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Filed Pursuant to Rule 424(b)(3)
File No. 333-7202
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INTERCORP EXCELLE INC.
1,065,000 SHARES OF COMMON STOCK
1,065,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
This Prospectus relates to an offering by Intercorp Excelle Inc., a Canadian
corporation (the "Company") of 1,000,000 shares of common stock, no par value
(the "Common Stock") and 1,065,000 redeemable common stock purchase warrants
(the "Warrants"), through Sharpe Capital, Inc. the representative (the
"Representative") and Aegis Capital Corporation and Klein Maus and Shire
Incorporated (who, with the Representative, are collectively the
"Underwriters"). This Prospectus also relates to the offering through the
Underwriters of 65,000 shares of Common Stock by certain Selling Securityholders
who are officers and directors of the Company (the "Selling Securityholders").
The Company will not receive any of the proceeds from the offering of the shares
by the Selling Securityholders. The shares of Common Stock offered hereby are
sometimes referred to as "Shares" herein. The offering of the Shares and
Warrants hereby is sometimes referred to as the "Offering" herein. The Shares
and Warrants are being offered and sold separately and will be separately
transferable immediately upon issuance.
Each Warrant entitles the holder to purchase one share of Common Stock at an
exercise price of $6.00 per share, subject to adjustment in certain events,
during the four year period commencing on the date of this Prospectus (the
"Effective Date"). The Warrants are subject to redemption by the Company at $.10
per Warrant, at any time commencing one year from the Effective Date (or earlier
with the consent of the Representative) and prior to their expiration, on not
less than 30 days' written notice to the holders of the Warrants, provided the
closing bid price per share of Common Stock if traded on the Nasdaq SmallCap
Market, or the last sales price per share if listed on the Nasdaq National
Market or a national exchange, has been at least 150% ($9.00 per share) of the
current Warrant exercise price, for a period of 20 consecutive business days
ending on the third day prior to the date upon which the notice of redemption is
given. The Warrants shall be exercisable until the close of the business date
preceding the date fixed for redemption. See "Description of
Securities--Warrants".
Prior to the Offering, there has been no market for the Common Stock or
Warrants, and there can be no assurance that a market will develop for the
Company's securities in the future or that if developed, it will be sustained.
The Company's Common Stock and Warrants have been approved for quotation on the
Nasdaq SmallCap Market under the trading symbols "RENE" and "RENEW",
respectively, and for the listing on the Boston Stock Exchange under the symbols
"REN" and "RENW", respectively.
The per share public offering price of the Shares and the Warrants and the
exercise price and the other terms of the Warrants offered hereby were
determined by negotiation between the Company and the Underwriters and do not
necessarily bear any direct relationship to the Company's assets, earnings, book
value per share or other generally accepted criteria of value. See
"Underwriting".
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
COMMENCING ON PAGE 8 AND "DILUTION" ON PAGE 18.
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 COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) SECURITYHOLDERS(3)
<S> <C> <C> <C> <C>
Per Share..................... $5.00 $.50 $4.50 $4.50
Per Warrant................... $.10 $.01 $0.09 --
Total(4).................... $5,431,500 $543,150 $4,595,850 $292,500
</TABLE>
SEE FOOTNOTES ON INSIDE FRONT COVER
The Common Stock and Warrants being sold by the Company and the Selling
Securityholders are being offered by the Underwriters on a "firm commitment"
basis, when, as and if delivered to and accepted by the Underwriters, subject to
prior sale, and other conditions and legal matters. The Underwriters reserve the
right to withdraw, cancel or modify the Offering and to reject orders, in whole
or in part, for the purchase of any of the securities offered notwithstanding
tender by check or otherwise. It is expected that delivery of the certificates
representing the Shares and Warrants will be made against payment therefor at
the offices of the Representative, 120 Broadway, 28th Floor, New York, New York
10005 on or about October 16, 1997.
SHARPE CAPITAL, INC.
AEGIS CAPITAL CORP.
