
national brands of conventional foods with respect to fat, sodium and fiber,
while having similar caloric content:
<TABLE>
<CAPTION>
NUTRITIONAL LABEL DECLARATIONS(1)
----------------------------------
MAJOR CONVENTIONAL
HEALTH VALLEY FOOD BRANDS(2)
------------- ------------------
<S> <C> <C>
Sodium(mg)
canned soups................................. 220-280 800-1000
canned chili................................. 200 830-1100
instant soups................................ 270-300 450-550
broths....................................... 170 1000
Fat(g)(3)
cereal bars.................................. 0-2 2-3
granola bars................................. 0-3 2-3
Fiber(g)(4)
flaked cereals............................... 4-6 1-2
granolas..................................... 6 4
</TABLE>
- ---------------
(1) Per serving.
(2) Represents a composite of comparable conventional food brands.
(3) Compared to low fat varieties of major conventional food brands.
(4) Without milk or soy beverage.
MARKET POSITION
As the following table illustrates, among natural and organic food
products, the Company's brands hold leading market positions in its three core
product categories.
<TABLE>
<CAPTION>
MARKET RANK (MARKET SHARE)
-------------------------------
NATURAL FOOD GROCERY
DISTRIBUTORS(1) RETAILERS(2)
--------------- ------------
CATEGORY BRANDS 1997 1997
- -------- ------ --------------- ------------
<S> <C> <C> <C>
Health)
Cold breakfast cereals Valley(R #1 (24.8%) #1 (32.2%)
Flakes Breadshop's(R)
Granolas
Puffed cereals
Health)
Baked goods Valley(R #2 (13.8%) N/A(3)
Granola bars
Cereal bars
Cookies
Health)
Canned and instant Valley(R #1 (31.2%) #1 (43.6%)
soups and chilis
Instant soup cups
Instant chili cups
Canned soups
Canned broths
</TABLE>
- ---------------
(1) Based on SPINS Distributor Information from Spence Information Services,
LLC. SPINS Distributor Information is based on actual sales from certain
natural foods distributor warehouses.
(2) Based on ACNielsen ScanTrack: SPINS Natural Track, which is scanner-based
information on sales of natural products in grocery retail outlets. This
data is drawn from ACNielsen's ScanTrack database, a statistically
representative sample of supermarkets across the United States.
(3) The data regarding sales of baked goods through the grocery retail channel
were not purchased by the Company for the full year.
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<PAGE> 35
NEW PRODUCT INTRODUCTIONS
New products are important in achieving growth in the natural food
industry. Both Health Valley and Breadshop have recently introduced new products
to respond to changes in consumer tastes, increased desire for convenience,
developments in nutrition and competition. Product innovations have ranged from
introducing new flavors of existing products to launching entire lines of
organic products or entering new product categories.
Recently, the Company developed a variety of new products, a number of
which have already been launched in the marketplace or are scheduled to be
launched during 1998. The following table summarizes actual and planned product
introductions for 1997 and 1998:
<TABLE>
<CAPTION>
CALENDAR QUARTER HEALTH VALLEY(R) Breadshop's(R)
---------------- ---------------- --------------
<S> <C> <C>
Fourth Quarter 1997 Hot Breakfast Cereal Cups Flakes 'N Frostin'(TM) Cold Breakfast Cereal
- Banana Gone Nuts(TM) Hot
Breakfast Cereal
- Amazing Apple!(TM) Hot
Breakfast Cereal
- Maple Madness!(TM) Hot
Breakfast Cereal
- Terrific 10-Grain(TM) Hot
Breakfast Cereal
First Quarter 1998 Animal Cookies (bulk package)
Second Quarter 1998 Moist & Chewy Granola Bars Wild Berry Moist & Chewy Granola Bars (bulk
- Peanut Crunch package)
- Dutch Apple
- Wild Berry
Amaranth Animal Cookies
- Original Honey
- Vanilla
Rice Crunchems(TM) Breakfast
Cereal
Banana Gone Nuts(TM) Breakfast
Cereal
Super Size Cereal
- Oat Bran Flakes
- Fiber 7(R) Flakes
- Amaranth Flakes
Third Quarter 1998 Instant Rice Meal Cups Cookie Classics
- Shiitake Mushroom - Oatmeal Chocolate Chip
- Cantonese - Chocolate Chunk
- Thai
Stone Wheat Crackers
- Original
- Cracked Pepper
- Sesame
Canned Soup and Chili
- Chicken Noodle
- Chicken & Rice
- Turkey Chili
- Vegetable Broth
- Mushroom Broth
Fourth Quarter 1998 Corn Crunchems(TM) Breakfast
Cereal
Berries 'n Cream(TM) Breakfast
Cereal
</TABLE>
The Company plans to continue investing in research and development in
order to create products for current and new categories. The Company plans to
direct a growing portion of research and development
34
<PAGE> 36
resources toward the development of evening, main meal products and side dish
products which the Company believes present significant growth opportunities,
particularly for the Health Valley(R) brand.
CUSTOMERS
The Company's primary customers are natural food and specialty food
distributors who purchase the Company's products for their own account for
resale to natural food and grocery retailers. For 1997, sales through each of
Tree of Life, Inc. and United Natural Foods, Inc. -- two large natural food
distributors -- accounted for 14% and 13%, respectively, of the Company's
revenues, and the percentages may increase for the year ending December 31,
1998. The Company also sells its products to conventional grocery retailers and
club wholesalers.
The Company also tracks the ultimate consumers of its products. The Company
possesses a unique, proprietary database which contains the names and addresses
of over 1,000,000 customers who have purchased the Company's products or have
contacted the Company in response to promotions. The Company is exploring
opportunities to utilize this list in marketing its products in the future.
SALES AND MARKETING
The Company markets its products through a combination of consumer
marketing and trade marketing activities.
Consumer Marketing
Historically, the Company relied principally on new products, informative
product packaging and trade promotion activities in order to attract new
consumers and grow its business. In addition, the Company decided in mid-1996 to
discontinue the rebate promotions utilized by Health Valley. During 1997, the
Company initiated the development of new products, reformulated certain existing
products to improve taste and nutritional value and redesigned its packaging. In
addition, the Company began to develop new consumer advertising and promotional
programs. As a result of these activities, the Company plans to launch several
new products under both the Health Valley(R) and Breadshop's(R) brands in 1998,
release newly designed packaging for most of its Health Valley(R) products and
initiate new print and radio advertising campaigns.
Trade Marketing -- Branded Products
The Company employs a direct sales force of approximately 15 salaried
employees who market the Company's Health Valley(R) and Breadshop's(R) products
to distributors and retailers. The Company's sales representatives, either
directly or through commissioned food brokers, obtain distribution and shelf
space for the Company's products and negotiate trade deals, advertisements and
promotions.
Trade Marketing -- Private Label
Since March 1997, the Company has employed a senior sales manager to
develop and maintain private label customer relationships. Since focusing on the
development of private label relationships in 1997, the Company has begun to
manufacture and sell its products under private labels to leading natural food
and conventional grocery retailers as well as to other food marketers. The
Company believes its private label sales activities can lead to increased
revenues and improve the Company's relationships with key customers, thereby
improving the market for its branded products.
MANUFACTURING
All of the Company's baked goods, cereals and granolas, and instant soups
and chilis are produced at its manufacturing facility in Irwindale, California.
The Company's canned chilis and soups and beverages are manufactured to the
Company's own specifications by co-packers. With respect to the Company's canned
chilis and soups, the Company provides the co-packer with all ingredients,
recipes and packaging for the Company's products, and maintains quality control
personnel at the co-packer's facility during all production runs.
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<PAGE> 37
The Company's bakery operations include five modern baking lines employing
specially-designed ovens capable of producing more than 10,000 twelve-pack cases
per shift. The Company's cereal and meal cup operations include four cereal
production lines and one instant meal cup line capable of producing more than
10,000 twelve-pack cases per shift.
Products are generally manufactured to customer orders. As a result, the
Company is able to minimize its investments in inventories while maintaining
high levels of customer service. The Company estimates that it is generally
utilizing less than 30% of the Irwindale facility's manufacturing capacity.
Accordingly, the Company can substantially increase sales of existing and
similar products without making significant capital investments.
TECHNICAL SERVICES
Research and Development
The Company's research and development team includes nutritionists and food
technologists who develop new products and improve existing products. Research
and development focuses on improving the taste and nutritional value of the
Company's products and reducing the cost of producing such products. Recently,
additional research and development emphasis has been placed upon developing
products that incorporate ingredients with specific nutritional benefits, or
functional foods.
Quality Assurance
Consistency of quality and food safety are of paramount importance to the
Company. Accordingly, the Company purchases packaging and ingredients only from
approved suppliers and inspects raw materials as required to ensure conformance
to specifications. Under the direction of a full-time quality assurance manager,
on line product monitoring as well as post production product testing and
evaluation are also used to help ensure consistent quality and safety. The
Company utilizes both in-house and outside lab testing to support its quality
assurance programs.
INFORMATION SYSTEMS
The Company utilizes sophisticated information systems for operations
management and financial planning and control. Major applications software
includes the Marcam PRISM process manufacturing package and the JD Edwards
financial package, both of which operate on the Company's IBM AS400/B320
hardware. The Company believes that its existing information systems have the
capacity to absorb significant future growth.
COMPETITION
The markets in which the Company is active are highly competitive. Numerous
natural and organic food companies compete with the Company, including The Hain
Food Group, Inc., Barbara's Bakery, Inc. and Fantastic Foods, Inc. The Company
believes that in the natural food sector it competes with over 500 companies,
most of which are small independent companies and none of which is dominant. The
Company's products also compete, from time to time, with products of larger
conventional food companies, such as ConAgra, Inc.'s Healthy Choice line or
Nabisco, Inc.'s SnackWell line. The Company competes with these companies based
upon product quality, taste and appearance, breadth of product offerings,
customer service and price.
The Company differs from many of its natural and organic food competitors
in several respects. First, the Company is substantially larger than most
natural and organic food companies. Second, the Company generally enjoys a
leading market share in its core categories and its sales are concentrated in a
few product categories rather than distributed across many categories. Third,
the Company manufactures the majority of its products, unlike many of its
competitors who use co-packers. Finally, in those instances where the Company
utilizes co-packers, it generally procures the natural and organic ingredients
and the packaging while many other natural food companies rely on co-packers to
procure such materials. The Company believes these differences constitute
competitive advantages in product quality, service levels, working capital
36
<PAGE> 38
utilization, food safety and cost. The Company generally competes with larger
conventional food companies by differentiating its products based on ingredients
and nutrition.
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company owns a number of registered trademarks including the following:
Health Valley(R), Breadshop's(R), Honey Gone Nuts(R), Fiber 7(R) and Soy Moo(R).
Registration of Banana Gone Nuts(TM), Amazing Apple!(TM) and Maple Madness!(TM)
are pending. The Company is not aware of any fact that would have a materially
adverse impact on the continuing use of these trademarks. See "Risk
Factors -- Trademarks." The Company's recipes and certain manufacturing
processes also constitute proprietary information and are important to the
Company's success and competitive position. Accordingly, the Company seeks to
establish and protect its trademarks, trade secrets and other proprietary
rights.
GOVERNMENT REGULATION
The Company's operations are subject to extensive regulation by the FDA,
the USDA and other state and local authorities regarding the processing,
packaging, storage, distribution, advertising and labeling of the Company's
products and environmental compliance. The Company's manufacturing facilities
and products are subject to periodic inspection by federal, state and local
authorities. The Company's advertising is subject to regulation by the FTC
pursuant to the Federal Trade Commission Act and regulations issued thereunder.
The Company believes that it is currently in substantial compliance with all
material governmental laws and regulations and maintains all material permits
and licenses relating to its operations.
The Company has, to its knowledge, complied with all current food labeling
and packaging requirements, including significant labeling requirements that
became effective during 1994. The Company has not experienced any significant
regulatory problems in the past and has not been subject to any material fines
or penalties.
In December 1997, the USDA published proposed regulations to standardize
organic certification requirements as part of the Organic Foods Production Act
which was enacted as part of the 1990 United States Farm Bill. This law will
provide for a minimum federal standard that all organic producers will have to
follow in order for their products to be certified "organic," and will include a
seal to provide consumers with assurance that products sold as "organic" meet
these minimum standards. The USDA comment period ended May 1, 1998 and the
Company, along with other organic food producers, has been lobbying to bring the
proposed standards in line with more rigorous existing standards. Due to the
large number of comments received by the USDA, the Company anticipates that
final regulations will not become effective until sometime after 1999.
EMPLOYEES
As of May 31, 1998, the Company employed 204 regular employees, of which 33
were in administration, 143 were in operations and 28 were in sales, marketing
and customer service. The Company had 134 temporary employees as of the same
date. The number of temporary employees is subject to significant fluctuation
throughout the year as the Company adjusts staffing levels in response to
seasonal and other fluctuations in demand. None of the Company's employees is
covered by a collective bargaining agreement. However, the Company is currently
negotiating with the Bakery, Confectionery & Tobacco Workers' International
Union concerning a collective bargaining agreement covering its production,
maintenance and warehouse employees. The Company believes that its relations
with its employees are good. The Company has a stable and experienced employee
pool with historically low turnover.
PROPERTIES
The Company's Irwindale facility, housing manufacturing, warehouse,
distribution and office space, consists of three leased standard industrial
buildings containing a total of approximately 300,000 square feet. The leases
for the facilities expire in September 1998, with a renewal option for a
five-year period. The rent payments under the renewal option are subject to
negotiation. The Company recently exercised the renewal
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<PAGE> 39
option with respect to the building which houses its manufacturing facilities
and office space containing a total of approximately 150,000 square feet. The
Company did not exercise the renewal option with respect to the building which
houses its warehouse and distribution facilities as a result of the decision to
outsource this function.
In addition, the Company leases a facility located in Santa Cruz,
California consisting of 52,600 square feet of warehouse, office and
manufacturing space which it acquired with the Breadshop acquisition. The
Company currently uses 2,000 square feet of office space and subleases the
remaining space. The Company intends to vacate and sublease the office space by
July 1998. The lease for this facility expires in March 2000.
The Company also leases a small office in Chicago, Illinois that serves as
NNG's principal executive office.
LEGAL PROCEEDINGS
An action entitled Mary Jo Modica et al. v. Health Valley Foods, Inc. et
al., filed in the circuit court for Tuscaloosa County, Alabama on August 27,
1996 as a small claim, is pending against Health Valley and the Company. This
action was conditionally certified on an ex parte basis as a nationwide class
action; however, the Alabama Supreme Court has recently held that such ex parte
certifications violate applicable Alabama Rules of Civil Procedure and the
Company believes that, upon motion, the conditional class certification will be
removed. The complaint seeks monetary damages and alleges claims based on
misrepresentation in connection with the Predecessor Company's practices
regarding the packaging of certain of its canned products. The complaint alleges
that the Predecessor Company's canned products were packed in tin cans that
contained some lead even though the packaging stated that the cans were
lead-free. None of the claims involves the safety, quality or nutritional
content of the food products manufactured by the Company or the Predecessor
Company. Although the Company believes that the suit lacks merit, the Company
has entered into an agreement in principle to settle this litigation, subject to
final documentation and court approval. See "Management's Discussion and
Analysis of Financial Condition -- Recent Operating Results."
In addition, the Company is from time to time involved in litigation in the
ordinary course of its business. The Company is not currently a party to any
litigation which in the opinion of management is likely to have a material
adverse effect on the Company's business, results of operations or financial
condition and cash flows.
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<PAGE> 40
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William R. Voss...................... 44 Chairman of the Board, Chief Executive Officer and
President
Diane J. Beardsley................... 43 Senior Vice President, Chief Financial Officer and
Secretary
William J. Nictakis.................. 38 Senior Vice President
Michael D. de Boom................... 52 Senior Vice President
Roger S. McEniry(2).................. 41 Director
David S. Katz(1)..................... 32 Director
Timothy J. Healy(1)(2)............... 50 Director
Lawrence A. Del Santo(1)(2).......... 64 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
WILLIAM R. VOSS has been the Chief Executive Officer, President and a
director of the Company since its formation in October 1995. Mr. Voss was
elected Chairman of the Board in April 1996. Prior to joining the Company, Mr.
Voss served as Chief Executive Officer of McCain Foods, a privately owned food
processing company, from July 1993 to August 1995, and prior to such time as
President and Chief Operating Officer of Pilgrim's Pride Corporation, a publicly
traded food processing company. Mr. Voss also served as a principal with Booz,
Allen & Hamilton, a management consulting firm. Mr. Voss received a Master of
Business Administration degree from Stanford University in 1980. Mr. Voss is a
director of Interphase Corporation, a publicly traded corporation.
DIANE J. BEARDSLEY has been Senior Vice President and Chief Financial
Officer of the Company since December 1996. From 1992 until joining the Company,
Ms. Beardsley served as Senior Vice President and Chief Financial Officer of
Leiner Health Products, a vitamin and supplement manufacturer, and held various
accounting and financial positions with Leiner Health Products from 1986 until
being appointed Senior Vice President -- Chief Financial Officer. Ms. Beardsley
was previously the Controller -- Corporate Accounting of Smith International,
Inc., a publicly traded oil and gas equipment manufacturing company. Ms.
Beardsley received a bachelor's degree in Business Administration from
California State University -- Fullerton in 1976 and is a certified public
accountant.
WILLIAM J. NICTAKIS has been Senior Vice President -- Sales and Marketing
of the Company since December 1996. Prior to joining the Company, Mr. Nictakis
served as Vice President -- General Manager of a joint venture between Frito-Lay
Company and Sara Lee Corporation. He served as Frito-Lay Company's Vice
President, Quantum Leap Business Systems from 1995 to 1996 and its Vice
President, UDS Channel Development from 1993 to 1995. Mr. Nictakis received a
Master of Business Administration from the University of Chicago in 1985.
