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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1998
REGISTRATION NO. 333-53501
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT
Under
the Securities Act of 1933
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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 22, 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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(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 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, was approximately
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$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 due to 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. 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. 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, weather, 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."
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<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.
15
<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.
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<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, includes 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 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 due to 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
11.4%, 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
23.9%, 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 $3.5
million for the years ended December 31, 1997 and December 31, 1996,
respectively. The decrease of $3.2 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 $43.3 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 $600,000 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 $39.6 million for the years ended December 31, 1997 and 1996, respectively.
The decrease of $39.3 million is primarily due to the issuance in 1996 of $0.9
million of Common Stock and $18.9 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. All of these
borrowings are secured by all of the Company's assets. 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 $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.
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.
27
<PAGE> 29
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
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<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)....................................... 27,840 * *
William J. Nictakis(9)...................................... 27,840 * *
All directors and executive officers as a group (8
persons).................................................. 2,733,881 62.5% 35.6%
</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, 27,840 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.
Costa Mesa, California
February 20, 1998
(April 9, 1998 as to Note 7,
July , 1998 as to the effects of
the stock split described in Note 1)
The accompanying consolidated financial statements include the effects of a
stock split of the Company's common stock anticipated to be approved by the
Company's Board of Directors in July 1998, subject to stockholder approval prior
to the closing of the Company's initial public offering. The above opinion is in
the form which will be signed by Deloitte & Touche LLP upon consummation of the
stock split, which is described in Note 1 of the notes to the consolidated
financial statements, and assuming that, from February 20, 1998 to the date of
such stock split, no other events will have occurred that would affect the
accompanying financial statements and notes thereto.
Deloitte & Touche LLP
Costa Mesa, California
July 2, 1998
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; 3,866,570, 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
9)...................... 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 (used in) 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
cost (FIFO) 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
alternate 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 $4,903 of cost in excess
of the fair value of net assets acquired. This goodwill is being amortized on a
straight-
F-9
<PAGE> 63
NATURAL NUTRITION GROUP, INC.
(FORMERLY KNOWN AS INTREPID FOOD HOLDINGS, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 which
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 Accounting Principles Board 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 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.
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>
- ---------------
* To be filed by amendment.
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.
II-1
<PAGE> 72
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. 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>
<C> <S>
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>
<C> <S>
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
** To be filed by amendment
(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 21st 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 21, 1998
- ----------------------------------------------------- Executive Officer, and President
William R. Voss (Principal Executive Officer)
* Senior Vice President and Chief July 21, 1998
- ----------------------------------------------------- Financial Officer (Principal
Diane J. Beardsley Accounting Officer)
* Director July 21, 1998
- -----------------------------------------------------
Roger S. McEniry
* Director July 21, 1998
- -----------------------------------------------------
David S. Katz
* Director July 21, 1998
- -----------------------------------------------------
Timothy J. Healy
* Director July 21, 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 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
(April 9, 1998 as to Note 7)
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 1.1
Document processed with T&W WPClean by MBERLIN (CO) on Tuesday, 05/05/98
at 9:44 PM
3,300,000 Shares
NATURAL NUTRITION GROUP, INC.
Common Stock
($.001 Par Value)
UNDERWRITING AGREEMENT
_______________, 1998
BT Alex. Brown Incorporated
Adams, Harkness & Hill, Inc.
As Representatives of the
Several Underwriters
c/o BT Alex. Brown Incorporated
One Bankers Trust Plaza
130 Liberty Street
New York, New York 10006
Gentlemen:
Natural Nutrition Group, Inc., a Delaware corporation (the
"Company"), proposes to sell to the several underwriters (the "Underwriters")
named in Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 3,300,000 shares of the Company's Common
Stock, $.001 par value (the "Firm Shares"). The respective amounts of the Firm
Shares to be so purchased by the several Underwriters are set forth opposite
their names in Schedule I hereto. The Company also proposes to sell at the
Underwriters' option an aggregate of up to 495,000 additional shares of the
Company's Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company (a) that
you are authorized to enter into this Agreement on behalf of the several
Underwriters, and (b) that the several Underwriters are willing, acting
severally and not jointly, to purchase the numbers of Firm Shares set forth
opposite their respective names in Schedule I, plus their pro rata portion of
the Option Shares if you elect to exercise the over-allotment option in whole or
in part for the accounts of the several Underwriters. The Firm Shares and the
Option Shares (to the extent the aforementioned option is exercised) are herein
collectively called the "Shares."
In consideration of the mutual agreements contained herein and
of the interests of the parties in the transactions contemplated hereby, the
parties hereto agree as follows:
<PAGE> 2
A registration statement on Form S-1 (File No.
333-53501) with respect to the Shares has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission. Copies of such registration statement, including any
amendments thereto, the preliminary prospectuses (meeting the requirements of
the Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have heretofore been
delivered by the Company to you. Such registration statement, together with any
registration statement filed by the Company pursuant to Rule 462 (b) of the
Act, is herein referred to as the "Registration Statement," which shall be
deemed to include all information omitted therefrom in reliance upon Rule 430A
and contained in the Prospectus referred to below. "Prospectus" means (i) the
form of prospectus first filed with the Commission pursuant to Rule 424(b) or
(ii) the last preliminary prospectus included in the Registration Statement
filed prior to the time it becomes effective or filed pursuant to Rule 424(a)
under the Act that is delivered by the Company to the Underwriters for delivery
to purchasers of the Shares, together with the term sheet or abbreviated term
sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each
preliminary prospectus included in the Registration Statement prior to the time
it becomes effective is herein referred to as a "Preliminary Prospectus."