KLEIN MAUS AND SHIRE INCORPORATED
The date of this Prospectus is October 9, 1997.
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(1) Does not include additional consideration to be received by the Underwriters
in the form of (i) a non-accountable expense allowance equal to 3% of the
gross offering proceeds (of which $50,000 has been paid), (ii) any value
attributable to the Underwriters' Warrant ("Underwriters' Warrant")
entitling the Underwriters to purchase up to 106,500 shares of Common Stock
and/or 106,500 Warrants at a price per share equal to 165% of the initial
public offering price per Share and per Warrant, and (iii) a financial
consulting agreement with the Representative for a period of thirty-six
months for an aggregate consideration of $88,000 payable in full on the
closing of the Offering. In addition, the Company has agreed to indemnify
the Underwriters against certain liabilities under the Securities Act of
1933, as amended (the "Act"). See "Underwriting".
(2) After deducting discounts and commission payable to the Underwriters, but
before payment of the Underwriters' non-accountable expense allowance of
$153,195 (or $176,174 if the Over-Allotment Option, defined below, is
exercised in full) or the other expenses of the Offering, estimated at
$321,805 payable by the Company. See "Underwriting".
(3) Before deducting the 3% nonaccountable expense allowance being paid by the
Selling Securityholders to the Underwriters of $9,750 ($11,213 if the
Over-Allotment Option is exercised in full).
(4) The Company and the Selling Securityholders have granted the Underwriters an
option, exercisable for 45 days after the Effective Date to purchase up to
an additional 150,000 shares of Common Stock and/or 159,750 Warrants from
the Company and 9,750 shares of Common Stock from the Selling
Securityholders upon the same terms and conditions set forth above, solely
for the purpose of covering over-allotments, if any (the "Over-Allotment
Option"). If the Over-Allotment Option is exercised in full, the total Price
to the Public, Underwriting Discounts and Commissions, Proceeds to Company
and Proceeds to the Selling Securityholders will be $6,246,225, $624,623,
$5,285,227 and $336,375, respectively. See "Underwriting".
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK OR WARRANTS TO
STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK OR WARRANTS TO COVER
SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK OR WARRANTS MAINTAINED BY
THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".
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ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
The Company and its officers, directors and auditors are residents of Canada
and subsequently all of the assets of the Company are or may be located outside
the United States. As a result, service of process may be effected upon the
Company through the offices of Gersten, Savage, Kaplowitz & Fredericks, LLP in
New York, but it may be difficult for investors to effect service of process
within the United States upon non-resident officers and directors, or to enforce
against them judgments obtained in the United States courts predicated upon the
civil liability provision of the Securities Act or state securities laws. The
Company has been advised by its Canadian legal counsel, Wildeboer Rand Thomson
Apps & Dellelce, that a judgment of a United States court predicated solely upon
civil liability under the Securities Act would probably be enforceable in Canada
if the United States court in which the judgment was obtained had a basis for
jurisdiction in the matter that was recognized by a Canadian court for such
purposes. However, there is substantial doubt whether an action could be brought
in Canada in the first instance on the basis of liability predicated solely upon
such laws. If investors have questions with regard to these issues, they should
seek the advice of their individual counsel. The Company has also been advised
by its Canadian legal counsel Wildeboer Rand Thomson Apps & Dellelce that,
pursuant to the Currency Act (Canada), a judgment by a court in any Province of
Canada may only be awarded in Canadian currency. Pursuant to the provision of
the Courts of Justice Act (Ontario), however, a court in the Province of Ontario
shall give effect to the manner of conversion to Canadian currency of an amount
in a foreign currency, where such manner of conversion is provided for in an
obligation enforceable in Ontario.
EXCHANGE RATE DATA
The Company maintains its books of account in Canadian dollars, but has
provided the financial data in this Prospectus in United States dollars with its
audit conducted in accordance with generally accepted auditing standards in the
United States of America. All references to dollar amounts in this Prospectus,
unless otherwise indicated, are in United States dollars.