MICHAEL D. DE BOOM has been Senior Vice President -- Operations of the
Company since June 1996. From 1995 until joining the Company, Mr. de Boom served
as Executive Vice President of Distribution, Manufacturing and Product
Development of Harry's Farmers Markets, a grocery retailer. He served as the
Director of Warehouse Operations for H.E.B. Grocery Co. from 1993 through 1995
and its Director of Bakery Manufacturing and Product Development from 1990
through 1993. Mr. de Boom held various food manufacturing and distribution
management positions with Alpha Beta Co., a grocery retailer, from 1971 until
1990.
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<PAGE> 41
ROGER S. MCENIRY has been a director of the Company since October 1995. Mr.
McEniry is a general partner of Frontenac Company, a private equity investment
firm headquartered in Chicago, which he joined in March 1985. Frontenac Company
is the general partner of Frontenac VI Limited Partnership ("Frontenac VI").
Frontenac VI is a stockholder of the Company.
DAVID S. KATZ has been a director of the Company since October 1995. Mr.
Katz is Vice President of Frontenac Company, which he joined in September 1994.
From 1993 to 1994 he was an executive at the Clipper Group, a New York based
private equity company.
TIMOTHY J. HEALY has been a director of the Company since 1997. Mr. Healy
has served as the Chairman, CEO and President of Select Beverages, Inc., a
privately held beverage bottler, since 1992.
LAWRENCE A. DEL SANTO has been a director of the Company since January
1998. Mr. Del Santo was the Chairman and Chief Executive Officer of The Vons
Companies, Inc. from 1994 until he retired in 1997. From 1992 to 1994, he served
as the Executive Vice President -- Food Stores for American Stores Company.
BOARD OF DIRECTORS
After consummation of the Offering, the Board of Directors of the Company
will consist of five directors divided into three classes with each class
serving for a term of three years. At each annual meeting of stockholders,
directors will be elected by the holders of the Common Stock to succeed those
directors whose terms are expiring. The director whose term will expire in 1999
is David S. Katz; directors whose terms will expire in 2000 are Timothy J. Healy
and Lawrence A. Del Santo; and directors whose terms will expire in 2001 are
William R. Voss and Roger S. McEniry. The Board of Directors has established an
Audit Committee and Compensation Committee and may establish such other
committees as the Board may determine. Directors elected by the Company's
stockholders may be removed only for cause.
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
do not receive compensation for serving as directors. Each director who is not
an employee of the Company or one of its subsidiaries ("Non-Employee Director")
receives an annual retainer of $5,000, a fee of $2,000 for attendance at each
Board of Directors' meeting and $1,000 for attendance at each committee meeting.
Directors are also reimbursed for out-of-pocket expenses incurred in attending
meetings of the Board of Directors or committees thereof or otherwise incurred
in their capacity as directors. In addition, each Non-Employee Director serving
on the Board of Directors at the closing of the Offering will receive an option
to purchase 10,000 shares of Common Stock. After the Offering, any newly elected
Non-Employee Director will receive an option to purchase 10,000 shares of the
Company's common stock upon becoming a director of the Company. In addition,
each Non-Employee Director will receive an option to purchase 5,000 shares
annually.
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<PAGE> 42
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the cash
compensation paid by the Company for services rendered during the fiscal year
ended December 31, 1997 to its chief executive officer and the other executive
officers of the Company whose total annual salary and bonus exceeded $100,000
during such period (each, a "Named Executive Officer").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
-------------------- UNDERLYING COMPENSATION
SALARY($) BONUS($) OPTIONS ($)
--------- -------- ------------ ------------
<S> <C> <C> <C> <C>
William R. Voss............................... $300,000 $ -- -- $4,750(1)
Chairman of the Board, Chief Executive
Officer and President
Diane J. Beardsley............................ 180,000 74,246(2) -- --
Senior Vice President and Chief Financial
Officer
William J. Nictakis........................... 225,000 194,718(3) -- --
Senior Vice President -- Sales and Marketing
Michael D. de Boom............................ 150,000 36,872(4) -- 1,125(5)
Senior Vice President -- Operations
</TABLE>
- ---------------
(1) Represents the Company's matching contribution to the Company's 401(k) plan
made on behalf of Mr. Voss.
(2) Includes a signing bonus of $45,000 paid in 1997 in accordance with Ms.
Beardsley's employment offer.
(3) Includes a signing bonus of $89,000 paid in 1997 and a payment of $69,160
for relocation expenses in accordance with Mr. Nictakis' employment offer.
(4) Includes the second and final bonus payment of $12,500 in accordance with
Mr. de Boom's employment offer.
(5) Represents the Company's matching contribution to the Company's 401(k) plan
made on behalf of Mr. de Boom.
OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted to the Named Executive Officers during the
fiscal year ended December 31, 1997. However, the options referred to below were
granted pursuant to the 1997 Stock Option Plan and formalized by the Board of
Directors in 1997.
OPTION GRANTS IN 1996
The following table sets forth individual grants of stock options made to
the Named Executive Officers during the fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE
SHARES TOTAL AT ASSUMED ANNUAL RATES
UNDERLYING OPTIONS OF STOCK PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE OR FOR OPTION TERM (1)
GRANTED EMPLOYEES IN BASE PRICE ----------------------------
NAME (#) FISCAL YEAR ($/SH) EXPIRATION DATE 5%($) 10%($)
---- ---------- ------------- ----------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William R. Voss....... 96,570(2) 35.2% (3) April 15, 2004 --(4) --(4)
Diane J. Beardsley.... 41,760(5) 15.2% $0.34 March 18, 2004 6,264 13,780
William J. Nictakis... 83,520(5) 30.5% $0.34 March 18, 2004 12,528 27,562
Michael D. de Boom.... 41,760(5) 15.2% $0.34 March 18, 2004 6,428 14,616
</TABLE>
- ---------------
(1) In accordance with the rules of the Commission, the hypothetical gains or
"option spreads" that would exist for the respective options are shown.
These gains are based on assumed rates of annual compounded
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<PAGE> 43
stock price appreciation of 5% and 10% from the date the option was granted
over the full option terms of the options shown. The 5% and 10% assumed
rates of appreciation are mandated by the rules of the Commission and do not
represent the Company's estimate or projection of future increases in the
price of its Common Stock. Using the assumed initial public offering price
of $15.00 as the fair market value for this calculation, the hypothetical
gains for Mr. Voss, Ms. Beardsley, Mr. Nictakis and Mr. de Boom, beginning
on the estimated date of consummation of the Offering through the end of
their option terms, would be (i) $1,380,951, $808,474, $1,616,948 and
$808,474, respectively, at a 5% appreciation rate and (ii) $1,959,406,
$1,053,605, $2,107,210 and $1,053,605, respectively, at a 10% appreciation
rate. The exercise price used for Mr. Voss for this calculation was $5.48
per share which would be his exercise price at the end of the term for his
option.
(2) Mr. Voss' options become exercisable in full on the earlier of (i) April 15,
1999, (ii) the consummation of the Offering and (iii) a sale of the Company.
(3) The exercise price for Mr. Voss' options increases over time from $0.34 to
$5.48 per share. If Mr. Voss exercised these options on the date of
consummation of the Offering, the exercise price would be $1.44 per share.
(4) Because the exercise price for Mr. Voss' options increases at an annual rate
in excess of 10%, the potential realizable value (assuming 5% and 10%
appreciation per annum) is zero.
(5) Each of these options is governed by NNG's 1997 Stock Option Plan. These
options become exercisable in three equal annual installments beginning on
the first anniversary of the commencement of such person's employment with
the Company. These options vest in full upon a sale of the Company.
FISCAL YEAR-END OPTION VALUES
The following table sets forth for the Named Executive Officers information
concerning the value of unexercised stock options at December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END(#) FISCAL YEAR-END(1)($)
------------------------- -------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------- -------------------------
<S> <C> <C>
William R. Voss................................... 0/96,570 0/569,763
Diane J. Beardsley................................ 13,920/27,840 91,315/182,630
William J. Nictakis............................... 27,840/55,680 182,630/365,261
Michael D. de Boom................................ 13,920/27,840 91,315/182,630
</TABLE>
- ---------------
(1) The value of "in-the-money" options represents the difference between the
exercise price of such option and the fair market value of the stock as of
December 31, 1997. The fair market value of the Common Stock as of that
date, solely for purposes of this calculation and based on certain analysis
undertaken by the Company in issuing options to a non-employee director, is
estimated to be $6.90 per share.
EMPLOYMENT AGREEMENTS
On October 2, 1995, the Company entered into an employment agreement with
William R. Voss, pursuant to which Mr. Voss became the Chief Executive Officer
of the Company. Mr. Voss' employment agreement provides for an annual base
salary of $300,000. In addition, Mr. Voss was granted options to purchase 96,570
shares of Common Stock at an exercise price of between $0.34 and $5.48 per
share, which options become exercisable on the earlier of the consummation of an
initial public offering or April 15, 1999. These options will become exercisable
upon the consummation of the Offering. Unless proper notice of termination is
given, the term of Mr. Voss' employment automatically renews for successive
one-year periods. No other executive officer has an employment agreement with
the Company.
INDEMNIFICATION AGREEMENTS
In addition to the indemnification provisions contained in the Company's
Certificate of Incorporation and By-Laws, the Company has entered into
indemnification agreements with all of its directors and executive
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<PAGE> 44
officers providing that the Company will indemnify those persons to the fullest
extent permitted by law against claims arising out of their actions as officers
or directors of the Company and will advance expenses of defending claims
against them. The Company believes that indemnification under these agreements
covers at least negligence and gross negligence by the directors and officers,
and requires the Company to advance litigation expenses in the case of actions,
including stockholder derivative actions, subject to the agreement that the
officer or director will repay any advances if it is ultimately determined that
the officer or director is not entitled to indemnification. The Company believes
that these provisions are essential to attracting and retaining qualified
persons as directors and officers.
1997 STOCK OPTION PLAN
In March 1997, the Company adopted its 1997 Stock Option Plan (the "1997
Plan"). The purpose of the 1997 Plan is to provide a means whereby selected
directors, officers, employees and consultants of the Company and its
subsidiaries may be granted options to purchase Common Stock to attract or
retain their services and to provide added incentive to them by encouraging
stock ownership in the Company. Under the 1997 Plan, the Company may issue
either incentive stock options or non-qualified stock options. The 1997 Plan is
administered by the Board of Directors, subject to its ability to delegate its
power under the 1997 Plan to a committee of the Board. The Board has the power
to select individuals to participate in the 1997 Plan, grant options under the
1997 Plan and determine the terms and conditions of the options.
The Company has reserved 222,430 shares of Common Stock for issuance upon
exercise of options governed by the 1997 Plan. The 1997 Plan will remain in
effect until March 2007, unless terminated earlier in connection with certain
mergers, consolidations or other reorganizations. The 1997 Plan may be amended
by the Board of Directors without the consent of the stockholders of the
Company, except that any amendment subject to stockholder approval required by
any federal or state law or regulation shall not become effective until such
approval is obtained. As of June 30, 1998, options to purchase 212,850 shares of
Common Stock were outstanding under the 1997 Plan. The Company does not intend
to grant any additional options under the 1997 Plan.
EMPLOYEE INCENTIVE COMPENSATION PLAN
Prior to the consummation of the Offering, the Board of Directors and the
Company's stockholders are expected to approve the Incentive Plan. The purpose
of the Incentive Plan is to provide directors, officers, employees, consultants
and independent contractors with additional incentives by increasing their
ownership interests in the Company. Individual awards under the Incentive Plan
may take the form of one or more of (i) either incentive stock options ("ISOs")
or non-qualified stock options ("NQSOs") and (ii) restricted stock. The
Compensation Committee will administer the Incentive Plan and generally select
the individuals who will receive awards and the terms and conditions of those
awards.
The Company intends to reserve 800,000 shares of Common Stock for use in
connection with the Incentive Plan. Shares of Common Stock which are
attributable to awards which have expired, terminated or been cancelled or
forfeited are available for issuance or use in connection with future awards.
In connection with the Offering, options to purchase a total of 116,920
shares of Common Stock will be granted to management of the Company pursuant to
the Incentive Plan, including options to purchase 25,000 shares granted to
William R. Voss and options to purchase 13,920 shares granted to Diane J.
Beardsley. These grants will be effective as of the date of consummation of the
Offering and have an exercise price equal to the initial public offering price
and a three-year vesting schedule.
The Incentive Plan will remain in effect until terminated by the Board of
Directors. The Incentive Plan may be amended by the Board of Directors without
the consent of the stockholders of the Company, except that any amendment,
although effective when made, will be subject to stockholder approval if
required by any federal or state law or regulation or by the rules of any stock
exchange or automated quotation system on which the Common Stock may then be
listed or quoted.
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<PAGE> 45
The Incentive Plan also provides for (i) the automatic grant to each
Non-Employee Director serving at the closing of the Offering of an option to
purchase 10,000 shares of Common Stock and (ii) after the Offering, the
automatic grant to each Non-Employee Director of an option to purchase 10,000
shares upon such person's initial election as a director. In addition, the
Incentive Plan provides for an automatic annual grant to each Non-Employee
Director of an option to purchase 5,000 shares at each annual meeting of
stockholders following the Offering; provided, however, that if the first annual
meeting of stockholders following a person's initial election as a Non-Employee
Director is within three months of the date of such election or appointment,
such person will not be granted an option to purchase 5,000 shares of Common
Stock at such annual meeting. These options will have an exercise price per
share equal to the fair market value of a share of Common Stock at the date of
grant. Options granted under the Plan will expire at the earlier of 10 years
from the date of grant or one year after termination of service as a director.
EMPLOYEE STOCK PURCHASE PLAN
Prior to consummation of the Offering, the Company will adopt the Purchase
Plan, pursuant to which a total of 400,000 shares of Common Stock will be
reserved for issuance. The Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"),
permits eligible employees of the Company to purchase Common Stock through
payroll deductions with all such deductions credited to an account under the
Purchase Plan. Payroll deductions may not exceed $25,000 for all purchase
periods ending during any Plan Year (as hereinafter defined).
The Purchase Plan operates on a calendar year basis (the "Plan Year"). To
be eligible to participate during a Plan Year, an employee must file all
requisite forms prior to a specified due date known as the "Grant Date."
Generally, the first day of each Plan Year will be the Grant Date and the last
day of each Plan Year will be an Exercise Date (the "Exercise Date"). The
determination of the Grant Date and the Exercise Dates is completely within the
discretion of the Plan Committee. On each Exercise Date, participants' payroll
deductions credited to their accounts will be automatically applied to the
purchase price of Common Stock at a price per share which is the lesser of
eighty-five percent (85%) of the fair market value of the Common Stock on the
Grant Date or on the Exercise Date. Employees may end their participation in the
Purchase Plan at any time during an offering period, and their payroll
deductions to date will be refunded. Participation ends automatically upon
termination of employment with the Company.
Employees are eligible to participate in the Purchase Plan if they are
customarily employed by the Company or a designated subsidiary for at least 20
hours per week and for more than five months in any calendar year. No person
will be able to purchase Common Stock under the Purchase Plan if such person,
immediately after the purchase, would own stock possessing 5% or more of the
total combined voting power or value of all outstanding shares of all classes of
stock of the Company.
RETIREMENT PLAN
The Company has adopted a 401(k) retirement savings plan (the "Retirement
Plan") covering substantially all employees (including the Company's executive
officers) who are 21 and meet minimum length of service requirements. The
Retirement Plan is intended to qualify under Section 401(k) of the Code.
Under the current terms of the Retirement Plan, participants may elect to
defer up to $10,000 of their annual base compensation (subject to limitations
under the Code) and to have such deferred amount contributed to the Retirement
Plan on their behalf. In addition, the Company makes a 50% matching contribution
up to the first 6% of the annual base compensation deferred by a participant.
Salary deferral is fully vested, while the Company's matching contributions
are vested over time with full vesting occurring upon completion of seven years
of service. Benefits under the Retirement Plan generally will be distributed in
the form of a lump sum or installments following the participant's retirement,
death, disability or other termination of employment. Benefits may be
distributed prior to termination of employment under certain limited
circumstances, including hardship.
44
<PAGE> 46
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock by (i) each person known by
the Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director, (iii) each Named Executive and (iv) all executive
officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OWNED
-------------------
BEFORE AFTER
NAME SHARES(1) OFFERING OFFERING
- ---- --------- -------- --------
<S> <C> <C> <C>
Frontenac VI Limited Partnership(2)......................... 2,195,998 52.8% 29.5%
State of Wisconsin Investment Board(3)...................... 1,629,539 39.2 21.9
William R. Voss(4).......................................... 414,221 9.7 5.5
Roger S. McEniry(5)......................................... 2,215,998 53.1 29.6
George Mateljan, Jr.(6)..................................... 304,500 6.8 3.9
David S. Katz............................................... -- -- --
Timothy J. Healy(7)......................................... 14,492 * *
Lawrence A. Del Santo(8).................................... 19,570 * *
Diane J. Beardsley(9)....................................... 13,920 * *
Michael D. de Boom(9)....................................... 13,920 * *
William J. Nictakis(9)...................................... 27,840 * *
All directors and executive officers as a group (8
persons).................................................. 2,719,961 62.4% 35.5%
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated below, the persons in the above table have sole
voting and investment power with respect to all shares owned by them.
(2) The address of Frontenac VI is c/o Frontenac Company, 135 S. LaSalle
Street, Suite 3800, Chicago, Illinois 60604.
(3) The address of the State of Wisconsin Investment Board is 121 East Wilson,
Madison, Wisconsin 53702.
(4) Includes 96,570 shares which may be acquired within 60 days of consummation
of the Offering pursuant to the exercise of stock options held by Mr. Voss.
Mr. Voss' address is c/o Natural Nutrition Group, Inc., 135 S. LaSalle,
Suite 1134, Chicago, Illinois 60603.
(5) Includes (i) 20,000 shares of Common Stock issuable to Frontenac Company
upon the exercise of options which will be granted and which will be
exercisable on the date of consummation of the Offering as a result of Mr.