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the
Underwriters as follows:
(a)
The Company has been duly organized and is validly existing as a corporation in
good standing under the laws of the State of Delaware with corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement. Each of the subsidiaries of the Company as
listed in Exhibit 21 to Item 16(a) of the Registration Statement (collectively,
the "Subsidiaries") has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement.
The Subsidiaries are the only subsidiaries, direct or indirect, of the Company.
The Company and each of the Subsidiaries are duly qualified to transact
business in all jurisdictions in which the conduct of their business requires
such qualification, except for such jurisdiction where the failure to so
qualify would not result in a material adverse change in the earnings,
business, management, properties, assets, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as a whole.
The outstanding shares of capital stock of each of the Subsidiaries have been
duly authorized and validly issued, are fully paid and non-assessable and are
owned by the Company or another Subsidiary free and clear of all liens,
encumbrances and equities and claims; and no options,
2
<PAGE> 3
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in the Subsidiaries are outstanding.
(b) The outstanding shares of Common Stock of the Company have
been duly authorized and validly issued and are fully paid and non-assessable;
the Shares to be issued and sold by the Company have been duly authorized and
when issued, paid for and delivered as contemplated herein will be validly
issued, fully paid and non-assessable; and no preemptive rights of stockholders
exist with respect to any of the Shares or the issue and sale thereof. Neither
the filing of the Registration Statement nor the offering or sale of the Shares
as contemplated by this Agreement gives rise to any rights, other than those
which have been disclosed in the Prospectus, waived or satisfied, for or
relating to the registration of any shares of Common Stock. This Agreement has
been duly authorized, executed and delivered by the Company.
(c) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. All of the Shares
conform to the description thereof contained in the Registration Statement. The
form of certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(d) The Registration Statement (other than any registration
statement filed by the Company after the effectiveness of this Agreement
pursuant to Rule 462(b)) has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. Any registration statement filed by the Company pursuant
to Rule 462(b) after the effectiveness of this Agreement will become effective
no later than 10:00 P.M., New York City time, on the date of this Agreement. The
Commission has not issued an order preventing or suspending the use of any
Prospectus relating to the proposed offering of the Shares nor instituted
proceedings for that purpose. The Registration Statement complies, and the
Prospectus and any amendments or supplements thereto will comply, with the
requirements of the Act and the Rules and Regulations. The Registration
Statement and any amendment thereto do not contain, and will not contain, any
untrue statement of a material fact, and do not omit, and will not omit, to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue statement
of material fact and do not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company by or on behalf of
any Underwriter through the Representatives, specifically for use in the
preparation thereof.
3
<PAGE> 4
(e) The consolidated financial statements of the Company and
the Subsidiaries, together with related notes and schedules as set forth in the
Registration Statement, present fairly the consolidated financial position and
the results of operations and cash flows of the Company and the Subsidiaries, at
the indicated dates and for the indicated periods. Such financial statements and
related schedules have been prepared in accordance with generally accepted
principles of accounting, consistently applied throughout the periods involved,
except as disclosed therein, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary financial
and statistical data included in the Registration Statement presents fairly the
information shown therein and such data has been compiled on a basis consistent
with the financial statements presented therein and the books and records of the
Company. The pro forma financial information included in the Registration
Statement and the Prospectus present fairly the information shown therein, have
been prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements, have been properly compiled on the
pro forma bases described therein, and, in the opinion of the Company, the
assumptions used in the preparation thereof are reasonable and the adjustments
used therein are appropriate to give effect to the transactions or circumstances
referred to therein.
(f) Deloitte & Touche LLP, who has certified certain of the
financial statements, as set forth under the heading "Experts", filed with the
Commission as part of the Registration Statement, are independent public
accountants as required by the Act and the Rules and Regulations.
(g) There is no action, suit, claim or proceeding pending or,
to the knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise which if
determined adversely to the Company or any of its Subsidiaries might result in
any material adverse change in the earnings, business, management, properties,
assets, operations, condition (financial or otherwise) or prospects of the
Company and of the Subsidiaries taken as a whole or to prevent the consummation
of the transactions contemplated hereby, except as set forth in the Registration
Statement.
(h) The Company and the Subsidiaries have good and marketable
title to all of the properties and assets reflected as owned by them in the
financial statements (or as described in the Registration Statement) hereinabove
described, subject to no lien, mortgage, pledge, charge or encumbrance of any
kind, except as otherwise reflected in such financial statements (or as
described in the Registration Statement) or which are not material to the
earnings, business, management, properties, assets, operations, condition
(financial or otherwise) or prospects of the Company and the Subsidiaries taken
as a whole. The Company and the Subsidiaries occupy their leased properties
under valid and enforceable leases conforming in all material respects to the
description thereof set forth in the Registration Statement, with such
exceptions as do not materially interfere with the use made or proposed to be
made of such property by the Company or a Subsidiary.
4
<PAGE> 5
(i) The Company and the Subsidiaries have filed all Federal,
State, local and foreign income tax returns which have been required to be filed
and have paid all taxes indicated by said returns and all assessments received
by them or any of them to the extent that such taxes have become due and are not
being contested in good faith. All tax liabilities have been adequately provided
for in the financial statements of the Company.
(j) Since the respective dates as of which information is
given in the Registration Statement, as it may be amended or supplemented, there
has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, operations, condition (financial or otherwise),
or prospects of the Company and its Subsidiaries taken as a whole, whether or
not occurring in the ordinary course of business, and there has not been any
material transaction entered into or any material transaction that is probable
of being entered into by the Company or the Subsidiaries, other than
transactions in the ordinary course of business and changes and transactions
described in the Registration Statement, as it may be amended or supplemented.