The following table sets forth, for the periods indicated, certain exchange
rates based on the noon buying rate in New York City for cable transfers in
Canadian dollars. Such rates are the number of United States dollars per one
Canadian dollar and are the inverse of rates quoted by the Federal Reserve Bank
of New York for Canadian dollars per US$1.00. The average exchange rate is based
on the average of the exchange rates on the last day of each month during such
periods. On October 8, 1997, the exchange rate was Cdn$1.00 per US$.7287.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
<S> <C> <C> <C> <C>
1993 1994 1995 1996
--------- --------- --------- ---------
RATE AT END OF PERIOD.................................................. $ 0.7576 $ 0.7143 $ .7353 $ 0.7299
AVERAGE RATE DURING PERIOD............................................. 0.7752 0.7299 0.7299 0.7353
HIGH................................................................... 0.7519 0.7092 0.7299 0.7299
LOW.................................................................... 0.7576 0.7143 0.7353 0.7299
</TABLE>
3
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE
CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" REFERS TO INTERCORP EXCELLE INC.
AND ITS WHOLLY-OWNED SUBSIDIARIES KALMATH INVESTMENTS LIMITED ("KALMATH") A
HOLDING COMPANY, EXCELLE BRAND FOODS CORPORATION, A WHOLLY-OWNED SUBSIDIARY OF
KALMATH, AND INTERCORP FOODS LTD. ALL INFORMATION IN THIS PROSPECTUS, UNLESS
OTHERWISE NOTED, ASSUMES NO EXERCISE OF THE OVER-ALLOTMENT OPTION OR THE
UNDERWRITERS' WARRANT.
THE COMPANY
The Company is in the business of developing, manufacturing, marketing, and
distributing salad dressings, sauces, dips, marinades and mayonnaise. The
Company distributes a branded line of gourmet salad dressings to supermarkets,
gourmet stores and specialty shops, primarily in Canada, under the name "Renee's
Gourmet-TM-." Salad dressings, dips, sauces, marinades and mayonnaise are also
distributed under the brand name "Excelle" and under private labels for both
retail and food service establishments, including supermarkets, restaurants,
hotels, hospitals, schools and other institutional cafeterias throughout Canada
and the United States. The Company markets over 200 products. Management
believes, based on the number of grocery store chains and gourmet stores that
carry the Company's products, that its products are sold in over 2,500 retail
outlets. Renee's has the largest market share of any refrigerated salad dressing
in Canada according to a recent A.C. Nielsen report.
The "Renee's Gourmet-TM-" line is distributed in most supermarkets in
Canada, including but not limited to, A&P, National Grocers, Oshawa Foods and
Provigo. The "Excelle" line is primarily distributed to food service
establishments, including, but not limited to, Scott's Hospitality/KFC and Prime
Restaurants. The Company's private labels include Shaw's (USA), Sobey's,
President's Choice, Master Choice and Wegman's. The private labels are sold
under one of such names or the supermarkets' own name to most supermarkets that
sell the "Renee's Gourmet-TM-" line.
All of the products in the "Renee's Gourmet-TM-" line are primarily made
from natural ingredients and are preservative and MSG free. Certain of the
Company's products are also designed to serve certain specific health conscience
markets. For example, the Company markets some products which are made without
milk, sugars or oils for consumers who are lactose intolerant, diabetics, or
allergy-prone. The Company recently introduced its "Renee's Gourmet Naturally
Light-TM-" line which is low in fat and intended for the growing diet and health
conscience market. Management intends to introduce an extension of the "Renee's
Gourmet-TM-" line which would include low-fat marinades and sauces, as well as
further exploring a line of its products to a kosher designation.
The Company's products are sold to supermarkets in a variety of bottle sizes
and in one gallon containers and individual portion cups and pouches for food
service establishments. The Renee's Gourmet-TM- salad dressings are sold in the
produce section of supermarkets and require refrigeration. Management believes
that it is an advantage to sell its products in the produce section because
fewer competing products are generally sold in the produce section and because
such products naturally complement lettuce and other vegetables sold in the
produce section. Where possible, the Company seeks to display its sauces and
marinades in the meat and poultry sections of supermarkets. The dressings have a
three to nine month refrigerated shelf life depending on the particular product.