McEniry's and Mr. Katz' services as directors of the Company and (ii)
2,195,998 shares held by Frontenac VI. Mr. McEniry is a general partner of
Frontenac Company, which is a general partner of Frontenac VI, and, in such
capacity, shares voting and investment power with respect to shares held by
Frontenac VI and Frontenac Company. Under the applicable rules of the
Securities and Exchange Commission, Mr. McEniry may be deemed to
beneficially own the shares of Common Stock held by Frontenac VI and
Frontenac Company. Mr. McEniry disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest therein.
(6) Includes 304,500 shares which may be acquired within 60 days of the date of
consummation of the Offering pursuant to the exercise of stock options held
by Mr. Mateljan. Mr. Mateljan's address is c/o John A. Calfas, 11601
Wilshire Blvd., Los Angeles, California 90025.
(7) Includes 10,000 shares of Common Stock issuable upon the exercise of
options which will be granted and which will be exercisable on the date of
consummation of the Offering.
(8) Includes 9,570 shares which may be acquired within 60 days of the date of
consummation of the Offering pursuant to the exercise of stock options held
by Mr. Del Santo and an additional 10,000 shares of Common Stock issuable
upon exercise of options which will be granted and which will be
exercisable on the date of consummation of the Offering.
(9) Includes 13,920, 13,920 and 27,840 shares which may be acquired within 60
days of the date of consummation of the Offering pursuant to the exercise
of stock options held by Ms. Beardsley and Messrs. de Boom and Nictakis,
respectively.
45
<PAGE> 47
CERTAIN TRANSACTIONS
NNG was formed in 1995 by William R. Voss and Frontenac Company to acquire
and develop natural and organic food companies. At that time Frontenac VI, a
private equity investment fund of which Frontenac Company is the general
partner, and Mr. Voss purchased 1,305,000 and 145,000 shares of Common Stock,
respectively, for a price of $0.34 per share.
On April 15, 1996, NNG, through a subsidiary, acquired the stock of Health
Valley from George Mateljan, Jr. for approximately $34 million. In connection
with the Health Valley acquisition, Frontenac VI and the State of Wisconsin
Investment Board ("SWIB") purchased 748,136 and 1,523,529 shares of Common
Stock, respectively, for a price of $0.34 per share and 10,751.358 and 7,951.309
shares of Preferred Stock, respectively, for a price of $1,000 per share, and
Mr. Voss purchased 145,000 shares of Common Stock for a price of $0.34 per
share. NNG also entered into an option agreement pursuant to which NNG granted
to Mr. Voss options to purchase 96,570 shares of Common Stock for an exercise
price which increases over time from $0.34 to $5.48 per share.
In connection with the Health Valley acquisition, the Company paid
Frontenac Company a fee of $395,233 for advisory and other services and SWIB a
commitment fee of approximately $85,000.
In connection with the Health Valley acquisition, the Company's Health
Valley subsidiary entered into an option agreement pursuant to which Health
Valley agreed to sell to George Mateljan, Jr. 100 shares of its common stock for
$22,222.22 per share (the "Health Valley Option").
In October 1996, the Company acquired the stock of Breadshop for
approximately $9 million. In connection with the Breadshop acquisition,
Frontenac Company was paid a fee of $100,000 for advisory services. In
connection with the Breadshop acquisition, Frontenac VI loaned the Company
$1,000,000 (the "Frontenac Loan"). On January 28, 1997 Frontenac VI, SWIB and
Timothy J. Healy, a director of the Company, purchased 142,862, 106,009 and
4,492 shares of Common Stock, respectively, for a price of $0.34 per share and
476.25, 353.40 and 23.451 shares of Series A Preferred Stock, respectively, for
a price of $1,000 per share, and Mr. Voss purchased 27,651 shares of Common
Stock for a price of $0.34 per share. The proceeds from the sale of these shares
were used to repay the Frontenac Loan.
In September 1997, in connection with the resolution of all outstanding
issues between the Company and George Mateljan, Jr. relating to the Health
Valley acquisition, $1,793,320 held in escrow was paid to the Company and
$367,878 was paid to Mr. Mateljan. In addition, Mr. Mateljan exchanged the
Health Valley Option for an option to purchase 406,000 shares of Common Stock
and an unspecified number of shares of Series A Preferred Stock of the Company
to be determined based on the number of shares of Series A Preferred Stock
redeemed prior to the exercise of the option. As a result of the redemption of
the Series A Preferred Stock with the proceeds of the Offering, no shares of
Series A Preferred Stock will be issuable upon exercise of this option. The
purchase price for the Common Stock upon exercise of the option held by Mr.
Mateljan is $0.34 per share.
From the Company's inception in October 1995 through April 19, 1997, the
Company paid Frontenac Company fees totalling $100,000 for the services of
Messrs. McEniry and Katz as directors of the Company during that period. Since
April 19, 1997 the Company has paid Frontenac Company a quarterly fee of $25,000
for those services.
COMPANY POLICY
In the future, any transactions with officers, directors and affiliates
will be approved by a majority of the Board, including a majority of the
disinterested members of the Board, and will be made on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
46
<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, 35,000 shares of Series A Preferred Stock, par value $.001 per
share ("Series A Preferred Stock"), and 2,000,000 shares of preferred stock,
$.01 par value per share ("Preferred Stock"). The 19,566.667 shares of Series A
Preferred Stock which are issued and outstanding will be redeemed with the
proceeds of the Offering.
COMMON STOCK
Of the 50,000,000 shares of Common Stock authorized, 7,456,664 shares will
be outstanding upon consummation of the Offering. Subject to the rights of the
holders of Preferred Stock, the holders of outstanding shares of Common Stock
are entitled to share ratably in dividends declared out of assets legally
available therefor at such time and in such amounts as the Board of Directors
may from time to time lawfully determine. Each holder of Common Stock is
entitled to one vote for each share held. Subject to the rights of holders of
any outstanding Preferred Stock, upon liquidation, dissolution or winding up of
the Company, any assets legally available for distribution to stockholders as
such are to be distributed ratably among the holders of the Common Stock then
outstanding. All shares of Common Stock currently outstanding are, and all
shares of Common Stock offered hereby when duly issued and paid for will be,
fully paid and nonassessable. Shares of Common Stock are not subject to any
redemption provisions and are not convertible into any other securities of the
Company.
The Board of Directors is classified into three classes as nearly equal in
number as possible, with the term of each class expiring on a staggered basis.
See "Management -- Board of Directors." The classification of the Board of
Directors may make it more difficult to change the composition of the Board of
Directors and thereby may discourage or make more difficult an attempt by a
person or group to obtain control of the Company. Cumulative voting for the
election of directors is not permitted, enabling holders of a majority of the
outstanding Common Stock to elect all members of the class of Directors whose
terms are then expiring.
PREFERRED STOCK
As of June 30, 1998, the Company's issued and outstanding Preferred Stock
consisted of 19,566.667 shares of Series A Preferred Stock held by five
stockholders of record. Upon the closing of the Offering, each outstanding share
of Series A Preferred Stock will be redeemed with a portion of the proceeds of
the Offering. The Series A Preferred Stock ranks senior to the Common Stock as
to distributions upon liquidation, dissolution and winding up of the Company.
Except as required by law, the holders of shares of Series A Preferred Stock are
not entitled to vote on matters presented to the stockholders of the
Corporation. Dividends accrue on the outstanding shares of Series A Preferred
Stock at a rate of 10% per annum, compounded quarterly. All accrued and unpaid
dividends must be paid before any dividend or other payment may be made with
respect to the Common Stock. Unless the Series A Preferred Stock is redeemed
prior thereto, the Company is required to redeem 50% of the shares Series A
Preferred Stock on April 15, 2003 and the balance on April 15, 2004 for a price
of $1,000 per share plus all accrued and unpaid dividends. The Company is also
required to redeem all of the shares of Series A Preferred Stock on a sale of
the Company, a change of control or a similar transaction. At the Company's
option, the Company may redeem up to 10,000 shares of Series A Preferred Stock
prior to a public offering of the Company's equity securities and all of the
shares of Series A Preferred Stock after a public offering of the Company's
equity securities. Under certain circumstances, such as breaches of certain
covenants by the Company, the holders of a majority of the shares of Series A
Preferred Stock may require the Company to redeem all of the shares of Series A
Preferred Stock.
The Certificate of Incorporation of the Company authorizes the Board of
Directors to issue, in addition to the Series A Preferred Stock, up to 2,000,000
shares of preferred stock in classes or series and to establish the
designations, preferences, qualifications, limitations or restrictions of any
class or series with respect to, among other things, the rate and nature of
dividends, the price, terms and conditions on which shares may be redeemed, the
terms and conditions for conversion or exchange into any other class or series
of the stock and voting rights. The Company will have authority, without
approval of the holders of Common Stock, to issue preferred stock that has
voting, dividend or liquidation rights superior to the Common Stock and that may
47
<PAGE> 49
adversely affect the rights of holders of Common Stock. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the voting power of the holders of Common Stock and could have the effect
of delaying, deferring or preventing a change in control of the Company. The
Company currently has no plans to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.
CERTAIN PROVISIONS AFFECTING STOCKHOLDERS
Delaware, like many other states, permits a corporation to adopt a number
of measures through amendment of the corporate charter or bylaws or otherwise,
which may have the effect of delaying or deterring any unsolicited takeover
attempts. In addition, Section 203 of the Delaware General Corporation Law
restricts certain "business combinations" with "interested stockholders"
(generally a holder of 15% or more of the Company's voting stock) for three
years following the date that person becomes an interested stockholder. By
delaying or deterring unsolicited takeover attempts, these provisions could
adversely affect prevailing market prices for the Common Stock.
The Company's Certificate of Incorporation contains certain provisions
permitted under the Delaware General Corporation Law relating to the liability
of directors. The provisions eliminate a director's liability to the Company and
its stockholders for monetary damages for a breach of fiduciary duty, except in
circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. The Certificate of Incorporation also
contains provisions obligating the Company to indemnify its directors to the
fullest extent permitted by the Delaware General Corporation Law. The Company
believes that these provisions will assist the Company in attracting and
retaining qualified individuals to serve as directors.
SHARES ELIGIBLE FOR FUTURE SALE
After the Offering, the Company will have outstanding 7,456,664 shares of
Common Stock. The 3,300,000 shares being sold in the Offering are freely
tradable without restriction unless acquired by affiliates of the Company. None
of the remaining 4,156,664 outstanding shares of Common Stock have been
registered under the Securities Act, which means that they may be resold
publicly only upon registration under the Securities Act or in compliance with
an exemption from the registration requirements of the Securities Act, including
the exemption provided by Rule 144 thereunder. In addition, upon consummation of
the Offering, 1,200,000 shares will be reserved for issuance under the Incentive
Plan and Purchase Plan. Of the currently outstanding options to purchase Common
Stock and options to be granted upon consummation of the Offering, options to
purchase 640,300 shares of Common Stock will be exercisable within 60 days of
the consummation of the Offering, subject to lock-up agreements. See
"Underwriting." Prior to the expiration of the lock-up period, the Company
intends to file a registration statement on Form S-8 covering shares issuable
upon exercise of stock options granted under the Company's stock option plans.
Such shares, upon issuance, will be immediately available for resale (in the
case of holders who are affiliates of the Company, subject to certain
limitations of Rule 144 under the Securities Act), subject to lock-up
agreements. Following the expiration or release of lock-up agreements,
"restricted securities" held by certain stockholders will be available for
public resale in accordance with Rule 144 under the Securities Act.
48
<PAGE> 50
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of the acquisition of restricted shares of Common
Stock from either the Company or any affiliate of the Company, the acquiror or
subsequent holder thereof may sell, within any three-month period commencing 90
days after the date of the Prospectus relating to the Offering, a number of
shares that does not exceed the greater of one percent of the then outstanding
shares of the Common Stock, or the average weekly trading volume of the Common
Stock on the Nasdaq National Market during the four calendar weeks preceding the
date on which notice of the proposed sale is sent to the Commission. Sales under
Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. If two years have elapsed since the later of the date of the
acquisition of restricted shares of Common Stock from the Company or any
affiliate of the Company, a person who is not deemed to have been an affiliate
of the Company at any time for 90 days preceding a sale would be entitled to
sell such shares under Rule 144 without regard to the volume limitations, manner
of sale provisions or notice requirements.
The Company and its officers, directors, present stockholders and option
holders have agreed not to offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of BT Alex. Brown Incorporated
except for (i) in the case of the Company, Common Stock issued pursuant to any
employee or director plan described herein or in connection with acquisitions
and (ii) in the case of all such holders, the exercise of stock options pursuant
to benefit plans described herein and shares of Common Stock disposed of as bona
fide gifts, subject, in each case, to any remaining portion of the 180-day
period applying to any shares so issued or transferred. In evaluating any
request for a waiver of the 180-day lock-up period, BT Alex. Brown Incorporated
will consider, in accordance with its customary practice, all relevant facts and
circumstances at the time of the request, including, without limitation, the
recent trading market for the Common Stock, the size of the request and, with
respect to a request by the Company to issue additional equity securities, the
purpose of such an issuance.
Sales, or the availability for sale of, substantial amounts of the Common
Stock in the public market could adversely affect prevailing market prices and
the ability of the Company to raise equity capital in the future.
REGISTRATION RIGHTS
The holders of approximately 4,156,664 shares of Common Stock and the
holders of options to purchase 406,000 shares of Common Stock are entitled,
subject to certain conditions, to require the Company to file a registration
statement under the Securities Act of 1933, as amended, covering the sale of
such shares. The Company is obligated to effect two "long form" registrations
(registrations on the Commission's Form S-1 or S-2). There is no limit on the
number of "short form" registrations. In addition, if the Company proposes to
register any of its securities under the Securities Act (other than pursuant to
a registration statement on Form S-4 or Form S-8), such holders are entitled to
include their shares of Common Stock therein, except that, among other
conditions, the underwriters of an offering have the right to limit the number
of shares included in such a registration. Pursuant to the terms of its
agreement with such holders, the Company is required to pay the expenses of all
such registrations, except for underwriting discounts and commissions. All such
holders have waived their registration rights with respect to this Offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
ChaseMellon Shareholder Services LLC.
49
<PAGE> 51
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom BT Alex. Brown Incorporated and Adams, Harkness & Hill, Inc. are acting as
representatives (the "Representatives"), has severally agreed to purchase from
the Company, the aggregate number of shares of Common Stock set forth opposite
its name below at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
BT Alex. Brown Incorporated.................................
Adams, Harkness & Hill, Inc. ...............................
Total............................................. 3,300,000
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the shares of Common
Stock offered by this Prospectus (other than those subject to the over-allotment
option described below) if any such shares are purchased. In the event of a
default by the Underwriters, the Underwriting Agreement provides that, in
certain circumstances, the purchase commitments of non-defaulting Underwriters
may be increased or the Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, exercisable by the
Representatives during the 30-day period after the date of this Prospectus, to
purchase up to an aggregate of 495,000 shares of Common Stock at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus. The Representatives may exercise such option only
to cover over-allotments in the sale of shares of Common Stock. To the extent
that the Representatives exercise such option, each of the Underwriters will
have a firm commitment, subject to certain conditions, to purchase the same
proportion of such additional shares of Common Stock as the number of shares of
Common Stock to be purchased and offered by such Underwriter in the above table
bears to the total number of shares in the above table.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the shares of Common Stock to the public at the
offering price set forth on the cover page of this Prospectus, and through the
Representatives to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
Offering, the public offering price and other selling terms may be changed.
The Company and its officers, directors, present stockholders and option
holders have agreed not to offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of BT Alex. Brown Incorporated
except for (i) in the case of the Company, Common Stock issued pursuant to any
employee or director plan described herein or in connection with acquisitions
and (ii) in the case of all such holders, the exercise of stock options pursuant
to benefit plans described herein and shares of Common Stock disposed of as bona
fide gifts, subject, in each case, to any remaining portion of the 180-day
period applying to any shares so issued or transferred. In evaluating any
request for a waiver of the 180-day lock-up period, BT Alex. Brown Incorporated
will consider, in accordance with its customary practice, all relevant facts and
circumstances at the time of the request, including, without limitation, the
recent trading market for the Common Stock, the size of the request and, with
respect to a request by the Company to issue additional equity securities, the
purpose of such an issuance.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
50
<PAGE> 52
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock will
be determined after negotiation between the Company and the Representatives.
Among the factors to be considered in such negotiations are prevailing market
conditions, the results of operations of the Company in recent periods, the
market capitalization and stages of development of other companies which the
Company and the Representatives believe to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant.
In connection with the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the Common Stock. Specifically, the Representatives may bid for and
purchase Common Stock in the open market to stabilize the price of the Common
Stock. The Underwriters may also over-allot the Offering, creating a syndicate
short position, and may bid for and purchase Common Stock in the open market to
cover the syndicate short position. Stabilizing transactions consist of certain
bids or purchases for the purpose of preventing or retarding a decline in the
market price of the Common Stock. The Representatives may also impose a penalty
bid pursuant to which the Representatives may reclaim from any Underwriter or
dealer participating in the Offering the selling concession on shares sold by
them and purchased by the Representatives in stabilizing or short covering
transactions. In addition, the Underwriters may bid for and purchase the Common
Stock in market making transactions. These activities may stabilize or maintain
the market price of the Common Stock above market levels that may otherwise
prevail. The Underwriters are not required to engage in these activities, and
may end these activities at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
The Underwriters have reserved for sale, at the initial public offering
price, up to 5.0% of the Common Stock offered hereby for employees and directors
of the Company and certain other individuals who have expressed an interest in
purchasing such shares of Common Stock in the Offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the Underwriters to the general public on the same basis as other
shares offered hereby.
The Underwriters have informed the Company that they do not intend to
confirm sales of Common Stock offered hereby for accounts over which they
exercise discretionary authority.
CERTAIN LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Katten Muchin & Zavis, Chicago, Illinois. Certain legal
matters will be passed upon for the Underwriters by Latham & Watkins,
Washington, D.C.