The Company and the Subsidiaries have no material contingent obligations which
are not disclosed in the Company's financial statements which are included in
the Registration Statement.
(k) Neither the Company nor any of the Subsidiaries is or with
the giving of notice or lapse of time or both, will be, in violation of or in
default under its Charter or By-Laws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by which
it, or any of its properties, is bound and which default is of material
significance in respect of the condition, financial or otherwise of the Company
and its Subsidiaries taken as a whole or the business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Company and the Subsidiaries taken as a whole. The execution and delivery of
this Agreement and the consummation of the transactions herein contemplated and
the fulfillment of the terms hereof will not conflict with or result in a breach
of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust or other agreement or instrument to which the
Company or any Subsidiary is a party, or of the Charter or by-laws of the
Company or any order, rule or regulation applicable to the Company or any
Subsidiary of any court or of any regulatory body or administrative agency or
other governmental body having jurisdiction, except for such conflicts, breaches
or defaults which would not result in a material adverse change to the earnings,
business, management, properties, assets, operations, condition (financial or
otherwise) or prospects of the Company and the Subsidiaries taken as a whole.
(l) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is required in connection with the execution and delivery by
the Company of this Agreement and the consummation of the transactions herein
contemplated, except as required by the Commission, the National Association of
Securities Dealers, Inc. (the "NASD") or as may be necessary to qualify the
Shares for public
5
<PAGE> 6
offering by the Underwriters under state securities or Blue Sky laws.
(m) The Company and each of the Subsidiaries holds all
material licenses, certificates and permits from governmental authorities which
are necessary to the conduct of their businesses.
(n) Neither the Company, nor to the Company's best knowledge,
any of its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Shares.
(o) Neither the Company nor any Subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act of
1940 and the rules and regulations of the Commission thereunder.
(p) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(q) The Company and each of its Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their respective
properties, as is customary for companies engaged in similar industries.
(r) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects
6
<PAGE> 7
and nothing has occurred, whether by action or by failure to act, which would
cause the loss of such qualification.
(s) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
An Act Relating to Disclosure of doing Business with Cuba, and the Company
further agrees that if it commences engaging in business with the government of
Cuba or with any person or affiliate located in Cuba after the date the
Registration Statement becomes or has become effective with the Commission or
with the Florida Department of Banking and Finance (the "Department"), whichever
date is later, or if the information reported or incorporated by reference in
the Prospectus, if any, concerning the Company's business with Cuba or with any
person or affiliate located in Cuba changes in any material way, the Company
will provide the Department notice of such business or change, as appropriate,
in a form acceptable to the Department.
(t) Except as otherwise disclosed in the Prospectus, no labor
dispute with the employees of the Company or any Subsidiary exists or, to the
knowledge of the Company, has been threatened, and the Company is not aware of
any existing or threatened labor disturbance by the employees of any of its or
any Subsidiary's principal suppliers, manufacturers or contractors, which, in
either case, might reasonably be expected to result in a material adverse change
in the earnings, business, management, properties, assets, operating conditions
(financial or otherwise) or prospects of the Company and of the Subsidiaries
taken as a whole.
(u) The Company and its Subsidiaries license, own or possess,
or can acquire on reasonable terms, adequate patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other intellectual
property (collectively, "Intellectual Property") necessary to carry on the
business as now operated by them, except where the failure to own or possess or
otherwise be able to acquire such Intellectual Property would not result in a
material adverse change to the earnings, business, management, properties,
assets, operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries taken as a whole, and neither the Company nor any
of its Subsidiaries has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with respect to any
Intellectual Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its Subsidiaries therein, and which infringement or conflict
(if the subject of any unfavorable decision, ruling or finding) or invalidity or
inadequacy, singly or in the aggregate, would result in a material adverse
change in the earnings, business, management, properties, assets, operating
conditions (financial or otherwise) or prospects of the Company and of the
Subsidiaries taken as a whole.
(v) Except as described in the Registration Statement and
except as would not, singly or in the aggregate, result in a material adverse
change in the earnings, business, management, properties, assets, operating
conditions (financial or otherwise) or prospects of the Company and of the
Subsidiaries taken as a whole, (i) neither the Company nor any of its
7
<PAGE> 8
Subsidiaries is in violation of any federal, state, local or foreign statute,
law, rule, regulation, ordinance, code, policy or rule of common law or any
judicial or administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to pollution or
protection of human health, the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata) or
wildlife, including, without limitation, laws and regulations relating to the
release or threatened release of chemicals, pollutants, contaminants, wastes,
toxic substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials (collectively, "Environmental Laws"), (ii) the Company and
its Subsidiaries have all permits, authorizations and approvals required under
any applicable Environmental Laws and are each in compliance with their
requirements, (iii) there are no pending or, to the Company's knowledge,
threatened administrative, regulatory or judicial actions, suits, demands,
demand letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company or any of its Subsidiaries and (iv) there are no events or circumstances
that might reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of its
subsidiaries relating to Hazardous Materials or any Environmental Laws.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and
covenants herein contained, and subject to the conditions herein set forth, the
Company agrees to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase from the Company, at a price of $_____
per share, the number of Firm Shares set forth opposite the name of each
Underwriter in Schedule I hereof, subject to adjustments in accordance with
Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be
made by wire transfer of immediately available funds to the order of the Company
against delivery of certificates therefor to the Representatives for the several
accounts of the Underwriters. Such payment and delivery are to be made at the
Chicago, Illinois offices of Latham & Watkins, at 10:00 a.m., Eastern time, on
__________________________ or at such other time and date not later than five
business days thereafter as you and the Company shall agree upon, such time and
date being herein referred to as the "Closing Date." (As used herein, "business
day" means a day on which the New York Stock Exchange is open for trading and on
which banks in New York are open for business and not permitted by law or
executive order to be closed.) The certificates for the Firm Shares will be
delivered in such denominations and in such registrations as the Representatives
request in writing not later than the second full business day prior to the
Closing Date, and will be made available for inspection by the Representatives
at least one business day prior to the Closing Date.