The Company's strategy is to continue to capitalize on the significant brand
name recognition of its Renee's line by increasing the amount of supermarkets
carrying its products, increasing the amount of products carried by such stores
and to penetrate other geographic markets including the United States. The
Company also intends to acquire or license other existing sauces and marinades
products for marketing through its established distribution network. In
addition, the Company intends to continue to
4
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expand its food service distribution business by entering into agreements with
large restaurant and hotel chains.
Intercorp Excelle Inc. was formed in Canada in April 1997 to consolidate the
business of its three wholly-owned subsidiaries, Excelle Brand Foods
Corporation, a Canadian company, established in 1987 to produce and distribute
products under the Excelle brand name, as well as private label products,
Kalmath Investments Limited, and Intercorp Foods Ltd., a Canadian company,
established in 1985 to distribute products under the Renee's Gourmet-TM- line.
The Company's principal offices are located at 1880 Ormont Drive, Toronto,
Ontario, Canada M9L 2V4 and its telephone number is (416) 744-2124.
5
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THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 1,000,000 Shares of Common Stock and 1,065,000 Warrants
by the Company and 65,000 Shares by the Selling
Securityholders. The Shares and the Warrants (sometimes
hereinafter collectively referred to as the
"Securities") may be purchased separately and will be
transferable separately upon issuance. Each Warrant is
exercisable at an exercise price of $6.00 per share. The
exercise price of the Warrants is subject to adjustment
in certain circumstances. The Warrants are exercisable
during the four year period commencing on the Effective
Date. The Warrants are redeemable by the Company
commencing one year from the Effective Date (or earlier
with the consent of the Representative) at a price of
$.10 per Warrant on 30 days' prior written notice
provided the last sales price of the Common Stock for 20
consecutive business days equals or exceeds 150% of the
current Warrant exercise price. See "Description of
Securities", "Principal Stockholders and Selling
Securityholders" and "Underwriting".
Common Stock Outstanding
Prior to Offering(1)............ 3,075,000
Common Stock to be
Outstanding After the
Offering(1)..................... 4,075,000
Warrants Outstanding Prior to
Offering(2)..................... 175,000
Warrants to be Outstanding After
the Offering(2)................. 1,240,000
Use of Proceeds................... The net proceeds to the Company from the sale of the
Securities are estimated to be approximately $4,120,850,
after deducting commissions and expenses of the Offering
estimated at $475,000. The Company intends to use the
net proceeds of this Offering for improvements in its
manufacturing capabilities, down payment for the
purchase of its leased facilities, selling and
marketing, the repayment of certain indebtedness, and
for working capital and general corporate purposes
including potential synergistic acquisitions. See "Use
of Proceeds".
Risk Factors...................... The Securities offered hereby are speculative and
involve a high degree of risk and should not be
purchased by anyone who cannot afford the loss of his or
her entire investment. See "Risk Factors" and
"Dilution".
Nasdaq SmallCap Market
Symbols(3)...................... Common Stock--RENE
Warrants--RENEW
Boston Stock Exchange
Symbols(3)...................... Common Stock--REN
Warrants--RENW
</TABLE>
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(1) Does not include an aggregate of 500,000 shares of Common Stock reserved for
issuance upon the exercise of options available for future grant under the
Company's Stock Option Plan (the "Plan"), 200,000 of which have been
granted. See "Management-Stock Option Plan".
(2) Includes 175,000 warrants (the "Bridge Warrants") issued in connection with
the Company's May 1997 bridge financing. The holders of the Bridge Warrants
have the right to exchange such warrants into warrants identical to the
Warrants offered hereby. See "Description of Securities-Bridge Warrants".
(3) The symbols do not imply that a liquid and active market will develop or be
sustained for the Securities upon completion of the Offering.