EXPERTS
The consolidated financial statements and financial statement schedules of
the Company as of December 31, 1996 and 1997 and for the year ended December 31,
1995 and the period January 1, 1996 through April 15, 1996 (the Predecessor
Company), the period April 16, 1996 through December 31, 1996 and the year ended
December 31, 1997 included in the Registration Statement and this Prospectus
have been audited by Deloitte & Touche LLP, independent accountants, as stated
in their reports appearing herein and elsewhere in the Registration Statement,
and are included in reliance upon the reports of such firm given upon their
authority as experts in auditing and accounting.
51
<PAGE> 53
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (which term shall encompass any and all amendments thereto) under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. Statements contained in this Prospectus
as to the contents of any contract or any other document are not necessarily
complete and in each instance reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. For further information with
respect to the Company, reference is hereby made to the Registration Statement
and such exhibits and schedules filed as a part thereof, which may be inspected
without charge, at the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. The Commission maintains a web site that
contains reports, proxy and information statements regarding registrants that
file electronically with the SEC. The address of this web site is
(http://www.sec.gov). Copies of all or any portion of the Registration Statement
may be obtained from the Public Reference Section of the Commission, upon
payment of the prescribed fees.
52
<PAGE> 54
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Natural Nutrition Group, Inc. (formerly known as Intrepid
Food Holdings, Inc.) and Subsidiaries
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1996,
December 31, 1997 and March 31, 1998 (unaudited)....... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1997, the Combined Statements of
Operations for the year ended December 31, 1995 and the
period from January 1, 1996 to April 15, 1996
(Predecessor Company) and the Consolidated Statements
of Operations for the three months ended March 31, 1997
and 1998 (unaudited)................................... F-4
Consolidated Statements of Stockholders' Deficit for the
years ended December 31, 1996 and 1997, and the three
months ended March 31, 1998 (unaudited)................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1997, the Combined Statements of
Cash Flows for the year ended December 31, 1995 and the
period from January 1, 1996 to April 15, 1996
(Predecessor Company) and the Consolidated Statements
of Cash Flows for the three months ended March 31, 1997
and 1998 (unaudited)................................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Natural Nutrition Group, Inc. (formerly known as Intrepid Food Holdings, Inc.)
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Natural
Nutrition Group, Inc. (formerly known as Intrepid Food Holdings, Inc.) and
subsidiaries (the Company) as of December 31, 1996 and 1997 (successor company
balance sheets), and the related consolidated statements of operations,
stockholders' deficit and cash flows for the years then ended (successor company
operations) and the combined statements of operations and cash flows for the
year ended December 31, 1995 and the period from January 1, 1996 to April 15,
1996 (Predecessor Company operations). 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, such successor company financial statements present fairly,
in all material respects, the consolidated financial position of Natural
Nutrition Group, Inc. (formerly known as Intrepid Food Holdings, Inc.) and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the periods then ended in conformity with
generally accepted accounting principles. Further, in our opinion, the
Predecessor Company combined financial statements referred to above present
fairly, in all material respects, the Predecessor Company's results of
operations and cash flows for the year ended December 31, 1995 and the period
from January 1, 1996 to April 15, 1996 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Costa Mesa, California
February 20, 1998
(April 9, 1998 as to Note 7,
July 24, 1998 as to the effects of
the stock split described in Note 1)
F-2
<PAGE> 56
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash........................................................ $ 313 $ 1 $ 1
Accounts receivable (net of allowance for doubtful accounts
of $1,334 (1996), $1,421 (1997) and $1,347 (1998),
respectively)............................................. 3,767 4,009 3,330
Other receivables........................................... 459 187 28
Inventories (Note 4)........................................ 4,985 5,278 4,998
Deferred income taxes (Note 3).............................. 2,741 2,188 2,188
Prepaid expenses and other current assets................... 328 376 310
------- ------- -------
Total current assets............................... 12,593 12,039 10,855
PLANT AND EQUIPMENT, net (Note 5)........................... 26,374 23,358 22,603
INTANGIBLE AND OTHER ASSETS, net (Note 6)................... 14,363 14,815 14,859
------- ------- -------
$53,330 $50,212 $48,317
======= ======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdraft.............................................. $ 639 $ 1,315 $ 717
Accounts payable............................................ 2,084 1,474 2,161
Accrued liabilities......................................... 6,358 3,878 3,617
Current portion of long-term debt (Note 7).................. 3,146 2,855 2,866
Current portion of capital lease obligations (Note 8)....... 809 170 45
------- ------- -------
Total current liabilities.......................... 13,036 9,692 9,406
LONG-TERM LIABILITIES:
Long-term debt, net of current portion (Note 7)............. 19,116 18,835 17,234
Deferred income taxes (Note 3).............................. 1,102 1,048 1,048
Other accrued expenses...................................... 607 251 251
Capital lease obligations, net of current portion (Note
8)........................................................ 188
------- ------- -------
Total long-term liabilities........................ 21,013 20,134 18,533
COMMITMENTS AND CONTINGENCIES (Note 9)
MANDATORY REDEMPTION SERIES A PREFERRED STOCK at redemption
value including cumulative dividends in arrears of $1,330,
$3,412 and $3,983 in December 31, 1996 and 1997 and March
31, 1998, respectively; 18,667, 19,567 and 19,567 shares
outstanding in December 31, 1996 and 1997 and March 31,
1998, respectively (Note 10).............................. 19,997 22,979 23,550
STOCKHOLDERS' DEFICIT:
Preferred stock, par value $.001 per share, 2,000,000 shares
authorized, no shares issued and outstanding.............. -- -- --
Common stock, $.001 par value; 65,000 shares authorized at
December 31, 1996 and 1997 and 50,000,000 shares
authorized at March 31, 1998; 3,866,664, 4,156,664 and
4,156,664 shares issued and outstanding at December 31,
1996 and 1997 and March 31, 1998, respectively............ 4 4 4
Additional paid-in capital.................................. 1,329 1,429 1,429
Accumulated deficit......................................... (2,049) (4,026) (4,605)
------- ------- -------
Total stockholders' deficit........................ (716) (2,593) (3,172)
------- ------- -------
$53,330 $50,212 $48,317
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 57
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1
DECEMBER 31, TO APRIL 15, THREE MONTHS ENDED
1995 1996 YEAR ENDED DECEMBER 31, MARCH 31,
(PREDECESSOR (PREDECESSOR ----------------------- -----------------------
COMPANY) COMPANY) 1996 1997 1997 1998
------------ ------------ ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales................. $73,351 $18,221 $ 39,942 $ 67,898 $ 16,299 $ 17,568
Cost of sales............. 53,839 13,897 27,180 42,370 10,627 10,960
------- ------- ---------- ---------- ---------- ----------
Gross profit.............. 19,512 4,324 12,762 25,528 5,672 6,608
Operating expenses:
Marketing, selling and
distribution......... 16,651 5,563 7,177 17,366 3,832 4,891
General and
administrative....... 6,541 2,937 5,148 5,759 1,324 1,292
------- ------- ---------- ---------- ---------- ----------
Total operating
expenses...... 23,192 8,500 12,325 23,125 5,156 6,183
------- ------- ---------- ---------- ---------- ----------
Operating income (loss)... (3,680) (4,176) 437 2,403 516 425
Other income.............. 645 169
Interest expense.......... 1,502 476 1,052 1,911 497 458
------- ------- ---------- ---------- ---------- ----------
Income (loss) before
provision (benefit) for
income taxes............ (4,537) (4,483) (615) 492 19 (33)
Provision (benefit) for
income taxes (Note 3)... 1,137 (1,166) 13 387 17 (25)
------- ------- ---------- ---------- ---------- ----------
Net income (loss)......... (5,674) (3,317) (628) 105 2 (8)
Preferred dividends (Note
10)..................... 1,330 2,082 514 571
------- ------- ---------- ---------- ---------- ----------
Net loss attributable to
common stockholders..... $ -- $ -- $ (1,958) $ (1,977) $ (512) $ (579)
======= ======= ========== ========== ========== ==========
Net loss per share --
Basic and Diluted....... $ (.62) $ (.48) $ (.13) $ (.14)
========== ========== ========== ==========
Weighted average number of
common shares
outstanding............. 3,161,737 4,132,491 4,059,967 4,156,664
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 58
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997, AND
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
--------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995................. 1,450,000 $2 $ 498 $ (91) $ 409
Issuance of common stock on April 12,
1996..................................... 2,416,664 2 831 833
Preferred dividend (Note 10)............... (1,330) (1,330)
Net loss................................... (628) (628)
--------- -- ------ ------- -------
BALANCE, December 31, 1996................. 3,866,664 4 1,329 (2,049) (716)
Issuance of common stock on January 28,
1997..................................... 290,000 100 100
Preferred dividend (Note 10)............... (2,082) (2,082)
Net income................................. 105 105
--------- -- ------ ------- -------
BALANCE, December 31, 1997................. 4,156,664 4 1,429 (4,026) (2,593)
Preferred dividend (Note 10)............... (571) (571)
Net loss................................... (8) (8)
--------- -- ------ ------- -------
BALANCE, March 31, 1998.................... 4,156,664 $4 $1,429 $(4,605) $(3,172)
========= == ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 59
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 1, THREE MONTHS
DECEMBER 31, TO APRIL 15, YEARS ENDED ENDED
1995 1996 DECEMBER 31, MARCH 31,
(PREDECESSOR (PREDECESSOR ------------------ -----------------
COMPANY) COMPANY) 1996 1997 1997 1998
------------ ------------ -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.......................................... $(5,674) $(3,317) $ (628) $ 105 $ 2 $ (8)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization............................ 3,368 989 2,344 3,445 903 917
Deferred income taxes.................................... 667 152 (187) 499 148
Gain on sale of plant and equipment...................... (25) (31) (24) (9)
Effect on cash of changes in operating assets and
liabilities, net of effects of acquisitions:
Accounts receivable, net............................... 2,804 1,200 634 (243) (607) 680
Inventories............................................ 2,860 1,899 (333) (292) 432 280
Prepaid expenses and other current assets.............. 214 (1,396) 972 224 (131) 225
Accounts payable....................................... 513 (893) (1,061) (610) (55) 687
Accrued liabilities.................................... 431 2,576 602 (2,836) 106 (262)
------- ------- -------- ------- ------- -------
Net cash provided by operating activities............ 5,158 1,210 2,312 268 789 2,519
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment............................ (1,602) (108) (62) (446) (192) (60)
Acquisitions, net of cash acquired......................... (43,592)
Proceeds from sale of plant and equipment.................. 49 31 390 350 50
(Increase) decrease in intangible and other assets......... (63) (7) 424 (801) (505) (196)
------- ------- -------- ------- ------- -------
Net cash used in investing activities................ (1,616) (115) (43,199) (857) (347) (206)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving line of credit/bank
overdraft................................................ (932) -- 2,356 3,250 (49) (1,464)
Proceeds from long-term debt............................... 1,234 19,012
Principal payments on long-term debt....................... (3,903) (559) (690) (3,448) (1,180) (849)
Issuance of common stock................................... 833 51 51
Issuance of mandatory redemption preferred stock........... 18,667 424 424
------- ------- -------- ------- ------- -------
Net cash (used in) provided by financing
activities......................................... (3,601) (559) 40,178 277 (754) (2,313)
------- ------- -------- ------- ------- -------
NET (DECREASE) INCREASE IN CASH............................ (59) 536 (709) (312) (312) --
CASH, beginning of period.................................. 64 5 1,022 313 313 1
------- ------- -------- ------- ------- -------
CASH, end of period........................................ $ 5 $ 541 $ 313 $ 1 $ 1 $ 1
======= ======= ======== ======= ======= =======
SUPPLEMENTAL INFORMATION --
Cash paid during the year for:
Interest............................................... $ 1,406 $ 370 $ 1,886 $ 978 $ 275 $ 314
======= ======= ======== ======= ======= =======
Income taxes........................................... $ 28 $ 206 $ 406 $ 4 $ 11 $ --
======= ======= ======== ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of preferred and common stock in exchange for
debt..................................................... $ -- $ 525 $ 525 $ --
======== ======= ======= =======
Mandatory accrued preferred dividends...................... $ 1,330 $ 2,082 $ 514 $ 571
======== ======= ======= =======
Purchase of acquisitions, net of cash acquired:
April 15, 1996 acquisition of Health Valley Company:
Fair value of assets................................... $ 43,462
Goodwill............................................... 4,902
Liabilities assumed.................................... (14,025)
--------
Net cash used to acquire business.................... 34,339
October 31, 1996 acquisition of The Breadshop:
Fair value of assets................................... 2,472
Trademarks............................................. 5,493
Goodwill............................................... 3,519
Liabilities assumed.................................... (2,231)
--------
Net cash used to acquire business.................... 9,253
--------
Net cash used to acquire businesses.................. $ 43,592
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 60
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- Natural Nutritional Group, Inc. (formerly known as Intrepid
Food Holdings, Inc.) (NNG or the Company) was incorporated in the State of
Delaware in October 1995 to acquire and develop natural and organic food
companies. In April 1996, NNG acquired the outstanding capital stock of Health
Valley Foods, Inc. and Health Valley Manufacturing Company (Predecessor
Company). In October 1996, the Company acquired The Breadshop, Inc. (Breadshop)
(Note 2).
The Company is a manufacturer and marketer of premium natural and organic
food products in the United States. The Company markets (i) breakfast cereals
and granolas, (ii) granola bars, cereal bars, cookies, crackers and other baked
goods and (iii) canned and instant soups and chilis, as well as other food
products, primarily under its Health Valley(R) and Breadshop's(R) brands.
Basis of Presentation -- The accompanying consolidated statements of
operations and cash flow include the combined activities of the Predecessor
Company for the year ended December 31, 1995 and the period January 1, 1996 to
April 15, 1996 prior to acquisition by the Company. The operations of NNG for
the period October 2, 1995 (inception) to December 31, 1995 were not significant
and have not been included. The results of the Company are not comparable to
those of the Predecessor Company due to the changes in capital structure to fund
the acquisitions, which included the issuance of preferred stock and the
incurrence of additional debt. Additionally, the purchase accounting adjustments
related to the acquisitions changed the cost basis of the Company's fixed
assets, trademarks and resulting goodwill. Certain amounts in the 1996 financial
statements have been reclassified to conform with the 1997 presentation.
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts and operations of NNG and its subsidiaries. All
material intercompany balances and transactions have been eliminated.
Stock Split -- Immediately prior to the consummation of a public offering
of the Company's Common Stock, the Company effected a 290-for-1 stock split of
its Common Stock. All share and per share amounts included in the accompanying
consolidated financial statements and footnotes have been restated to reflect
the stock split.
Basic and Fully Diluted Per Share Information -- In February 1997, the
Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings per
Share, which is effective for financial statements for interim and annual
periods ending after December 15, 1997. SFAS No. 128 redefines earnings per
share under generally accepted accounting principles.
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the periods presented. Diluted net
income (loss) per share is computed using the weighted average number of common
and common equivalent shares outstanding during the periods presented assuming
the exercise of the Company's stock options.
Basic and diluted loss per share is based on the weighted average number of
common shares outstanding. Common stock equivalents were not included in the
computation of Diluted EPS because such inclusion would have been antidilutive
for the years ended December 31, 1996 and 1997 and the three months ended March
31, 1997 and 1998. The Predecessor Company earnings per share data have been
excluded from the statement of operations, as such information is not relevant
to the Company's capital structure.
Unaudited Information -- The accompanying consolidated balance sheet as of
March 31, 1998 and the related consolidated statements of operations and cash
flows for the three months ended March 31, 1997 and
F-7
<PAGE> 61
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 1998, have been prepared by the Company, without audit, in accordance
with generally accepted accounting principles for interim financial information
and, in the opinion of management, contain all adjustments consisting only of
normal recurring accruals necessary for a fair presentation of such information.
Inventories -- Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market value.
Plant and Equipment -- Plant and equipment, including capitalized lease
assets, are stated at cost. Depreciation is provided for on the straight-line
method over the lesser of the estimated useful lives of the assets or the lease
term. Amortization of leasehold improvements is based on the lesser of their
estimated useful lives or the terms of the related leases and is calculated
using the straight-line method. Useful lives are as follows:
<TABLE>
<S> <C>
Machinery and equipment..................................... 3 to 20 years
Furniture and fixtures...................................... 3 to 14 years
Leasehold improvements...................................... 5 to 10 years
</TABLE>
Repairs and maintenance are expensed as incurred, whereas significant
improvements, which materially increase values or extend useful lives, are
capitalized and depreciated over the estimated useful lives of the related
assets. The cost of assets retired or otherwise disposed of and the related
accumulated depreciation are eliminated from the accounts in the year of
disposal. Gains or losses resulting from the disposal of assets are charged or
credited to operations as incurred.
Fair Value of Financial Instruments -- The carrying values of accounts
receivable and accounts payable approximate fair value due to the short
maturities of such instruments. The carrying values of term loans approximate
fair value due to the fact that they are based on variable interest rates.
Intangible and Other Assets -- The excess of purchase price over the fair
value of net assets acquired, as well as trademarks related to the Breadshop
acquisition, are included in intangible and other assets and are being amortized
on a straight-line basis over a 40-year period. Accumulated amortization of
intangibles amounted to $113, $447 and $528 at December 31, 1996 and 1997 and
March 31, 1998, respectively.
In 1997, the Company undertook a program to update its packaging designs.
Costs of $420, associated with development of new packaging designs, were
capitalized and will be amortized over three years, beginning with related
product shipments in 1998.
Revenue Recognition -- The Company records revenue at the time the related
products are shipped to the customer.
Customer Concentration -- The Company had significant sales to (a) three
individual retailers who accounted for 13%, 12% and 10% of revenue for the
fiscal year ending December 31, 1995, (b) a significant distributor who
accounted for 14% of revenue for each of 1996 and 1997 and (c) a significant
distributor who accounted for 13% of revenue for 1997. Given the significant
amount of revenues derived from certain customers, collectibility issues arising
from financial difficulties of any of these customers or the loss of any such
customers could have a material adverse effect on the Company's business.