8
<PAGE> 9
(c) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company hereby grants an option to the several Underwriters to
purchase the Option Shares at the price per share as set forth in the first
paragraph of this Section 2. The option granted hereby may be exercised in whole
or in part by giving written notice (i) at any time before the Closing Date and
(ii) only once thereafter within 30 days after the date of this Agreement, by
you, as Representatives of the several Underwriters, to the Company setting
forth the number of Option Shares as to which the several Underwriters are
exercising the option, the names and denominations in which the Option Shares
are to be registered and the time and date at which such certificates are to be
delivered. The time and date at which certificates for Option Shares are to be
delivered shall be determined by the Representatives but shall not be earlier
than three nor later than 10 full business days after the exercise of such
option, nor in any event prior to the Closing Date (such time and date being
herein referred to as the "Option Closing Date"). If the date of exercise of the
option is three or more days before the Closing Date, the notice of exercise
shall set the Closing Date as the Option Closing Date. The number of Option
Shares to be purchased by each Underwriter shall be in the same proportion to
the total number of Option Shares being purchased as the number of Firm Shares
being purchased by such Underwriter bears to the total number of Firm Shares,
adjusted by you in such manner as to avoid fractional shares. The option with
respect to the Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters. You, as
Representatives of the several Underwriters, may cancel such option at any time
prior to its expiration by giving written notice of such cancellation to the
Company. To the extent, if any, that the option is exercised, payment for the
Option Shares shall be made on the Option Closing Date by wire transfer of
immediately available funds to the order of the Company against delivery of
certificates therefor at the Chicago, Illinois offices of Latham & Watkins.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a
public offering of the Firm Shares as soon after the execution and delivery of
this Agreement as the Representatives deem it advisable to do so. The Firm
Shares are to be initially offered to the public at the initial public offering
price set forth in the Prospectus. The Representatives may from time to time
thereafter change the public offering price and other selling terms. To the
extent, if at all, that any Option Shares are purchased pursuant to Section 2
hereof, the Underwriters will offer them to the public on the foregoing terms.
It is further understood that you will act as the
Representatives for the Underwriters in the offering and sale of the Shares in
accordance with a Master Agreement Among Underwriters entered into by you and
the several other Underwriters.
4. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the several Underwriters
that:
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(a) The Company will (i) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representatives containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations, (ii) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations and (iii) file on a timely basis all
reports and any definitive proxy or information statements required to be filed
by the Company with the Commission subsequent to the date of the Prospectus and
prior to the termination of the offering of the Shares by the Underwriters.
(b) The Company will advise the Representatives promptly (i)
when the Registration Statement or any post-effective amendment thereto shall
have become effective, (ii) of receipt of any comments from the Commission,
(iii) of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional information,
and (iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the use of the Prospectus or of
the institution of any proceedings for that purpose. The Company will use its
best efforts to prevent the issuance of any such stop order preventing or
suspending the use of the Prospectus and to obtain as soon as possible the
lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under (or obtain exemptions from the
application of) the Blue Sky or state securities laws of such jurisdictions as
the Representatives may reasonably have designated in writing and will make such
applications, file such documents, and furnish such information as may be
reasonably required for that purpose, provided the Company shall not be required
to qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not now so qualified or required to file
such a consent or where it would be subject to taxation as a foreign
corporation. The Company will, from time to time, prepare and file such
statements, reports, and other documents, as are or may be required to continue
such qualifications in effect for so long a period as the Representatives may
reasonably request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives may
reasonably request. The Company will deliver to the Representatives at or before
the Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver to
the Representatives such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
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<PAGE> 11
reasonably be requested), and of all amendments thereto, as the Representatives
may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"), and
the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the Prospectus. If, during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Representatives, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances
existing at the time the Prospectus is delivered to a purchaser, not misleading,
or, if it is necessary at any time to amend or supplement the Prospectus to
comply with any law, the Company promptly will prepare and file with the
Commission an appropriate amendment to the Registration Statement or supplement
to the Prospectus so that the Prospectus as so amended or supplemented will not,
in the light of the circumstances when it is so delivered, be misleading, or so
that the Prospectus will comply with the law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
15 months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earning statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(g) The Company will, for a period of five years from the
Closing Date, deliver to the Representatives copies of annual reports and copies
of all other documents, reports and information furnished by the Company to its
stockholders or filed with any securities exchange pursuant to the requirements
of such exchange or with the Commission pursuant to the Act or the Securities
Exchange Act of 1934, as amended. The Company will deliver to the
Representatives similar reports with respect to significant subsidiaries, as
that term is defined in the Rules and Regulations, which are not consolidated in
the Company's financial statements.
(h) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of Common
Stock (or agreement for such) will be made for a period of 180 days after the
date of this Agreement, directly or indirectly, by the Company otherwise than
hereunder or with the prior written consent of BT Alex. Brown Incorporated;
provided, however, that the Company may issue shares of its Common Stock or
options to purchase its Common Stock, or shares of Common Stock upon exercise of
options, pursuant to any stock option, stock bonus or other stock plan or
arrangement described in the Registration Statement and may issue shares of
Common Stock in connection with acquisitions.