6
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SUMMARY COMBINED FINANCIAL INFORMATION
The summary financial information set forth below is qualified by and should
be read in conjunction with the Combined Financial Statements, including the
notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
YEAR ENDED JANUARY 31, (UNAUDITED)
--------------------------- --------------------------
<S> <C> <C> <C> <C>
1996 1997 1996 1997
------------ ------------- ------------ ------------
STATEMENT OF INCOME DATA
Revenues................................................ $ 8,457,288 $ 10,459,655 $ 2,309,733 $ 2,780,557
Gross profit............................................ 2,070,404 2,859,721 604,231 847,999
Income from operations.................................. 182,218 484,452 116,630 135,224
Net income.............................................. 421,431 293,961 73,836 79,153
Earnings per share before extraordinary items........... 0.03 0.10 0.02 0.03
Extraordinary items per share........................... 0.11 -- -- --
Earnings per share after extraordinary items............ 0.14 0.10 0.02 0.03
Weighted average number of shares outstanding........... 3,075,000 3,075,000 3,075,000 3,075,000
</TABLE>
<TABLE>
<CAPTION>
AT APRIL 30, 1997
AT JANUARY 31, (UNAUDITED)
-------------------------- ----------------------------
<S> <C> <C> <C> <C>
1996 1997 ACTUAL AS ADJUSTED(1)
------------ ------------ ------------ --------------
BALANCE SHEET DATA
Working capital................................. $ 52,003 $ 367,300 $ 295,235 $ 4,348,085
Total assets.................................... 3,748,482 3,058,747 4,807,999 8,860,849
Long-term debt.................................. 751,034 746,195 698,926 630,926
Total liabilities............................... 3,243,717 2,246,505 3,925,668 3,857,668
Stockholders' equity............................ 504,765 812,242 882,331 5,003,181
</TABLE>
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(1) Reflects the issuance of the 1,000,000 Shares and 1,065,000 Warrants offered
hereby and the application of the net proceeds therefrom.
7
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RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH INVESTMENTS IN THE SECURITIES OFFERED HEREBY. THIS PROSPECTUS CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. AN INVESTMENT IN THE SECURITIES
OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
1. INTENSE COMPETITION IN DRESSING MARKET. The Company's business is
subject to significant competition. The refrigerated salad dressing market is
highly competitive. Outside the refrigerated sector of the industry, Kraft is
the largest competitor in the retail sector. The Company is not a significant
competitor in the shelf-stable sector of the industry. The primary food service
sector competitors that the Company faces are also Kraft, Select, Hellmann's and
Richardson's.
The Company's Renee's Gourmet-TM- brand products compete with other larger
and better capitalized food companies that manufacture refrigerated dressings.
The larger competitors who also place their products in the refrigerated produce
or dairy sections in the United States include Dean's Foods which distributes
Marie's brand salad dressings, T. Marzetti's, an independent manufacturer, and
Naturally Fresh, which three companies comprise approximately 85% of the United
States market. Another significant competitor in the refrigerated section in the
United States includes Walden's.
The private label industry is also highly competitive. Manufacturers compete
on price, quality and taste and contracts are awarded based primarily on these
criterion. The Company has been successful in competing for private label
agreements with several supermarket chains and food service institutions. There
are no assurances that the Company will continue to be able to provide prices
acceptable to its customers.
There are also regional competitors that the Company competes with. Certain
of the Company's competitors have greater financial and other resources than the
Company. See "Business--Competition".
2. SECURED LOANS; EXISTENCE OF LIENS ON SIGNIFICANT PORTION OF ASSETS. A
substantial portion of the Company's assets have been pledged as security for a
credit facility with National Bank of Canada. The credit facility includes a
Cdn$900,000 revolving demand loan, Cdn$1,332,536 in non-revolving demand loans,
Cdn$350,000 U.S. currency forward contract and a Cdn$30,000 business MasterCard.