Vendor Concentration -- The Company utilizes a single-contract manufacturer
for the production of canned soups and chilis, which accounted for approximately
25% of revenues for the years ended December 31, 1995, 1996 and 1997. The
inability of the contract manufacturer to supply the Company with sufficient
product quantities in a timely manner could have a material adverse effect until
alternative sources could be identified or developed.
Customer Rebates -- The Predecessor Company had historically provided a $5
rebate to customers who returned 20 proof-of-purchase labels. Management decided
to discontinue this program during 1996, and a
F-8
<PAGE> 62
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reserve was established to approximate the remaining cost of the program based
on the number of products out at the retail level that reflected this offer.
Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Long-Lived Assets -- In accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, the Company periodically evaluates the
recoverability of the net carrying value of plant and equipment and intangible
assets using current and anticipated net income and undiscounted cash flows,
and, if necessary, an impairment is recorded. The Company has recorded no such
impairment in 1995, 1996 and 1997.
Comprehensive Income -- The Company adopted SFAS No. 130, Reporting
Comprehensive Income, on January 1, 1998. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company does not have any
comprehensive income components requiring separate disclosure.
New Accounting Pronouncements -- For the fiscal year beginning January 1,
1999, the Company will adopt SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information and SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. The Company is reviewing the
impact of the adoption of these pronouncements on its consolidated financial
statements.
Stock-Based Compensation -- The Financial Accounting Standards Board's SFAS
No. 123, Accounting for Stock-Based Compensation, requires expanded disclosures
of stock-based compensation arrangements with employees. The standard defines a
fair value method of accounting for stock options and other equity instruments.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period,
which is usually the vesting period. As permitted by the SFAS No. 123, the
Company has elected to continue to account for such transactions under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and discloses, in a note to the financial statements, pro forma net
income and earnings per share as if the Company had applied the fair value
method of accounting. The Company will continue to use APB Opinion No. 25 for
measurement and recognition of employee stock-based transactions.
2. ACQUISITIONS
On April 15, 1996, pursuant to a stock purchase agreement, NNG acquired all
of the outstanding capital stock of the Predecessor Company for $34,339, in
cash, including $2,339 in transaction costs. Additionally, pursuant to the stock
purchase agreement the former owner was granted an option to purchase 100 shares
of common stock of Health Valley at $22,222.22 per share. During 1997, this
option was terminated and a new option was issued. The new option enables the
former owner to purchase 406,000 shares of NNG ("Common Stock") at $.34 per
share, and up to an unspecified number of shares of Series A Preferred Stock to
be determined based on the number of shares of Series A Preferred Stock redeemed
prior to the exercise of such option at $1,000 per share.
The acquisition was accounted for using the purchase method. Accordingly,
the purchase price was allocated to assets acquired based on their estimated
fair values. This treatment resulted in approximately $4,902 of cost in excess
of the fair value of net assets acquired. This goodwill is being amortized on a
F-9
<PAGE> 63
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
straight-line basis over 40 years. Health Valley results of operations have been
included in the accompanying financial statements from the date of acquisition.
On October 31, 1996, the Company completed its acquisition of all of the
outstanding capital stock of Breadshop for $9,253 in cash, including $502 in
transaction costs. The acquisition was accounted for using the purchase method.
Accordingly, the purchase price was allocated to assets acquired based on their
estimated fair values. This treatment resulted in approximately $3,519 of cost
in excess of the fair value of net assets acquired as of October 31, 1996, and a
trademark valuation of $5,493. These amounts are being amortized on a
straight-line basis over 40 years. Breadshop's results have been included in the
accompanying consolidated financial statements from the date of acquisition. The
results of the Company, had Breadshop been acquired as of April 15, 1996 and
included in the accompanying financial statements, would be as follows:
<TABLE>
<S> <C>
Revenues.................................................... $ 45,969
=========
Net loss.................................................... $ (779)
=========
Net loss per share -- basic and diluted..................... $ (.19)
=========
Weighted average number of common shares outstanding........ 4,132,491
=========
</TABLE>
3. INCOME TAXES
In accordance with SFAS No. 109, Accounting for Income Taxes, deferred tax
assets and deferred tax liabilities reflect the tax consequences in future years
of differences between the income tax bases of assets and liabilities and the
corresponding bases used for financial reporting purposes. Measurement of the
deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of
the Company's assets and liabilities result in a deferred tax asset, SFAS No.
109 requires an evaluation of the probability of being able to realize the
future benefits indicated by such asset. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion
or all of the deferred tax asset will not be realized. The Company's provision
for income taxes for the three months ended March 31, 1997 and March 31, 1998
are based upon estimates of effective rates for the corresponding periods. The
Predecessor Company's income tax benefit for the period January 1, 1996 to April
15, 1996 reflects the future income tax benefit expected to be realized.
Components of the income tax expense (benefit) are as follows at December
31:
<TABLE>
<CAPTION>
1995 1996 1997
------ ---- -----
<S> <C> <C> <C>
Current:
Federal.............................................. $ (634) $ 86 $ --
State................................................ 2 11 3
------ ---- -----
(632) 97 3
Deferred............................................... 1,769 (84) 499
Other.................................................. (115)
------ ---- -----
$1,137 $ 13 $ 387
====== ==== =====
</TABLE>
F-10
<PAGE> 64
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Major components of the Company's deferred taxes at December 31, 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Net operating loss carryforwards............................ $ 1,449 $ 2,172
Accruals.................................................... 1,223 197
Reserves.................................................... 325 359
Basis difference in acquired assets......................... (1,954) (1,198)
Depreciation and amortization............................... 452 (787)
AMT credit and carryforwards................................ 32 80
Capitalization of inventory costs........................... 213 63
Other, including state taxes................................ (101) 254
------- -------
$ 1,639 $ 1,140
======= =======
</TABLE>
At December 31, 1997, the Company has available net operating loss (NOL)
carryforwards of approximately $5,186 and $4,030, for federal and California
income taxes, respectively. These NOLs will begin to expire in the Years 2010
and 2000, respectively. The majority of the available NOLs were acquired from
the Predecessor Company in the transactions described in Note 2. The Internal
Revenue Code of 1986, as amended, contains provisions that may limit the
Company's utilization of its NOL carryforward because of the change in ownership
of the Company's stock. The limitation, if any, applies to NOL generated prior
to the change in ownership (prior to April 15, 1996). Management believes that
the limitations, if any, do not have a material impact on the Company's ability
to utilize such net operating losses to offset future earnings.
In connection with the acquisition of the Predecessor Company and Breadshop
by the Company, a tax liability was recorded to reflect the increase in book
basis over tax basis for such net assets acquired. Such amount is included in
noncurrent deferred liabilities.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials..................................... $2,491 $2,457 $2,716
Work-in-progress.................................. 129 237 157
Finished goods.................................... 2,365 2,584 2,125
------ ------ ------
$4,985 $5,278 $4,998
====== ====== ======
</TABLE>
F-11
<PAGE> 65
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PLANT AND EQUIPMENT
Plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment.......................... $14,921 $15,135 $15,152
Leasehold improvements........................... 8,994 8,994 8,995
Furniture and fixtures........................... 1,868 2,074 2,066
Assets not in use................................ 2,786 2,437 2,437
------- ------- -------
28,569 28,640 28,650
Less accumulated depreciation.................... (2,195) (5,282) (6,047)
------- ------- -------
$26,374 $23,358 $22,603
======= ======= =======
</TABLE>
6. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill......................................... $ 8,498 $ 8,881 $ 8,881
Trademarks....................................... 5,493 5,493 5,493
Other............................................ 521 940 1,136
------- ------- --------
14,512 15,314 15,510
Less accumulated amortization.................... (149) (499) (651)
------- ------- --------
$14,363 $14,815 $ 14,859
======= ======= ========
</TABLE>
7. LONG-TERM DEBT
Debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Revolving line of credit.................................... $ 2,158 $ 4,732
Term Loan A................................................. 12,000 10,700
Term Loan B................................................. 6,500 5,930
Other....................................................... 1,604 328
------- -------
22,262 21,690
Less current portion........................................ (3,146) (2,855)
------- -------
Total long-term debt.............................. $19,116 $18,835
======= =======
</TABLE>
The Company's bank credit agreement consists of a $6.5 million revolving
line of credit facility, and two term loan facilities. The revolving line of
credit facility expires in June 30, 1999, and Health Valley pays an annual
commitment fee of .375% on the unused portion of the revolving credit facility.
The Term Loan A requires quarterly principal payments, which began March 31,
1997 and end June 30, 2003, in increasing amounts, which began at $250 and end
at $575. The Term Loan B requires quarterly principal payments, which began
April 30, 1997 and end October 31, 2002, in increasing amounts, which began at
$160 and end at
F-12
<PAGE> 66
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$380. All of these borrowings are collateralized by substantially all of the
assets of the Company's wholly-owned subsidiary.
Interest on the borrowings under these agreements are at varying rates
based, at the Company's option, on the bank's prime rate plus .25% per annum, or
the London Interbank Offered Rate (LIBOR) plus 2.5% per annum. The borrowings at
prime rates have daily terms, while the LIBOR borrowings have terms of one to
six months. Interest payments are made at the end of the each quarter for prime
rate borrowings, and the end of each respective period for LIBOR borrowings.
Effective December 31, 1997, the interest rate on the revolving line of credit
was 8.75%, the interest rate on term loan A was 8.5%, and the interest rate on
term loan B was 8.75%.
The revolving line of credit facility limits the Company's borrowing, based
on eligible receivable and inventory valuations. The maximum credit available
was $4,844 and $3,680 as of December 26, 1997 and December 27, 1996,
respectively.
The long-term debt agreement contains various restrictive covenants that
include a prohibition on payment of dividends, specified minimum net worth and
current ratio levels, and specific limitations on leverage ratios and capital
expenditure amounts. The agreement also contains a mandatory requirement to make
accelerated payments on the term debt in the event that a significant sale or
disposition of fixed assets occurs. At December 31, 1997, the Company was in
violation of the fixed charge coverage ratio covenant and, on April 9, 1998,
obtained a waiver from the lender.
Other debt includes notes payable to a financing company, with underlying
fixed assets as collateral, payable in monthly installments ranging from $2 to
$13, bearing interest rates of 8.91% to 11.81%, and maturing between March 1998
and July 2000.
The scheduled repayments of debt are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 2,855
1999........................................................ 7,701
2000........................................................ 3,004
2001........................................................ 3,285
2002........................................................ 3,695
Thereafter.................................................. 1,150
-------
$21,690
=======
</TABLE>
8. CAPITAL LEASE OBLIGATIONS
Obligations under capitalized equipment leases exist for the next year and
are as follows:
<TABLE>
<S> <C>
1998........................................................ $175
Less amounts representing interest.......................... (5)
----
Present value of minimum lease payments..................... $170
====
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Company leases its facilities under the terms of
operating leases. These leases are for terms of five years; the current
obligations extend through September 1998. These leases contain a renewal option
for a five-year period commencing October 1998. The leases also contain
escalation clauses which provide for increases in the monthly payments of up to
5% per annum based on inflationary factors determined by the lessor. Rent
expense related to these leases amounted to $1,513, $812, $1,147, $287 and $287
for the years ended December 31, 1995, 1996 and 1997 and the three months ended
March 31, 1997 and
F-13
<PAGE> 67
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998, respectively. Future minimum rental payments net of sublease income for
the lease obligations referred to above are $945 for the year ending December
31, 1998.
Contingencies -- The Company is a party to various legal proceedings
arising from the normal course of operations. Although the ultimate disposition
of these proceedings is not determinable, management, based on advice of legal
counsel, does not believe that adverse determinations in any or all of such
proceedings will have a material adverse effect on the Company's financial
position, results of operations and cash flows.
10. MANDATORY REDEMPTION 10% PREFERRED STOCK
The Company's Series A Preferred Stock has a mandatory redemption value of
$9,783 on each of the seventh and eighth anniversary dates from the original
issuance or April 12, 2003 and 2004, respectively, plus any accrued but unpaid
dividends. Dividends on the Series A Preferred Stock are cumulative and accrue
at a 10% annual rate based on a redemption value of $1,000 per share. In the
event of liquidation, dissolution, qualifying sale or merger of the Company,
each holder of Series A Preferred Stock has a liquidation preference equal to
$1,000 per share plus any accrued but unpaid dividends. Subject to certain
limitations, the Company, at its option, may redeem all or part of the
outstanding shares of Series A Preferred Stock at the redemption value plus all
accrued but unpaid dividends. During fiscal year 1997, the Company issued 900
shares of Series A Preferred Stock, liquidation value of $1,000 per share, as
repayment for $900 of debt. As the Series A Preferred Stock has characteristics
similar to debt instruments, the balance of preferred shares have been
classified above shareholders' equity in the financial statements.
11. RETIREMENT PLANS
The Company maintains a defined contribution retirement plan (401(k)
Savings Plan) (the Plan) that covers all eligible employees who elect to
participate. Employees may contribute between 1% and 15% of their earnings under
the Plan, subject to annual limits set by the Internal Revenue Service. The
Company matches 50% of the participant's contributions, up to 3% of each
participant's earnings. In addition, the Company is able to make additional
discretionary contributions. The Company's contributions for the periods ended
December 31, 1995, 1996 and 1997 and March 31, 1997 and 1998 were $197, $103,
$72, $28 and $29, respectively.
12. RELATED-PARTY TRANSACTIONS
Frontenac Company, a private equity firm and the general partner of
Frontenac VI Limited Partnership, provides consulting and financial services to
the Company. Such services include, but are not limited to, addressing issues
related to strategic direction, long-term growth, acquisitions and divestitures,
executive recruitment, and new financings. Two directors of the Company are
affiliates of Frontenac Company.
Fees paid by the Company to Frontenac Company in 1996 include a $395
transaction fee related to the Health Valley acquisition and a $100 transaction
fee related to the Breadshop acquisition. The 10% Convertible Promissory Note
due to Frontenac VI Limited Partnership (Note 6) had accrued interest payable of
$17 as of December 31, 1996. This Note and the related interest was satisfied on
January 31, 1997 through a cash payment of $500 and an additional stock purchase
valued at $526. Expenses incurred by the Company from Frontenac Company for the
years ended December 31, 1996 and 1997 and the three months ended March 31, 1997
and 1998 include Board of Directors fees of $83, $88, $15 and $25, respectively.
The charges incurred in these transactions were substantially the same as
charges which would have been incurred had similar services been provided by
unrelated parties.
F-14
<PAGE> 68
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OTHER INFORMATION
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued salaries, vacation and related
benefits....................................... 1,251 897 940
Accrued acquisition expenses..................... 1,732 1,760 1,715
Accrued rebates.................................. 1,970 5 --
Other accrued liabilities........................ 1,405 1,216 962
------ ------ ------
$6,358 $3,878 $3,617
====== ====== ======
</TABLE>
14. STOCK OPTIONS
In January of 1997, the Company amended the Management Option Agreement
(Option Agreement) with its Chairman and President. The Option Agreement granted
options to purchase 96,570 common shares at increasing option prices in excess
of the fair value ($.34 per share) of the stock at the grant date. The options
become fully vested and exercisable on the earlier of: (1) a qualified public
offering or approved sale or (2) on the third anniversary from the date of
grant. The Option Agreement also contains certain antidilution provisions.
In March of 1997, the Company adopted the 1997 Stock Option Plan (the
Option Plan) to provide for and formalize the grant of stock options to key
employees. In connection with the adoption of the Option Plan, the Company
formalized the grant of options for 212,280 shares at $.34 per share to key
employees. These options vest one third on the first anniversary date of
employment subsequent to the date of grant and one third on each of the two
subsequent anniversary dates. Options granted under the Plan will become fully
vested in the event of a fundamental change or stock sale (as defined within the
Plan) of the Company.
At December 31, 1997, 59,610 options were vested and exercisable having a
weighted average exercise of $.34 per share. No options were exercised or
canceled during fiscal year 1997.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for the Plan. No
compensation cost has been recognized for the Plan. Had compensation cost for
the Company's plan been determined based on the fair value at the grant date for
awards under those plans consistent with the method of SFAS No. 123, the
Company's net income would have decreased by the pro forma amounts indicated
below at December 31, 1997:
<TABLE>
<S> <C>
Net income:
As reported............................................... $105
Pro forma................................................. $101
</TABLE>
The fair value of stock options formalized in 1997 had a weighted average
fair value of $.06 per share. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions used for grants in 1997: dividend yield of 0% for all
grants, risk-free rate of 6.68%; expected life of 3 years. Volatility of 0% was
used (as the Company is not a public entity).
F-15
<PAGE> 69
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUBSEQUENT EVENT (UNAUDITED)
In the second quarter of 1998, the Company recorded a $7.3 million charge
to operations (before a tax benefit of $2.9 million) reflecting its decision to
restructure certain operations of the Company in light of revisions in its
business strategies, and for certain litigation in which it is involved.
Approximately $5.3 million was recorded as a restructuring charge comprised of
the following components (i) a $2.1 million noncash charge for the write-off of
the leasehold improvements in the Company's distribution warehouse as a result
of the Company's decision to outsource this function and not renew the lease on
the warehouse, (ii) a $2.1 million noncash charge for the writedown to net
realizable value of certain manufacturing assets that the Company is holding for
sale and other assets whose values have been impaired by the Company's revised
product offering and (iii) a $1.1 million noncash charge for the writedown of
inventory resulting from the Company's decision to accelerate the introduction
of new products and packaging. A charge of $2.0 million relates to certain
litigation with respect to which the Company entered into an agreement in
principle to settle, subject to final documentation and court approval.