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(i) The Company will use its best efforts to list, subject to
notice of issuance, the Shares on the Nasdaq National Market.
(j) The Company has caused each officer, director, present
stockholder and option holder of the Company to furnish to you, on or prior to
the date of this Agreement, a letter or letters, in form and substance
satisfactory to the Underwriters, pursuant to which each such person shall agree
not to offer, sell, sell short or otherwise dispose of any shares of Common
Stock of the Company or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Shares or
derivative of Common Shares owned by such person or request the registration for
the offer or sale of any of the foregoing (or as to which such person has the
right to direct the disposition of) for a period of 180 days after the date of
this Agreement, directly or indirectly, except with the prior written consent of
BT Alex. Brown Incorporated ("Lockup Agreements").
(k) The Company shall apply the net proceeds of its sale of
the Shares as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the
proceeds received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Subsidiaries to register as an
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act").
(m) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
for the Common Stock.
(n) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any securities of the Company.
5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to
the performance of the obligations of the Company under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel for the
Company; the cost of printing and delivering to, or as requested by, the
Underwriters copies of the Registration Statement, Preliminary Prospectuses, the
Prospectus, this Agreement, the Underwriters' Selling Memorandum, the
Underwriters' Invitation Letter, the Listing Application, the Blue Sky Survey
and any supplements or amendments thereto; the filing fees of the Commission;
the filing fees and expenses (including legal fees and disbursements) incident
to securing any required review by the National Association of Securities
Dealers, Inc. (the "NASD") of the terms of the sale of the Shares; the listing
fee of the Nasdaq National Market; and the expenses, including the fees and
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<PAGE> 13
disbursements of counsel for the Underwriters, incurred in connection with the
qualification of the Shares under State securities or Blue Sky laws. The Company
agrees to pay all costs and expenses of the Underwriters, including the fees and
disbursements of counsel for the Underwriters, incident to the offer and sale of
directed shares of the Common Stock by the Underwriters to employees and persons
having business relationships with the Company and its Subsidiaries. The Company
shall not, however, be required to pay for any of the Underwriters expenses
(other than those related to qualification under NASD regulation and State
securities or Blue Sky laws) except that, if this Agreement shall not be
consummated because the conditions in Section 6 hereof are not satisfied, or
because this Agreement is terminated by the Representatives pursuant to Section
11 hereof, or by reason of any failure, refusal or inability on the part of the
Company to perform any undertaking or satisfy any condition of this Agreement or
to comply with any of the terms hereof on its part to be performed, unless such
failure to satisfy said condition or to comply with said terms be due to the
default or omission of any Underwriter, then the Company shall reimburse the
several Underwriters for reasonable out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of performing
their obligations hereunder; but the Company shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the
Firm Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the Option
Closing Date, as the case may be, of the representations and warranties of the
Company contained herein, and to the performance by the Company of its covenants
and obligations hereunder and to the following additional conditions:
(a) The Registration Statement and any post-effective
amendments thereto shall have become effective and any and all filings required
by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and
any request of the Commission for additional information (to be included in the
Registration Statement or otherwise) shall have been disclosed to the
Representatives and complied with to their reasonable satisfaction. No stop
order suspending the effectiveness of the Registration Statement, as amended
from time to time, shall have been issued and no proceedings for that purpose
shall have been taken or, to the knowledge of the Company, shall be contemplated
by the Commission and no injunction, restraining order, or order of any nature
by a Federal or state court of competent jurisdiction shall have been issued as
of the Closing Date which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, the opinion of Katten
Muchin & Zavis, counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters to the effect
that:
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(i) The Company and each subsidiary named in Exhibit 21 to the
Registration Statement (each a "Subsidiary," and collectively the
"Subsidiaries") has been duly incorporated, is existing as a corporation in good
standing under the laws of the State of Delaware (with respect to the Company)
and the states as indicated in Exhibit 21 to the Registration Statement (with
respect to the Subsidiaries) and has the corporate power and authority to own or
lease its properties and conduct its business as described in the Prospectus;
and the Company and each Subsidiary is duly qualified as a foreign corporation
and is in good standing in each jurisdiction set forth in a certificate
(attached hereto as Exhibit A) from the Company in which the Company certifies
the states in which the Company or such Subsidiary owns or leases real property
or has employees or offices.
(ii) The Company has authorized and outstanding capital stock
as set forth under the heading "Capitalization" in the Prospectus; the
authorized capital stock of the Company (including the Common Stock) conforms as
to legal matters to the description thereof in the Prospectus; all outstanding
shares of Common Stock have been duly authorized and validly issued and are
fully paid and nonassessable; and the stockholders of the Company have no
preemptive rights with respect to any shares of capital stock of the Company
granted by the Company under its Certificate or By-laws or any contract known to
us to which the Company is a party. The form of certificate used to evidence the
Common Stock complies with all applicable requirements of the Certificate and
By-laws and the General Corporation Law of the State of Delaware.
(iii) The Shares to be issued and sold by the Company under
the Underwriting Agreement have been duly authorized and when issued and
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<PAGE> 15
delivered to the underwriters against payment therefor as provided by the
Underwriting Agreement will have been validly issued, fully paid and
nonassessable.