F-16
<PAGE> 70
- ---------------------------------------------------------
- ---------------------------------------------------------
NO PERSON, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 10
History of the Company................... 15
Use of Proceeds.......................... 16
Dividend Policy.......................... 17
Dilution................................. 17
Capitalization........................... 18
Selected Consolidated Financial Data..... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 21
Business................................. 29
Management............................... 39
Principal Stockholders................... 45
Certain Transactions..................... 46
Description of Capital Stock............. 47
Shares Eligible for Future Sale.......... 48
Underwriting............................. 50
Certain Legal Matters.................... 51
Experts.................................. 51
Additional Information................... 52
Index to Financial Statements............ F-1
</TABLE>
---------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
3,300,000 SHARES
NATURAL NUTRITION GROUP LOGO
HEALTH VALLEY LOGO
BREADSHOP NATURAL FOODS LOGO
Common Stock
--------------------------
PROSPECTUS
--------------------------
BT ALEX. BROWN
ADAMS, HARKNESS & HILL, INC.
, 1998
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting commissions and discounts) payable by the
Company in connection with the issuance and distribution of the Common Stock
pursuant to the Prospectus contained in this Registration Statement. The Company
will pay all of these expenses.
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT
-----------
<S> <C>
Securities and Exchange Commission registration fee......... $ 17,913
NASD filing fee............................................. 6,572
Nasdaq National Market listing fee.......................... 72,875
Accountants' fees and expenses.............................. 150,000
Blue Sky fees and expenses.................................. 5,000
Legal fees and expenses..................................... 375,000
Transfer Agent and Registrar fees and expenses.............. 10,000
Printing and engraving...................................... 150,000
Miscellaneous expenses...................................... 112,640
--------
Total............................................. $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Second Amended and Restated Certificate of Incorporation
provides that the Company shall, to the fullest extent permitted by Section 145
of the Delaware General Corporation Law, as amended from time to time, indemnify
all persons whom it may indemnify pursuant thereto.
Section 145 of the Delaware General Corporation Law permits a corporation,
under specified circumstances, to indemnify its directors, officers, employees
or agents against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlements actually and reasonably incurred by them in
connection with any action, suit or proceeding brought by third parties by
reason of the fact that they were or are directors, officers, employees, or
agents of the corporation, if such directors, officers, employees or agents
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to be indemnified for such expenses despite such
adjudication of liability.
The Company's Second Amended and Restated Certificate of Incorporation
provides that the Company's directors will not be personally liable to the
Company or its stockholders for monetary damages resulting from breaches of
their fiduciary duty as directors except (i) for any breach of the duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, which
makes directors liable for unlawful dividends or unlawful stock repurchase or
redemptions or (iv) for transactions from which directors derive improper
personal benefit.
Upon the effectiveness of this Registration Statement the Company will
enter into indemnification agreements with its directors and certain officers.
The form of such agreement is filed as an Exhibit hereto.
II-1
<PAGE> 72
The Company expects to have director and officer insurance coverage concurrently
with the consummation of the Offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information reflects the 290-for-1 stock split to be effected
in connection with the consummation of the Offering.
On October 2, 1995, pursuant to a Common Stock Purchase Agreement, the
Registrant issued (i) 145,000 shares of Common Stock to William R. Voss ("Voss")
and (ii) 1,305,000 shares of Common Stock to Frontenac VI Limited Partnership
("Frontenac VI")_. The purchase price for the shares was $0.34 per share.
On April 15, 1996, pursuant to a Stock Purchase Agreement, the Registrant
issued (i) 145,000 shares of Common Stock to Voss, (ii) 748,136 shares of Common
Stock and 10,715.358 shares of Series A Preferred Stock to Frontenac VI and
(iii) 1,523,529 shares of Common Stock and 7,951.31 shares of Series A Preferred
Stock to State of Wisconsin Investment Board ("SWIB"). The purchase price for
the shares was $0.34 per share of Common Stock and $1,000 per share of Series A
Preferred Stock.
On April 15, 1996, pursuant to a Management Stock Option Agreement, the
Company granted to Voss options to purchase 96,570 shares of Common Stock for an
exercise price that increases over time from $0.34 to $5.48 per share.
During 1996, in connection with the commencement of their employment, the
Company granted to each of Terry Sebastian, Michael D. de Boom, Diane J.
Beardsley and William J. Nictakis options to purchase 10,440, 41,760, 41,760 and
83,520 shares of Common Stock, respectively, for an exercise price of $0.34 per
share.
On January 27, 1997, pursuant to a Stock Purchase Agreement, the Registrant
issued (i) 27,651.5 shares of Common Stock to Voss, (ii) 142,862 shares of
Common Stock and 476.25 shares of Series A Preferred Stock to Frontenac VI and
(iii) 106,009.5 shares of Common Stock and 353.40 shares of Series A Preferred
Stock to SWIB. The purchase price for the shares was $0.34 per share of Common
Stock and $1,000 per share of Series A Preferred Stock.
On January 27, 1997, pursuant to a Stock Purchase Agreement, the Registrant
issued 4,492 shares of Common Stock and 23.451 shares of Series A Preferred
Stock to each of Timothy J. Healy, Chance Bahadur and Mark Smith. The purchase
price for the shares was $0.34 per share of Common Stock and $1,000 per share of
Series A Preferred Stock.
During the first quarter of 1997, in connection with commencement of each
of their employment, the Company granted to each of Mark Smith, Kevin Mosley and
Ronald Haughey options to purchase 13,920, 10,440 and 10,440 shares of Common
Stock, respectively, for exercise prices of $0.34 per share. Options to purchase
9,280 shares of Common Stock issued to Mark Smith were subsequently terminated
in connection with the termination of his employment.
On September 30, 1997, pursuant to a Settlement Agreement, the Company
granted to George Mateljan, Jr., the former owner of the Health Valley
companies, options to purchase 406,000 shares of Common Stock for an exercise
price of $0.34 per share and up to 3,082.22 shares of Series A Preferred Stock
for an exercise price of $1,000 per share in exchange for cancellation of
outstanding options to purchase shares of Common Stock of Health Valley Company,
a wholly owned subsidiary of the Company. Mr. Mateljan subsequently transferred
options to purchase 81,200 and 20,300 shares of Common Stock and a corresponding
number of shares of Series A Preferred Stock to John A. Calfas and Wasserstein
Perrella & Co., respectively.
In January 1998, the Company granted to Lawrence A. Del Santo, a
non-employee director, options to purchase 10,150 shares of Common Stock for an
exercise price of $6.90 per share.
II-2
<PAGE> 73
The options issued to Sebastian, de Boom, Beardsley, Nictakis, Smith,
Mosley, Haughey and Del Santo are governed by the Company's 1997 Option Plan.
The grant of options issued prior to the adoption of the 1997 Option Plan was
formalized in March 1997.
No underwriters were involved in any of the transactions described above.
All of the securities issued in the foregoing transactions were issued by the
Registrant in reliance upon the exemption from registration available under
Section 4(2) of the Securities Act, including Regulation D promulgated
thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<S> <C>
1.1* -- Form of Underwriting Agreement.
2.1* -- Stock Purchase Agreement dated as of March 17, 1996 by
and between George Mateljan, Jr. and Health Valley
Company. Schedules and exhibits to this Stock Purchase
Agreement have not been included herewith, but will be
furnished supplementally to the Commission upon request.
2.2* -- Amendment to Stock Purchase Agreement dated as of April
15, 1996 by and between George Mateljan, Jr. and Health
Valley Company.
2.3* -- Stock Purchase Agreement dated October 16, 1996 by and
between the stockholders of The Bread Shop, Inc. and TBS
Acquisition Corporation. Schedules and exhibits to this
Stock Purchase Agreement have not been included herewith,
but will be furnished supplementally to the Commission
upon request.
3.1 -- Form of Second Amended and Restated Certificate of
Incorporation of the Registrant.
3.2* -- Form of Amended and Restated Bylaws of the Registrant.
4.1* -- Specimen stock certificate representing Common Stock.
5* -- Opinion of Katten Muchin & Zavis as to the legality of
the securities being registered (including consent).
10.1* -- Common Stock Purchase Agreement dated as of October 2,
1995 by and between the Registrant, Frontenac VI Limited
Partnership and William R. Voss.
10.2* -- Employment Agreement dated October 2, 1995 by and between
the Registrant, and William R. Voss.
10.3* -- Amendment No. 1 dated January 28, 1997 to Employment
Agreement by and between the Registrant, and William R.
Voss.
10.4* -- Stock Purchase Agreement dated April 15, 1996 by and
between the Registrant, Frontenac VI Limited Partnership,
State of Wisconsin Investment Board and William R. Voss.
10.5* -- Amended and Restated Credit Agreement dated October 31,
1996 by and between Health Valley Company, TBS
Acquisition Corporation, The Bread Shop and LaSalle
National Bank.
10.6* -- First Amendment to Loan and Security Agreement dated June
1997 by and between Health Valley Company and LaSalle
National Bank.
10.7* -- Second Amendment to Loan and Security Agreement dated
April 1998 by and between Health Valley Company and
LaSalle National Bank.
10.8* -- Stock Purchase Agreement dated as of January 28, 1997 by
and between the Registrant, William R. Voss, Frontenac VI
Limited Partnership and State of Wisconsin Investment
Board.
10.9* -- Amended and Restated Management Option Agreement dated
January 28, 1997 by and between the Registrant, and
William R. Voss.
10.10* -- Stock Purchase Agreement dated as of January 28, 1997 by
and between the Registrant, Timothy J. Healy, Chance
Bahadur and Mark Smith.
10.11* -- Settlement Agreement dated as of September 30, 1997 by
and between Health Valley Company, the Registrant, and
George Mateljan, Jr.
10.12* -- Second Amended and Restated Registration Agreement dated
September 30, 1997 by and between the Registrant, and the
stockholders and option holders named therein.
</TABLE>
II-3
<PAGE> 74
<TABLE>
<S> <C>
10.13* -- Form of Natural Nutrition Group, Inc. Employee Incentive
Compensation Plan.
10.14* -- Form of Natural Nutrition Group, Inc. 1998 Employee Stock
Purchase Plan.
10.15* -- Form of Indemnification Agreement.
10.16* -- Lease Agreement dated August 5, 1988 by and between
CalMat Properties, Inc. and Health Valley Natural Foods,
Inc.
10.17* -- Intrepid Food Holdings, Inc. 1997 Stock Option Plan, as
amended.
10.18* -- Form of Stock Option Agreement for the Intrepid Food
Holdings, Inc. 1997 Stock Option Plan.
21* -- Subsidiaries of the Registrant.
23.1 -- Consent of Deloitte & Touche LLP.
23.2* -- Consent of Katten Muchin & Zavis (contained in its
opinion to be filed as Exhibit 5 hereto).
24* -- Power of Attorney
27* -- Financial Data Schedule.
99.1* -- Consent of Natural Foods Merchandiser
99.2* -- Consent of Spence Information Services, LLC
</TABLE>
- ---------------
* Previously filed
(b) Financial Statement Schedules.
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Report of Independent Public Accountants.................... S-1
Schedule II -- Valuation and Qualifying Accounts............ S-2
</TABLE>
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes:
(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) For purposes of determining any liability under the Securities Act, 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 Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the 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 Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless, in the opinion of its counsel, the
matter had 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.
II-4
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chicago,
and State of Illinois on the 28th day of July, 1998.
Natural Nutrition Group, Inc.
By: /s/ WILLIAM R. VOSS
----------------------------------
William R. Voss
Chairman, Chief Executive Officer
and President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM R. VOSS Chairman of the Board, Chief July 28, 1998
- ----------------------------------------------------- Executive Officer, and President
William R. Voss (Principal Executive Officer)
* Senior Vice President and Chief July 28, 1998
- ----------------------------------------------------- Financial Officer (Principal
Diane J. Beardsley Accounting Officer)
* Director July 28, 1998
- -----------------------------------------------------
Roger S. McEniry
* Director July 28, 1998
- -----------------------------------------------------
David S. Katz
* Director July 28, 1998
- -----------------------------------------------------
Timothy J. Healy
* Director July 28, 1998
- -----------------------------------------------------
Lawrence A. Del Santo
*By /s/ WILLIAM R. VOSS
-------------------------------------------------
William R. Voss
As Attorney-in-fact
</TABLE>
II-5
<PAGE> 76
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and
Stockholders of Natural Nutrition Group, Inc.
(formerly known as Intrepid Food Holdings, Inc.) and Subsidiaries:
We have audited the financial statements of Natural Nutrition Group, Inc.
as of December 31, 1997 and 1996 (successor company balance sheets) and the
statements of operations and cash flows for the years then ended (successor
company operations) and the statements of operations and cash flows for the
period from January 1, 1996 to April 15, 1996 (predecessor company operations)
and have issued our report thereon dated February 20, 1998 (April 9, 1998 as to
Note 7, July 24, 1998 as to the effects of the stock split described in Note 1),
included elsewhere in this Registration Statement. Our audits also included the
financial statement schedule listed in Item 16 of this Registration Statement.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, CA
February 20, 1998
S-1
<PAGE> 77
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE BALANCE
AT BEGINNING AT END
OF YEAR EXPENSES OTHER DEDUCTIONS OF YEAR
------------ -------- ----- ---------- -------
<S> <C> <C> <C> <C> <C>
Deducted from Assets:
Allowance for doubtful accounts:
1997..................................... $1,334 $312 $ -- $225 $1,421
1996..................................... 25 67 1,242 -- 1,334
1995..................................... 91 22 -- 88 25
Reserve for obsolete inventories:
1997..................................... $ 866 $179 $ -- $596 $ 449
1996..................................... 152 875 25 184 866
1995..................................... 100 252 -- 200 152
</TABLE>
S-2
<PAGE> 1
EXHIBIT 3.1
FORM OF
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
NATURAL NUTRITION GROUP, INC.
(originally incorporated as Intrepid Food Holdings, Inc. on October 2, 1995)
Natural Nutrition Group, Inc. (f/k/a Intrepid Food Holdings, Inc.) (the
"Corporation"), a corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware (the "Law"), does hereby
certify:
I. That the Board of Directors of the Corporation adopted a resolution
setting forth the Second Amended and Restated Certificate of Incorporation set
forth below, declaring its adoption advisable and submitting it to the
stockholders entitled to vote in respect thereof for their consideration.
II. That by written consent executed in accordance with Section 228 of
the Law, the holders of a majority of the outstanding stock entitled to vote
thereon, and the holders of a majority of the outstanding stock of each class
entitled to vote thereon as a class, have voted in favor of the adoption of the
Second Amended and Restated Certificate of Incorporation set forth below. In
accordance with Section 228 of the Law, written notice of such action has been
given to stockholders who did not execute the written consent.
III. That the Second Amended and Restated Certificate of Incorporation
of the Corporation set forth below has been duly adopted and approved in
accordance with Sections 242 and 245 of the Law:
ARTICLE I
The name of the corporation is Natural Nutrition Group, Inc. (the
"CORPORATION").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Corporation Trust Center, Wilmington, County of
New Castle, Delaware 19801. The name of the Corporation's registered agent at
such address is The Corporation Trust Corporation.
ARTICLE III
The nature of the business to be conducted or promoted is to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware (the "Law").
<PAGE> 2
ARTICLE IV
A. Capital Stock.
1. Authorized Stock.
Immediately prior to the filing of this Second Amended and Restated
Certificate of Incorporation, the total numbers of shares of capital stock of
all classes which the Corporation had authority to issue was 65,000 shares,
including (i) 40,000 shares of Common Stock, par value $0.001 per share ("Old
Common Stock"), and (ii) 35,000 shares of Preferred Stock, par value $0.001 per
share ("Old Preferred Stock"). 35,000 of the shares designated "Old Preferred
Stock" were of a series designated "Series A Preferred Stock." Effective upon
the filing of this Second Amended and Restated Certificate of Incorporation with
the Secretary of State of the State of Delaware, the Corporation shall have
authority to issue the following classes of stock, in the number of shares and
at the par value as indicated opposite the name of the class:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PAR VALUE
CLASS AUTHORIZED PER SHARE
- --------------------------- ------------------- ---------------------
<S> <C> <C>
Common Stock [50,000,000] $ 0.001
Preferred Stock [2,035,000] $ 0.001
</TABLE>
35,000 shares of the Preferred Stock shall be designated "Series A Preferred
Stock." The remaining 2,000,000 shares of Preferred Stock may be issued from
time to time in one or more series. The Board of Directors of the Corporation
(the "Board of Directors") is expressly authorized to provide for the issue of
all or any of the remaining shares of the Preferred Stock in one or more series,
and to fix the number of shares and to determine or alter for each such series,
such voting powers, full or limited, or no voting powers, and such designations,
preferences, and relative, participating, optional, or other rights and such
qualifications, limitations, or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issue of such shares (a "Preferred Stock Designation") as may
be permitted by the Law. The Board of Directors is also expressly authorized to
increase or decrease (but not below the number of shares of such series then
outstanding) the number of shares of any series (other than the Series A
Preferred Stock) subsequent to the issue of shares of that series. In case the
number of shares of any such series shall be so decreased the shares
constituting such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
The designations and the powers, preferences and relative,
participating, optional or other rights of the Common Stock and the Series A
Preferred Stock and the qualifications, limitations or restrictions thereof are
as set forth in Section B below.
-2-
<PAGE> 3
2. Conversion of Common Stock and Preferred Stock.
At the time of the filing of this Second Amended and Restated
Certificate of Incorporation with the Secretary of State of the State of
Delaware, (a) each outstanding whole share of Old Common Stock shall
automatically, without the necessity of any further action on the part of the
holder thereof, be changed and reclassified into _____________ shares of Common
Stock, and (b) each outstanding share of Old Preferred Stock shall remain
outstanding as one share of Series A Preferred Stock. Upon the occurrence of the
reclassifications effected by this Section A.2. (the "CONVERSIONS"), each
certificate for outstanding shares of Old Common Stock dated prior to the
effective date of the Conversions shall evidence, and be deemed to evidence, the
number of shares of Common Stock into which the shares previously evidenced by
such certificate shall have been reclassified in accordance with this Section
A.2., and the Conversions shall become effective in accordance with the terms
hereof, whether or not any or all of the certificates evidencing Old Common
Stock shall have been surrendered or new certificates evidencing the number of
shares of Common Stock into which such shares have been reclassified have been
issued in accordance with Section A.3. hereof.
3. Subsequent Reissuance of Certificates.
Following the occurrence of the Conversions, each holder of shares of
Old Common Stock shall either (a) surrender each certificate evidencing any such
shares at the office of the Corporation or (b) notify the Corporation that such
certificate has been lost, stolen or destroyed and execute an agreement
satisfactory to the Corporation to indemnify the Corporation from any loss
incurred by it in connection with the reissuance of such lost, stolen or
destroyed certificate. The Corporation shall thereupon issue and deliver to such
holder a certificate or certificates, in the name shown on such certificate
evidencing Old Common Stock, for the number of whole shares of Common Stock into
which the shares of Old Common Stock evidenced by the surrendered (or lost,
stolen or destroyed) certificate have been reclassified, dated as of the date on
which the Conversions become effective. The Corporation shall not be obligated
to issue any certificate evidencing shares of Common Stock in connection with
the Conversions except in accordance with this Section A.3.
4. Fractional Shares.
Notwithstanding the foregoing, no fraction of a share of Common Stock
shall be issued by virtue of the Conversions, but in lieu thereof, each holder
of shares of Old Common Stock who would otherwise be entitled to a fraction of a
share of Common Stock (after aggregating all fractional shares of Common Stock
to be received by such holder) shall receive from the Corporation an amount in
cash (rounded to the nearest whole cent) equal to the product of (i) such
fraction multiplied by (ii) the initial price per share to the public in the
Corporation's initial public offering of Common Stock.
B. Designations and Rights.
The designations and the powers, preferences and relative,
participating, optional or other rights of the capital stock and the
qualifications, limitations or restrictions thereof are as follows:
-3-
<PAGE> 4
1. Common Stock.
a. Voting Rights: Except as otherwise required by law or
expressly provided herein or in a Preferred Stock Designation, the holders of
shares of Common Stock shall be entitled to one vote per share on each matter
submitted to a vote of the stockholders of the Corporation.
b. Dividends: Subject to the rights of the holders, if any, of
Preferred Stock, the holders of Common Stock shall be entitled to receive
dividends at such times and in such amounts as may be determined by the Board of
Directors of the Corporation.
c. Liquidation Rights: In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
after payment or provision for payment of the debts and other liabilities of the
Corporation and the preferential amounts to which the holders of any outstanding
shares of Preferred Stock shall be entitled upon dissolution, liquidation or
winding up, the assets of the Corporation available for distribution to
stockholders shall, except as may otherwise be provided in a Preferred Stock
Designation, be distributed ratably among the holders of the shares of Common
Stock.
2. Series A Preferred Stock.
a. Rank. As to distributions upon liquidation, dissolution and
winding up, the shares of Series A Preferred Stock shall rank senior to the
Common Stock.
b. Voting Rights. Except as otherwise required by law or
expressly provided herein, each share of Series A Preferred Stock shall have no
voting rights.
c. Dividends. (i) When and as declared by the Corporation's
Board of Directors and to the extent permitted under the Law, the Corporation
shall pay preferential dividends to the holders of the shares of Series A
Preferred Stock as provided in this Section B.2.c. Except as otherwise provided
herein, dividends on each share of Series A Preferred Stock shall accrue on a
daily basis at 10% per annum (the "Dividend Rate") of the sum of the Liquidation
Value (as hereinafter defined) plus all accumulated and unpaid dividends
thereon, from and including the date of issuance of such share of Series A
Preferred Stock to and including the date on which the Liquidation Value of such
share of Series A Preferred Stock (plus all accrued and unpaid dividends
thereon) is paid. Such dividends shall accrue whether or not they have been
declared and whether or not there are profits, surplus or other funds of the
Corporation legally available for the payment of dividends. Such dividends shall
be cumulative such that all accrued and unpaid dividends shall be fully paid or
declared with funds irrevocably set apart for payment before any dividend,
distribution or payment may be made with respect to any Junior Securities (as
hereinafter defined), other than repurchases of Common Stock from employees of
the Corporation or a Subsidiary (as hereinafter defined) upon termination of
such employee's employment which repurchases in the aggregate do not exceed 5%
of the outstanding shares of Common Stock in any fiscal year (or such greater
percentage or specific number of shares as the holder or holders of a majority
of the shares of Series A Preferred Stock may have approved in writing with
respect to any particular fiscal year or in connection with any particular
repurchase). The date on which the Corporation initially issues
-4-
<PAGE> 5
any share of Series A Preferred Stock shall be deemed to be its "date of
issuance" regardless of the number of times transfer of such share is made on
the stock records maintained by or for the Corporation, regardless of the number
of certificates which may be issued to evidence such share and regardless of the
conversion of such shares into shares of Common Stock.
(ii) January 1, April 1, July 1 and October 1 of
each year shall constitute "Dividend Reference Dates" for purposes hereof. To
the extent not paid on each Dividend Reference Date, all dividends which have
accrued on each share of Series A Preferred Stock during the twelve-month period
ending upon each December 31 shall be accumulated and shall remain accumulated
and unpaid dividends with respect to such share of Series A Preferred Stock
until paid.
(iii) Except as otherwise provided herein, if at any
time the Corporation pays less than the
total amount of dividends then accrued with respect to all outstanding shares of
Series A Preferred Stock, such payment shall be distributed ratably among the
holders of such shares based upon the number of shares of such series held by
each such holder.
(iv) The "Liquidation Value" of each share of Series
A Preferred Stock is $1,000.00 (such amount to be adjusted appropriately in the
event the shares of Series A Preferred Stock are subdivided into a greater
number or combined into a lesser number). "Junior Securities" means any equity
securities of the Corporation other than the Series A Preferred Stock.
(v) The Corporation shall not permit any entity of
which the Corporation owns, directly or
indirectly, 50% or more of the outstanding capital stock or other interest
having voting power or rights to elect a majority of the board of directors or
other governing body of such entity (a "Subsidiary") to purchase or otherwise
acquire for consideration any shares of equity securities of the Corporation
unless the Corporation could, under paragraph (i) of this Section B.2.c.,
purchase or otherwise acquire such shares at such time and in such manner.
d. Mandatory Redemption. (i) The Corporation shall redeem 50%
of the outstanding shares of Series A Preferred Stock on the seventh anniversary
of the date of issuance of the first share of Series A Preferred Stock
("Issuance Date") and all remaining outstanding shares of Series A Preferred
Stock on the eighth anniversary of the Issuance Date (each such redemption date,
a "Mandatory Redemption Date").
Each share of Series A Preferred Stock shall be redeemed at a price of $1,000.00
per share (such amount to be adjusted appropriately in the event the shares of
Series A Preferred Stock are subdivided into a greater number or combined into a
lesser number) plus all accrued but unpaid dividends thereon to the Mandatory
Redemption Date (the "Mandatory Redemption Price").
(ii) Not less than 30 days nor more than 60 days
prior to a Mandatory Redemption Date, written notice (a "Mandatory Redemption
Notice") shall be mailed, first class postage prepaid, to each holder of record
on such notice date of the Series A Preferred Stock at his post office address
last shown on the stock records of the Corporation. A Mandatory
-5-
<PAGE> 6
Redemption Notice shall state: (A) the number of shares of the Series A
Preferred Stock being redeemed from each such shareholder on the Mandatory
Redemption Date: (B) what the Mandatory Redemption Date and the Mandatory
Redemption Price are; and (C) that the holder is to surrender to the
Corporation, in the manner and at the place designated, the certificate or
certificates representing the shares of Series A Preferred Stock to be redeemed.
(iii) On or before each Mandatory Redemption Date,
each holder of shares of Series A Preferred Stock being redeemed shall surrender
the certificate or certificates representing such shares to the Corporation, in
the manner and at the place designated in the Mandatory Redemption Notice, and
thereupon the Mandatory Redemption Price for such shares will be payable to the
order of the person whose name appears on such certificate or certificates as
the owner thereof, and each surrendered certificate shall be cancelled and
retired. If a certificate is surrendered and all the shares evidenced thereby
are not being redeemed, the Corporation shall cause certificates for shares of
Series A Preferred Stock not being redeemed to be issued and delivered to the
person whose name appears as the owner on the surrendered certificate.
(iv) If a Mandatory Redemption Notice shall have
been duly given, and if on the Mandatory Redemption Date no default is made in
the payment of the Mandatory Redemption Price, then notwithstanding that the
certificates evidencing any of the shares of Series A Preferred Stock shall not
have been surrendered, the dividends with respect to such shares shall cease to
accrue after such Mandatory Redemption Date and all rights with respect to such
shares shall forthwith after such Mandatory Redemption Date terminate, except
only the right of the holders to receive the Mandatory Redemption Price upon
surrender of their certificate or certificates therefor (and a certificate for
the balance of such shares evidenced by such surrendered certificates which are
not being redeemed).
(v) If the funds of the Corporation legally
available therefor shall be insufficient to discharge such redemption
requirement in full, funds to the extent legally available for such purpose
shall be set aside in the place specified in the Mandatory Redemption Notice.
The maximum number of full shares of Series A Preferred Stock that can be
redeemed with such funds shall be redeemed ratably from the holders of the
Series A Preferred Stock. The Mandatory Redemption Notice shall specify the
number of shares of Series A Preferred Stock to be redeemed from each holder.
Thereafter, the Corporation shall redeem shares of Series A Preferred Stock
ratably from the holders thereof as funds legally available therefor become
available and supplementary redemption notices containing information similar to
the Mandatory Redemption Notice shall be delivered to holders of Series A
Preferred Stock. Such supplementary redemption notices shall specify
supplementary redemption dates which shall be not less than 30 nor more than 60
days after the date of such notice. Dividends shall continue to accrue on shares
of Series A Preferred Stock at the rate specified herein until funds sufficient
to redeem such shares become available, are set aside as aforesaid and a
supplementary Mandatory Redemption Notice with respect to such shares is
delivered to the holders of such shares.
(vi) (A) If a Fundamental Change (as hereinafter
defined) is to occur, the Corporation will notify each holder of Series A
Preferred Stock in writing of such pending Fundamental Change no less than 35
days prior to the consummation thereof. Such notice will
-6-
<PAGE> 7
describe the material terms and conditions of the Fundamental Change (including,
but not limited to, the amount and nature of the total consideration to be paid
in connection therewith) and the provisions of this Section B.2.d.(vi) and the
Corporation will thereafter give each holder prompt notice of any material
changes in such terms. Each holder of Series A Preferred Stock then outstanding
may (1) waive such notice or (2) require the Corporation to redeem all or any
portion of the Series A Preferred Stock owned by such holder at a price per
share of Series A Preferred Stock equal to the Liquidation Value plus all
accrued dividends through the redemption date (the "Special Redemption Price"),
by giving written notice to the Corporation of such election within 20 days
after receipt of notice from the Corporation. Such notice to the Corporation
will include an election by such holder of the Series A Preferred Stock to
receive such holder's respective Special Redemption Price in cash or in
securities from the acquiring person, or in a combination thereof. Any
securities to be delivered to the holders of Series A Preferred Stock will be
valued at their Market Price (as hereinafter defined). Upon receipt of such
election(s), the Corporation will be obligated to redeem the number of shares
specified therein at the time of the consummation of such Fundamental Change. If
the Fundamental Change does not occur, all requests for redemption will be
rescinded. "Market Price" of any security means the average of the closing
prices of such security's sales on all securities exchanges on which such
security may at the time be listed, or, if there has been no sale on any such
exchange on any day, the average of the highest bid and lowest asked price on
all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the closing prices quoted in The Nasdaq Market as
of 4:00 P.M., New York time, or, if on any day such security is not quoted in
The Nasdaq Market, the average of the highest bid and lowest asked prices on
such day in the domestic over-the-counter market as reported by the National
Quotation Bureau, Incorporated, or any similar successor organization, in each
such case averaged over a period of 21 days consisting of the day as of which
"Market Price" is being determined and the 20 consecutive business days prior to
such day. If at any time such security is not listed on any securities exchange
or quoted in The Nasdaq Market or the over-the-counter market, the "Market
Price" will be the fair value thereof reasonably determined in good faith by the
Board of Directors of the Corporation.
(B) If a Change in Ownership (as hereinafter defined) has
occurred or the Corporation obtains knowledge that a Change in Ownership is to
occur, the Corporation will promptly notify each holder of Series A Preferred
Stock in writing of such Change in Ownership, but in any event such notice shall
not be given later than five days after the occurrence of such Change in
Ownership. Such notice will describe the material definitive terms and the date
of consummation of such Change of Ownership and the provisions of this Section
B.2.d.(vi) and the Corporation will thereafter give each holder prompt notice of
any material changes in such terms. Each holder of Series A Preferred Stock then
outstanding may (1) waive such notice or (2) require the Corporation to redeem
all or any portion of the Series A Preferred Stock owned by such holder at a
price per share of Series A Preferred Stock equal to the Special Redemption
Price, by giving written notice to the Corporation of such election within 20
days after receipt of notice from the Corporation. Upon receipt of such
election(s), the Corporation shall be obligated to redeem for cash the aggregate
number of shares of Series A Preferred Stock specified therein on the later of
(1) the occurrence of the Change in Ownership or (2) 30 days after the
Corporation's receipt of such election(s). If in any case a proposed Change in
Ownership does not occur, all elections for redemption in connection therewith
will be rescinded.
-7-
<PAGE> 8
(C) The term "Fundamental Change" means (1) a sale or
transfer of more than 33-1/3% of the assets of the Corporation on a consolidated
basis in any transaction or series of related transactions (other than sales in
the ordinary course of business) or (2) merger, consolidation or reorganization
to which the Corporation is a party, except for a merger, consolidation or
reorganization in which the Corporation is the surviving corporation and, after
giving effect to such merger, consolidation or reorganization, the holders of
the Corporation's outstanding capital stock (on a fully-diluted basis)
immediately prior to the merger, consolidation or reorganization will own
immediately following the merger, consolidation or reorganization the
Corporation's outstanding capital stock (on a fully diluted basis) having a
majority of the ordinary voting power to elect the Corporation's board of
directors. The term "Change of Ownership" means any sale, issuance or redemption
or series of sales, issuances or redemptions (or any combination thereof) of
shares of the Corporation's capital stock by the holders thereof or the
Corporation which results in any person or group of affiliated persons (other
than the owners of the Corporation's capital stock as of immediately prior to
any such transaction) owning capital stock of the Corporation possessing the
voting power (under ordinary circumstances) to elect a majority of the members
of the Corporation's Board of Directors.
(D) If and to the extent that applicable law or any other
restriction prohibits the payment to the holders of Series A Preferred Stock of
all or any portion of the amounts required to be paid under Section
B.2.d.(vi)(A) or (B) above, such unpaid amounts will be paid to the holders of
Series A Preferred Stock by the person (other than the Corporation) who is a
party to the Fundamental Change or Change of Ownership upon the closing thereof
or on such other date determined pursuant to Section B.2.d.(vi)(B) hereof by
purchase of such shares of Series A Preferred Stock under an agreement which
will provide that such purchased shares will be cancelled effective upon such
purchase. In the event the full amount of any payment hereunder is not paid to
the holders of Series A Preferred Stock upon or immediately prior to such
closing or other date in accordance herewith, then the entire amount payable in
respect of the Fundamental Change or Change of Ownership will be distributed
ratably among the holders of Series A Preferred Stock in proportion to the
aggregate redemption price to be paid to each holder.
(E) In the event that the requirements of Sections
B.2.d.(vi)(A), (B) and (D) above are not complied with, the Corporation will
either:
(1) cause the closing of the Fundamental Change or Change of
Ownership to be postponed until such time as the requirements of
Sections B.2.d.(vi)(A), (B) and (D) above have been complied with; or
(2) cancel such Fundamental Change or Change of Ownership, in
which event the rights, preferences and privileges of the holders of
Series A Preferred Stock shall revert to and be the same as such
rights, preferences and privileges existing immediately prior to the
date of the first notice referred to in Sections B.2.d.(vi)(A) or (B)
above.
e. Optional Redemption.
(i) The Corporation may, at its option at any time, redeem all, or
any number less than all, of the outstanding shares of Series A Preferred Stock
on any date selected for such
-8-
<PAGE> 9
redemption by the Corporation (each such date an "Optional Redemption Date").
Each share of Series A Preferred Stock shall be redeemed at a price of $1,000.00
per share (such amount to be adjusted appropriately in the event the shares of
Series A Preferred Stock are subdivided into a greater number or combined into a
lesser number) plus all accrued but unpaid dividends thereon to the Optional
Redemption Date (the "Optional Redemption Price").
(ii) Not less than 30 days nor more than 60 days prior to an Optional
Redemption Date, written notice (an "Optional Redemption Notice") shall be
mailed, first class postage prepaid, to each holder of record on such notice
date of the Series A Preferred Stock at his post office address last shown on
the stock records of the Corporation. An Optional Redemption Notice shall state:
(i) the number of shares of the Series A Preferred Stock being redeemed from
each such stockholder on such Optional Redemption Date; (ii) the Optional
Redemption Date and the Optional Redemption Price; and (iii) that the holder is
to surrender to the Corporation, in the manner and at the place designated, the
certificate or certificates representing the shares of Series A Preferred Stock
to be redeemed.
(iii) On or before each Optional Redemption Date, each holder of
shares of Series A Preferred Stock being redeemed shall surrender the
certificate or certificates representing such shares to the Corporation, in the
manner and at the place designated in the Optional Redemption Notice, and
thereupon the Optional Redemption Price for such shares will be payable to the
order of the person whose name appears on such certificate or certificates as
the owner thereof, and each surrendered certificate shall be canceled and
retired. If a certificate is surrendered and all the shares evidenced thereby
are not being redeemed, the Corporation shall cause certificates for shares not
being redeemed to be issued and delivered to the person whose name appears as
the owner on the surrendered certificate.