(iv) Except as described in or contemplated by the Prospectus,
to the knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any Common Shares or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(v) To our knowledge, there are no legal or governmental
proceedings pending other than those set forth under "Business - Legal
Proceedings" in the Prospectus to which the Company or any Subsidiary is a party
or of which any property of the Company or any Subsidiary is the subject, which
are required to be described in the Registration Statement or the Prospectus;
and to our knowledge no such proceedings are threatened by governmental
authorities or others.
(vi) The Company has corporate power and authority to enter
into and perform its obligations under the Underwriting Agreement. The
Underwriting Agreement has been duly authorized, executed and delivered by the
Company and is enforceable against the Company in accordance with its terms; and
the performance by the Company of the Underwriting Agreement and the
consummation of the Transaction will not result in a breach or violation of any
of the terms or provisions of or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any Subsidiary pursuant to, (i) any contract,
indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument known to us to which the Company or any Subsidiary is a
party or by which they or their respective properties are bound, (ii) the
Certificate or By-laws, (iii) any laws or administrative rules or regulations
normally applicable to transactions of the sort contemplated by the Underwriting
Agreement (other than state securities or Blue Sky laws, rules or regulations)
or (iv) any judgment, order or decree known to us of any court or governmental
agency or body to which the Company or any Subsidiary is a party or by which
they or their respective properties are expressly bound.
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<PAGE> 16
(vii) No consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation by the
Company of the Transaction, except such as may be required under the Act or as
may be required under the securities or Blue Sky laws of any jurisdiction or by
the NASD.
(viii) The Registration Statement has become effective under
the Act and, to the best of our knowledge, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that purpose have
been instituted or are pending or threatened by the Commission. Any required
filing of the Prospectus and any supplement thereto pursuant to Rule 424(b)
under the Rules and Regulations has been made in the manner and within the time
period required by such Rule 424(b).
(ix) The Company has been advised by the Nasdaq National
Market that the Common Stock has been approved for listing on the Nasdaq
National Market. The Registration Statement on Form 8-A relating to the Common
Stock has become effective under the Securities Exchange Act of 1934, as
amended.
(x) The Registration Statement and the Prospectus (other than
the financial statements are supporting schedules and other financial data
included therein, as to which we render no opinions), and each amendment or
supplement thereto, as of their respective effective or issue dates and as of
the Closing Date, complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations.
(xi) To our knowledge, there are no contracts or documents of
a character required to be described in the Registration Statement or Prospectus
or to be filed as exhibits to the Registration Statement or Prospectus which are
not described and filed as required, and the descriptions in the Registration
Statement and Prospectus of such contracts and other documents are accurate in
all material respects and such descriptions fairly present in all material
respects the information required to be shown.
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(xii) The Company is not, and will not be as a result of the
consummation of the Transaction and the application of the net proceeds
therefrom described in the Prospectus, an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(xiii) All outstanding shares of capital stock of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and are owned of record by the Company. The Company has not
created any lien or encumbrance on, or transferred any interest in, such stock
pursuant to any express provision of any indenture, mortgage, deed of trust,
note agreement or other agreement known to us to which the Company is a party or
by which it is bound, and to our knowledge, no person other than the Company has
expressly asserted any lien on or claim of ownership with respect to, such
stock.
(xiv) The statements under the captions "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources," "Business - Legal Proceedings," "Management
Employment Agreements, - Indemnification Agreements, - 1997 Stock Option Plan, -
Employee Incentive Compensation Plan, - Employee Stock Purchase Plan, and -
Retirement Plan," "Principal Stockholders," "Shares Eligible for Future Sale,"
"Description of Capital Stock" and "Certain Transactions" in the Prospectus and
Item 14 of Part II of the Registration Statement, insofar as such statements
constitute a summary of legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to such legal
matters, documents and proceedings.
In rendering such opinion Katten Muchin & Zavis may rely as to
matters governed by the laws of states other than Illinois, New York and
Delaware or Federal laws on local counsel in such jurisdictions, provided that
in each case Katten Muchin & Zavis shall state that they believe that they and
the Underwriters are justified in relying on such other counsel. In addition to
the matters set forth above, such opinion shall also include a statement to the
effect
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that nothing has come to the attention of such counsel which leads them
to believe that (i) the Registration Statement, at the time it became effective
under the Act (but after giving effect to any modifications incorporated therein
pursuant to Rule 430A under the Act) and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements, in the light of
the circumstances under which they are made, not misleading (except that such
counsel need not express a view as to financial statements, schedules and
statistical information therein). With respect to such statement, Katten Muchin
& Zavis may state that their belief is based upon the procedures set forth
therein, but is without independent check and verification.
(c) The Representatives shall have received from Latham &
Watkins, counsel for the Underwriters, an opinion dated the Closing Date or the
Option Closing Date, as the case may be, substantially to the effect specified
in subparagraphs (ii), (iv), (v) and (x) of Paragraph (b) of this Section 6, and
that the Company is a duly organized and validly existing corporation under the
laws of the State of Delaware. In rendering such opinion Latham & Watkins may
rely as to all matters governed other than by the laws of the States of New York
and Delaware or Federal laws on the opinion of counsel referred to in Paragraph
(b) of this Section 6. In addition to the matters set forth above, such opinion
shall also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the Registration
Statement, or any amendment thereto, as of the time it became effective under
the Act (but after giving effect to any modifications incorporated therein
pursuant to Rule 430A under the Act) as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact, necessary in order to make the statements, in the light
of the circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, schedules and
statistical information therein). With respect to such statement, Latham &
Watkins may state that their belief is based upon the procedures set forth
therein, but is without independent check and verification.
(d) The Representatives shall have received at or prior to the
Closing Date from Latham & Watkins a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the qualification
for offering and sale by the Underwriters of the Shares under the State
securities or Blue Sky laws of such jurisdictions as the Representatives may
reasonably have designated to the Company.
(e) You shall have received, on each of the dates hereof, the
Closing Date and the Option Closing Date, as the case may be, letters dated the
date hereof, the Closing
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Date or the Option Closing Date, as the case may be, in
form and substance satisfactory to you, of each of Deloitte & Touche LLP and
Mead, Poortinga & Company confirming that they are independent public
accountants within the meaning of the Act and the applicable published Rules and
Regulations thereunder and stating that in their opinion the financial
statements and schedules examined by them and included in the Registration
Statement comply in form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and Regulations; and
containing such other statements and information as is ordinarily included in
accountants' "comfort letters" to Underwriters with respect to the financial
statements and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, a certificate or
certificates of the Chief Executive Officer and the Chief Financial Officer of
the Company to the effect that, as of the Closing Date or the Option Closing
Date, as the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registrations
Statement has been issued, and no proceedings for such purpose have been taken
or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing Date or the
Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules
424 or 430A under the Act have been made;
(iv) He or she has carefully examined the Registration
Statement and the Prospectus and, in his or her opinion, as of the effective
date of the Registration Statement, the statements contained in the Registration
Statement were true and correct, and such Registration Statement and Prospectus
did not omit to state a material fact required to be stated therein or necessary
in order to make the statements therein not misleading, and since the effective
date of the Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which has not
been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company and its Subsidiaries taken as a whole or the earnings, business,
management, properties, assets, operations, condition (financial or otherwise)
or prospects of the Company and the Subsidiaries taken as a whole, whether or
not arising in the ordinary course of business.
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(g) The Company shall have furnished to the Representatives
such further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters as the
Representatives may reasonably have requested.
(h) The Lockup Agreements described in Section 4(j) are in
full force and effect.
The opinions and certificates mentioned in this Agreement
shall be deemed to be in compliance with the provisions hereof only if they are
in all material respects satisfactory to the Representatives and to Latham &
Watkins, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this
Section 6 shall not have been fulfilled when and as required by this Agreement
to be fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representatives by notifying the Company of such termination in writing
or by telegram at or prior to the Closing Date or the Option Closing Date, as
the case may be.
In such event, the Company and the Underwriters shall not be
under any obligation to each other (except to the extent provided in Sections 5
and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligations of the Company to sell and deliver the portion
of the Shares required to be delivered as and when specified in this Agreement
are subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the Act,
against any losses, claims, damages or liabilities to which such Underwriter or
any such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided,
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however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement, or omission or alleged omission
made in the Registration Statement, any Preliminary Prospectus, the Prospectus,
or such amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Company may otherwise have; provided,
further, that, with respect to any untrue statement or alleged untrue statement
or omission or alleged omission made in any preliminary prospectus, the
foregoing indemnity agreement shall not inure to the benefit of any Underwriter
from whom the person asserting any such losses, claims, damages or liabilities
purchased the Shares concerned, or any person controlling such Underwriter, to
the extent that any such loss, claim, damage or liability of such Underwriter
results from the fact that a copy of the Prospectus was not sent or given to
such person, if required by the Securities Act to have been delivered, at or
prior to the written confirmation of the sale of such Shares to such person and
the untrue statement or alleged untrue statement or omission or alleged omission
was corrected in such Prospectus, if the Company had previously furnished copies
of such Prospectus to such Underwriter.
(b) Each Underwriter severally and not jointly will indemnify
and hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer, or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding; provided, however, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available to any
party who shall fail to give notice as
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provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of Section 8(a) or (b). In case any
such proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party and
shall pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel at its own expense. Notwithstanding the foregoing, the
indemnifying party shall pay as incurred (or within 30 days of presentation) the
fees and expenses of the counsel retained by the indemnified party in the event
(i) the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel, (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them or
(iii) the indemnifying party shall have failed to assume the defense and employ
counsel acceptable to the indemnified party within a reasonable period of time
after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) and by the Company in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if settled
with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or
22
<PAGE> 23
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the one hand or the Underwriters on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this Section 8(d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 8(d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, and (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement,
any Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this Section 8
hereby consents to the jurisdiction of any court having jurisdiction over any
other contributing party, agrees that process issuing from such court may be
served upon him or it by any other contributing party and consents to the
service of such process and agrees that any other contributing party may join
him or it as an additional defendant in any such proceeding in which such other
contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of
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any Underwriter or any person controlling any Underwriter, the Company, its
directors or officers or any persons controlling the Company, (ii) acceptance of
any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter, or to the Company, its directors or
officers, or any person controlling the Company, shall be entitled to the
benefits of the indemnity, contribution and reimbursement agreements contained
in this Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case
may be, any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
Representatives of the Underwriters, shall use your reasonable efforts to
procure within 36 hours thereafter one or more of the other Underwriters, or any
others, to purchase from the Company such amounts as may be agreed upon and upon
the terms set forth herein, the Firm Shares or Option Shares, as the case may
be, which the defaulting Underwriter or Underwriters failed to purchase. If
during such 36 hours you, as such Representatives, shall not have procured such
other Underwriters, or any others, to purchase the Firm Shares or Option Shares,
as the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company or you
as the Representatives of the Underwriters will have the right, by written
notice given within the next 36-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or of the Company except to the extent provided in Section 8
hereof. In the event of a default by any Underwriter or Underwriters, as set
forth in this Section 9, the Closing Date or Option Closing Date, as the case
may be, may be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to BT Alex. Brown
Incorporated, Bankers Trust Plaza, 130 Liberty Street,
24
<PAGE> 25
New York, New York 10006, Attention: Corporate Finance Department; if to the
Company to Natural Nutrition Group, Inc., 135 South LaSalle Street, Suite 1134,
Chicago, Illinois 60603, Attention: William R. Voss, with a copy to Katten
Muchin & Zavis, 525 W. Monroe, Suite 1600, Chicago, Illinois 60661,
Attention: Kenneth W. Miller, Esq.