(iv) If an Optional Redemption Notice shall have been duly given, and
if on the Optional Redemption Date no default is made in the payment of the
Optional Redemption Price, then notwithstanding that the certificates evidencing
any of the shares of Series A Preferred Stock shall not have been surrendered,
the dividends with respect to such shares shall cease to accrue after such
Optional Redemption Date and all rights with respect to such shares shall
forthwith after such Optional Redemption Date terminate, except only the right
of the holders to receive the Optional Redemption Price upon surrender of their
certificate or certificates therefor (and a certificate for the balance of such
shares evidenced by such surrendered certificates which are not being redeemed).
(v) Until such time as the Corporation has closed a public offering
of its equity securities pursuant to a registration statement declared effective
by the Securities and Exchange Commission, the Corporation shall not redeem
under this section B.2.e, in the aggregate, more than 10,000 shares of Series A
Preferred Stock (such number to be adjusted appropriately in the event shares of
Series A Preferred Stock are subdivided into a greater number or combined into a
lesser number).
f. Liquidation Rights. Upon the dissolution, liquidation or winding
up of the Corporation, whether voluntary or involuntary, the holders of the
Series A Preferred Stock shall be entitled to receive out of the assets of the
Corporation available for distribution to stockholders, the amount of $1,000.00
per share (such amount to be adjusted proportionately in
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the event the shares of Series A Preferred Stock are subdivided into a greater
number or combined into a lesser number), plus all accrued and unpaid dividends
to which such holders shall be entitled pursuant to Section B.2.c. hereof,
before any payment or distribution shall be made on any Junior Securities. For
purposes of this Section B.2.f., the merger or consolidation of the Corporation
or the sale of all or substantially all of the Corporation's assets shall not be
deemed to be a liquidation, dissolution or winding up of the Corporation. After
the payment to the holders of the shares of the Series A Preferred Stock of the
full preferential amounts provided for in this Section B.2.f, the holders of the
Series A Preferred Stock as such shall have no right or claim to any of the
remaining assets of the Corporation. If upon any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the assets to
be distributed to the holders of Series A Preferred Stock shall be insufficient
to permit the payment to such stockholders of the full preferential amount
aforesaid, then all of the assets of the Corporation available for distribution
to the holders of Series A Preferred Stock shall be distributed ratably in
accordance with the amount payable with respect to each share.
g. Events of Noncompliance.
(i) The occurrence of any of the following events shall be an Event
of Noncompliance under this Second Amended and Restated Certificate of
Incorporation:
(1) any material default with respect to the
performance or observance of any of the material covenants or agreements of the
Corporation contained in this Second Amended and Restated Certificate of
Incorporation, the By-Laws of the Corporation or any agreements entered into in
connection with the issuance of shares of Series A Preferred Stock, and such
default shall not be cured within thirty (30) days of notice being given to the
Corporation;
(2) a receiver, conservator, custodian, liquidator or
trustee of the Corporation or any Subsidiary or of all or any of the assets of
any of them, is appointed by court order; or an order for relief is entered
under the federal bankruptcy laws with respect to the Corporation or any
Subsidiary; or any of the assets of any of them is sequestered by court order;
(3) the Corporation or any Subsidiary files a
petition in voluntary bankruptcy or seeking relief under any provision of any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction, whether now or hereafter in
effect, or consents to the filing of any petition against it under any such law;
or
(4) the Corporation or any Subsidiary makes an
assignment for the benefit of its creditors, or admits in writing its inability
to pay, or in fact does not pay, its debts generally as they become due, or
consents to the appointment of a receiver, conservator, custodian, liquidator or
trustee of the Corporation or any Subsidiary, or all or any part of the assets
of any of them.
(ii) If an Event of Noncompliance has occurred, the holder or holders
of a majority of the shares of the Series A Preferred Stock then outstanding may
demand (by written notice delivered to the Corporation) immediate redemption of
all of such shares of Series A Preferred
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Stock at a price per share equal to $1,000.00 per share (such amount to be
adjusted proportionately in the event the shares of Series A Preferred Stock are
subdivided into a greater number or combined into a lesser number) plus all
accrued but unpaid dividends thereon through the date of redemption. The
Corporation shall give prompt written notice of such election to the other
holders of such shares of Series A Preferred Stock (but in any event within five
days after receipt of the initial demand for redemption of the Series A
Preferred Stock). The Corporation shall redeem the Series A Preferred Stock
within 30 days after receipt of the demand for redemption to the fullest extent
possible based upon the amount of funds which can then be legally applied for
such redemption, and if such obligation is not met in full within such 30 days,
such obligation shall continue to be discharged as promptly as legal funds
become available therefor until the obligation is discharged in full.
(iii) After any Event of Noncompliance specified in Section B.2.g.(i)
above has occurred, any holder of Series A Preferred Stock may proceed to
protect and enforce such holder's rights either by suit in equity or by action
of law, or both, whether for the specific performance of any covenant or
agreement contained in this Second Amended and Restated Certificate of
Incorporation, or the Corporation's By-Laws, or in aid of the exercise of any
power granted in any agreements entered into in connection with the issuance of
shares of Series A Preferred Stock, this Second Amended and Restated Certificate
of Incorporation or the Corporation's By-Laws, or to enforce exercise of any
power granted in this Second Amended and Restated Certificate of Incorporation,
or the Corporation's By-Laws, or to enforce any other legal or equitable right
or remedy of such holder.
(iv) No failure to exercise or delay in the exercise of any right,
power or remedy accruing to any holder of Series A Preferred Stock upon any
Event of Noncompliance hereunder or other breach or default of the Corporation
under this Second Amended and Restated Certificate of Incorporation, the
Corporation's By-Laws, or any agreements entered into in connection with the
issuance of Series A Preferred Stock, shall impair such right, power or remedy
of such holder or shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring.
(v) All remedies, under either this Second Amended and Restated
Certificate of Incorporation, or the Corporation's By-Laws, or by law or
otherwise afforded to any holder of Series A Preferred Stock by agreement or
otherwise shall be cumulative and not alternative.
ARTICLE V
The business and affairs of the Corporation shall be managed by or
under the direction of a board of directors consisting of not less than three
(3) nor more than nine (9) directors. The exact number shall be determined from
time to time by resolution adopted by the affirmative vote of a majority of the
directors in office at the time of adoption of such resolution. As of the date
of filing of this Second Amended and Restated Certificate of Incorporation, the
number of directors shall be five (5) and shall consist of the following
persons: William R. Voss, Roger S. McEniry, David S. Katz, Timothy J. Healy and
Lawrence A. Del Santo.
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The directors shall be divided into three classes, Class I, Class II
and Class III with each class having either one, two or three members. As of the
date of filing of this Second Amended and Restated Certificate of Incorporation,
Class I shall consist of [DAVID S. KATZ]. As of the date of filing of this
Second Amended and Restated Certificate of Incorporation, Class II shall consist
of the following directors: [MESSRS. HEALY AND DEL SANTO]. As of the date of
filing of this Second Amended and Restated Certificate of Incorporation, Class
III shall consist of the following directors: [MESSRS. MCENIRY AND VOSS]. The
term of office of the Class I, Class II and Class III directors shall expire at
the annual meeting of stockholders in 1999, 2000 and 2001, respectively.
Beginning in 1999, at each annual meeting of stockholders, successors to the
class of directors whose term expires at that annual meeting shall be elected
for a three-year term. If the number of directors is changed, any increase or
decrease shall be apportioned among the classes by the Board of Directors so as
to maintain the number of directors in each class as nearly equal as is
reasonably possible, and any additional director of any class elected to fill a
vacancy resulting from an increase in such class shall hold office for a term
that shall coincide with the remaining term of that class. In no case will a
decrease in the number of directors, shorten the term of any incumbent director,
even though such decrease may result in an inequality of the classes until the
expiration of such term. A director shall hold office until the annual meeting
of stockholders in the year in which his or her term expires and until his or
her successor shall be elected and qualified subject, however, to prior death,
resignation, retirement or removal from office. Except as otherwise provided by
law, directors may only be removed for cause by the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the shares of the Corporation
entitled to vote at an election of directors. Except as required by law or the
provisions of this Second Amended and Restated Certificate of Incorporation, all
vacancies on the Board of Directors and newly-created directorships shall be
filled by the Board of Directors. Any director elected to fill a vacancy not
resulting from an increase in the number of directors shall have the same
remaining term as that of his or her predecessor.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Second Amended and Restated Certificate of Incorporation and any
Preferred Stock Designation applicable thereto, and such directors so elected
shall not be divided into classes pursuant to this Article V.
Notwithstanding anything to the contrary contained in this Second
Amended and Restated Certificate of Incorporation, the affirmative vote of the
holders of at least eighty percent (80%) of the voting power of the shares
entitled to vote generally in the election of directors shall be required to
amend, alter or repeal, or to adopt any provision inconsistent with, this
Article V.
ARTICLE VI
A. Written Consent. Any action required or permitted to be taken by
the stockholders of the Corporation shall be effected only at a duly called
annual or special meeting of stockholders of the Corporation and shall not be
effected by consent in writing by the holders of outstanding stock pursuant to
Section 228 of the Law or any other provision of the Law.
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<PAGE> 13
B. Special Meetings. Special meetings of stockholders of the
Corporation may be called only upon not less than ten (10) nor more than sixty
(60) days' written notice by the Board of Directors, pursuant to a resolution
approved by a majority of the Board of Directors.
C. Amendment. Notwithstanding anything contained in this Second
Amended and Restated Certificate of Incorporation to the contrary, the
affirmative vote of the holders of at least eighty percent (80%) of the voting
power of the shares of the Corporation entitled to vote generally in the
election of directors shall be required to amend, alter or repeal, or to adopt
any provision inconsistent with, this Article VI.
ARTICLE VII
In furtherance and not in limitation of the power conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the By-laws of the Corporation. The By-laws of the Corporation may be altered,
amended, or repealed, or new By-laws may be adopted, by the Board of Directors
in accordance with the preceding sentence or by the vote of the holders of at
least eighty percent (80%) of the voting power of the shares of the Corporation
entitled to vote generally in the election of directors at an annual or special
meeting of stockholders, provided that, if such alteration, amendment, repeal or
adoption of new By-laws is effected at a duly called special meeting, notice of
such alteration, amendment, repeal or adoption of new By-laws is contained in
the notice of such special meeting.
ARTICLE VIII
A director of the Corporation shall not, in the absence of fraud, be
disqualified by his office from dealing or contracting with the Corporation
either as a vendor, purchaser or otherwise, nor in the absence of fraud shall a
director of the Corporation be liable to account to the Corporation for any
profit realized by him from or through any transaction or contract of the
Corporation by reason of the fact that such director, or any firm of which such
director is a member or any corporation of which such director is an officer,
director or stockholder, was interested in such transaction or contract if such
transaction or contract has been authorized, approved or ratified in a manner
provided in the Law for authorization, approval or ratification of transactions
or contracts between the Corporation and one or more of its directors or
officers or between the Corporation and any other corporation, partnership,
association or other organization in which one or more of its directors or
officers are directors or officers or have a financial interest.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware as the By-laws of the Corporation may provide. The books of the
Corporation may be kept outside the State of Delaware at such place or places as
may be designated from time to time by the Board of Directors of the Corporation
or in the By-laws of the Corporation. Election of directors need not be by
written ballot unless the By-laws of the Corporation so provide.
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ARTICLE X
Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of the Law or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of Section 279 of the Law, order a meeting of the creditors or
class of creditors and/or the stockholders or class of stock of the Corporation,
as the case may be, to be summoned in such manner as said court directs. If a
majority in number representing three-fourths (3/4) of the value of the
creditors or class of creditors and/or the stockholders or class of stockholders
of the Corporation, as the case may be, agree to any compromise or arrangement
or to any reorganization of the Corporation as a consequence of such compromise
or arrangement, said compromise or arrangement of said reorganization shall, if
sanctioned by the Court to which said application has been made, be binding on
all the creditors or class of creditors and/or on all the stockholders or class
of stockholders, of the Corporation, as the case may be, and also on the
Corporation.
ARTICLE XI
The Board of Directors of the Corporation may adopt a resolution
proposing to amend, alter, change or repeal any provision contained in this
Second Amended and Restated Certificate of Incorporation, in the manner now or
hereafter prescribed by statute.
ARTICLE XII
A. Indemnification of Officers and Directors: The Corporation shall:
1. indemnify, to the fullest extent permitted by the Law, any
present or former director of the Corporation and any present or former officer,
employee or agent of the Corporation selected by the Board of Directors for
indemnification, such selection to be evidenced by an indemnification agreement,
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Corporation) by reason of the fact that such person is or was a director, or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, or if such person has previously been designated for
indemnification by a resolution of the Board of Directors, is or was an officer,
employee or agent of the Corporation, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such person's conduct was unlawful. The termination of any action, suit or
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proceeding by judgment, order, settlement or conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which such person
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that such person's conduct was unlawful; and
2. indemnify any present or former director of the Corporation and any
present or former officer, employee or agent of the Corporation selected by the
Board of Directors for indemnification, such selection to be evidenced by an
indemnification agreement, who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact that
such person is or was a director, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or if such person has
previously been designated for indemnification by a resolution of the Board of
Directors, is or was an officer, employee or agent of the Corporation, against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to, the Corporation,
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper; and
3. indemnify any present or former director or officer or any present
or former employee or agent of the Corporation selected by the Board of
Directors for indemnification, such selection to be evidenced by an
indemnification agreement, against expenses (including attorneys' fees) actually
and reasonably incurred by such person in connection therewith, to the extent
that such person has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in Article XII.A.1. and 2., or in
defense of any claim, issue or matter therein; and
4. make any indemnification under Article XII.A.1. and 2. (unless
ordered by a court) only as authorized in the specific case upon a determination
that indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because such director, officer, employee or
agent has met the applicable standard of conduct set forth in Article XII.A.1.
and 2. Such determination shall be made, with respect to a person who is an
officer or director at the time of such determination, (a) by a majority vote of
the directors who are not parties to such action, suit or proceeding, even if
less than a quorum, or (b) by a committee of such directors designated by a
majority vote of such directors, even if less than a quorum, or (c) if there are
no such directors, or if such directors so direct, by independent legal counsel
in a written opinion, or (d) by the stockholders of the Corporation; and
5. pay expenses incurred by a director or officer in defending a civil
or criminal action, suit or proceeding in advance of the final disposition of
such action, suit or proceeding
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upon receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that such director or
officer is not entitled to be indemnified by the Corporation as authorized in
this Article XII. Notwithstanding the foregoing, the Corporation shall not be
obligated to pay expenses incurred by a director or officer with respect to any
threatened, pending, or completed claims, suits or actions, whether civil,
criminal, administrative, investigative or otherwise ("Proceedings"), initiated
or brought voluntarily by such director or officer and not by way of defense
(other than Proceedings brought to establish or enforce a right to
indemnification under the provisions of this Article XII, unless a court of
competent jurisdiction determines that each of the material assertions made by
such director or officer in such Proceedings were not made in good faith or were
frivolous). The Corporation shall not be obligated to indemnify such director or
officer for any amount paid in settlement of a Proceeding covered hereby without
the prior written consent of the Corporation to such settlement; and
6. not deem the indemnification and advancement of expenses provided
by, or granted pursuant to, the other subsections of this Article XII as
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any By-law, agreement or vote of
stockholders or disinterested directors, or otherwise, both as to action in such
director's or officer's official capacity and as to action in another capacity
while holding such office; and
7. have the right, authority and power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
such person and incurred by such person in any such capacity, or arising out of
such person's status as such, whether or not the Corporation would have the
power to indemnify such person against such liability under the provisions of
this Article XII; and
8. deem the provisions of this Article XII to be a contract between
the Corporation and each director, or appropriately designated officer, employee
or agent who serves in such capacity at any time while this Article XII is in
effect, and any repeal or modification of this Article XII shall not affect any
rights or obligations then existing with respect to any state of facts then or
theretofore existing or any action, suit or proceeding theretofore or thereafter
brought or threatened based in whole or in part upon such state of facts. The
provisions of this Article XII shall not be deemed to be a contract between the
Corporation and any directors, officers, employees or agents of any other
corporation (the "Second Corporation") which shall merge into or consolidate
with the Corporation when the Corporation shall be the surviving or resulting
corporation, and any such directors, officers, employees or agents of the Second
Corporation shall be indemnified to the extent required under the Law only at
the discretion of the board of Directors of the Corporation; and
9. continue the indemnification and advancement of expenses provided
by, or granted pursuant to, this Article XII, unless otherwise provided when
authorized or ratified, as to a person who has ceased to be a director, officer,
employee or agent of the Corporation, and the indemnification and advancement of
expenses provided by, or granted pursuant to, this Article XII shall inure to
the benefit of the heirs, executors and administrators of such a person.
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B. Elimination of Certain Liability of Directors: No director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Law, as the same exists or hereafter may be amended, or (iv)
for any transaction from which the director derived an improper personal
benefit. If the Law is amended to authorize the further elimination or
limitation of liability of directors, then the liability of a director of the
Corporation, in addition to the limitation on personal liability provided
herein, shall be limited to the fullest extent permitted by the amended Law. Any
repeal or modification of this Article XII by the stockholders of the
Corporation shall be prospective only and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
IN WITNESS WHEREOF, the Corporation has caused this Second Amended and
Restated Certificate of Incorporation to be signed by its President on _________
___, 1998.
NATURAL NUTRITION GROUP, INC.
(F/K/A INTREPID FOOD HOLDINGS,
INC.)
By:
-------------------------------------
William R. Voss
President and Chief Executive Officer
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
Natural Nutrition Group, Inc. (formerly known as Intrepid Food Holdings,
Inc.) and Subsidiaries
We consent to the use in this Amendment No.3 to the Registration Statement No.
333-53501 relating to 3,300,000 shares of common stock of Natural Nutrition
Group, Inc. (formerly known as Intrepid Food Holdings, Inc.) and subsidiaries
(the Company) on Form S-1 of our report dated February 20,1998, (April 9, 1998
as to Note 7, July 24, 1998 as to the effects of the stock split described in
Note 1) appearing in the Prospectus, which is a part of this Registration
Statement, and of our report dated February 20,1998 relating to the financial
statement schedule appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Costa Mesa, CA
July 27,1998