11. TERMINATION.
This Agreement may be terminated by you by notice to the
Company as follows:
(a) at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which information
is given in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the Company and its
Subsidiaries taken as a whole or the earnings, business, management, properties,
assets, operations, condition (financial or otherwise) or prospects of the
Company and its Subsidiaries taken as a whole, whether or not arising in the
ordinary course of business, (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, escalation, declaration, emergency, calamity, crisis or change
on the financial markets of the United States would, in your reasonable
judgment, make it impracticable to market the Shares or to enforce contracts for
the sale of the Shares, or (iii) suspension of trading in securities generally
on the New York Stock Exchange or the American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such Exchange, (iv) the enactment, publication, decree or
other promulgation of any statute, regulation, rule or order of any court or
other governmental authority which in your opinion materially and adversely
affects or may materially and adversely affect the business or operations of the
Company, (v) declaration of a banking moratorium by United States or New York
State authorities, (vi) any downgrading in the rating of the Company's debt
securities by any "nationally recognized statistical rating organization" (as
defined for purposes of Rule 436(g) under the Exchange Act); (vii) the
suspension of trading of the Company's common stock by the Commission on the
Nasdaq Stock Market or (viii) the taking of any action by any governmental body
or agency in respect of its monetary or fiscal affairs which in your reasonable
opinion has a material adverse effect on the securities markets in the United
States; or
(b) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of
the Underwriters, the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have
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any right or obligation hereunder. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company and the Underwriters acknowledge and agree that
the only information furnished or to be furnished by any Underwriter to the
Company for inclusion in any Prospectus or the Registration Statement consists
of the information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), legends required by
Item 502(d) of Regulation S-K under the Act and the information under the
caption "Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
If the foregoing letter is in accordance with your
understanding of our agreement, please sign and return to us the enclosed
duplicates hereof, whereupon it will become a binding agreement among the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
NATURAL NUTRITION GROUP, INC.
By:
Name:
Title:
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The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
BT ALEX. BROWN INCORPORATED
ADAMS, HARKNESS & HILL, INC.
As Representatives of the several
Underwriters listed on Schedule I
By: BT Alex. Brown Incorporated
By: ----------------------------------
Authorized Officer
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SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Shares
Underwriter to be Purchased
BT Alex. Brown Incorporated
Adams, Harkness & Hill, Inc.
Total ____________
____________
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<PAGE> 1
EXHIBIT 5
July 21, 1998
Natural Nutrition Group, Inc.
135 South LaSalle St., Suite 3800
Chicago, Illinois 60603
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel for Natural Nutrition Group, Inc., a Delaware
corporation (the "Company") in connection with the preparation and filing by the
Company of a Registration Statement on Form S-1--File No. 333-53501 (the
"Registration Statement") with the Securities and Exchange Commission under the
Securities Act of 1933, as amended. The Registration Statement relates to the
sale by the Company of up to an aggregate of 3,795,000 shares of the Company's
Common Stock, $0.001 par value per share (the "Common Stock").
In connection with this opinion, we have relied as to matters of fact,
without investigation, upon certificates of public officials and others and upon
affidavits, certificates and written statements of directors, officers and
employees of, and the accountants for, the Company. We have also examined
originals or copies, certified or otherwise identified to our satisfaction, of
such instruments, documents and records as we have deemed relevant and necessary
to examine for the purpose of this opinion, including (a) the Registration
Statement, (b) the proposed form of Underwriting Agreement between the Company,
BT Alex. Brown Incorporated and Adams, Harkness & Hill, Inc. (the "Underwriting
Agreement"), (c) the form of Second Amended and Restated Certificate of
Incorporation of the Company, (d) Amended and Restated By-laws of the
Company and (e) resolutions adopted by the Board of Directors and stockholders
of the Company.
In connection with this opinion, we have assumed the accuracy and
completeness of all documents and records that we have reviewed, the genuineness
of all signatures, the due authority of the parties signing such documents, the
authenticity of the documents submitted to
<PAGE> 2
Natural Nutrition Group, Inc.
July 21, 1998
Page 2
us as originals and the conformity to authentic original documents of all
documents submitted to us as certified, conformed or reproduced copies.
Based upon and subject to the foregoing, it is our opinion that up to
the 3,795,000 shares of Common Stock covered by the Registration Statement
(including up to the 495,000 shares issuable upon exercise of the Underwriter's
over-allotment option), when sold by the Company and paid for in accordance with
the provisions of the Underwriting Agreement, will be legally issued, fully paid
and non-assessable shares of Common Stock.
Our opinion expressed above is limited to the General Corporation Law
of the State of Delaware, and we do not express any opinion concerning any other
laws. This opinion is given as of the date hereof, and we assume no obligation
to advise you of changes that may hereafter be brought to our attention.
We hereby consent to the reference to our name in the Registration
Statement under the caption "Legal Matters" and further consent to the inclusion
of this opinion as Exhibit 5 to the Registration Statement.
Very truly yours,
/s/ KATTEN MUCHIN & ZAVIS