The credit facility is secured by assets of the Company including assignment of
the Cdn$200,000 life insurance policy on Arnold Unger, the Cdn$150,000 life
insurance policy on Renee Unger, and the Company's accounts receivable,
inventory, and all intangible property. The credit facilty is further secured by
pledges of the outstanding shares of the Company's subsidiaries, however, under
the terms of the credit facility, voting control must remain with the Company's
Chief Executive Officer, Arnold Unger and President, Renee Unger. The credit
facility has been additionally guaranteed by the Company's officers, Renee Unger
and Arnold Unger, in the amount of $250,000 each. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Certain Transactions".
There are certain restrictions on debt to equity ratios along with other
negative and affirmative covenants. The aforementioned pledge of security makes
such assets unavailable to secure additional debt financing, which may affect
the Company's ability to borrow further in the future.
3. UNCERTAINTIES OF GOVERNMENT REGULATION. The Company is subject to
various Canadian and United States regulations relating to health and safety
standards. The Company is also responsible for adhering to environmental
standards for manufacturing facilities. Regulations in new markets and future
changes in existing regulations may adversely impact the Company by raising the
cost of production and delivery of dressings and sauces and/or by affecting the
perceived healthfulness of the Company's products. A failure to comply with one
or more regulatory requirements could result in a variety of sanctions,
including fines and the withdrawal of the Company's products from store shelves.
Because the Company
8
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sells a portion of its products in the United States, the Company must comply
with federal regulations administered by the United States Food and Drug
Administration (the "FDA") and the United States Department of Agriculture. Food
labeling regulations administered by the Secretary of Health and Human Services
through the FDA subject the Company to uniform labeling and certain other
labeling requirements for its products. See "Business--Government Regulation".
4. UNCERTAINTY OF NEW PRODUCT DEVELOPMENT AND NO ASSURANCE OF MARKET
ACCEPTANCE. The perpetuation of the Company's success is dependent upon
continued name recognition and acceptance of the Company's existing and new
products. No assurances can be made that any or all products will achieve or
maintain consumer acceptance. The Company has been developing new flavors and
types of sauces for Renee's Gourmet-TM- brand products along with the Excelle
brand and private labels. The Company has especially focused on increasing its
low-fat and fat-free line of dressing products since low-fat food production is
the fastest growing sector of the refrigerated industry. There are no assurances
that this trend will persist or that the Company will have the ability to
successfully introduce or market any of its new products. Continued product
development and commercialization efforts are subject to all of the risks
inherent in the development of new products including achieving market
acceptance, competition, compliance with labeling and other government
regulations and access to limited shelf space. There is no assurance that the
Company will be able to develop, manufacture and distribute new products which
achieve market acceptance. See "Business".
5. UNCERTAINTY AS TO COMPANY'S ABILITY TO EXPAND INTO UNITED STATES AND
OTHER MARKETS. The Company's sales in the United States have been limited to
private label products. The Company's brand products do not have name
recognition in the United States market. The Company's strategy is to penetrate
into the U.S. market and to introduce its brand products into other markets. The
U.S. market for refrigerated dressings is highly competitive. In order to
penetrate the U.S. and other markets, the Company will have to devote
significant resources to advertising and marketing in such countries in order to
develop consumer awareness of its products and to procure sufficient shelf space
for its products. There can be no assurance that the Company will be successful
in its efforts. The Company intends to devote a portion of the net proceeds of
this Offering toward the expansion into the U.S. market and other markets. See
"Business".
6. LIMITED SHELF-SPACE. The Company's products require refrigeration and
are primarily marketed in the produce section where there is substantial
competition for limited shelf-space. There is no assurance that the Company will
be able to acquire additional shelf-space for its products or maintain its
current space. In order to receive shelf-space, the Company often offers
discounted initial product shipments, advertising allowances or cash. No
assurances may be given that the Company will be able to continue to pay these
expenses.
7. RAW MATERIAL SHORTAGE. The availability and favorable pricing of fresh
ingredients for the manufacture of salad dressings, dips, marinades and
mayonnaise are factors that the Company cannot control. The Company experienced
a decrease in the price of vegetable oil and sugar that was offset by an
increase in the price of eggs and cheeses in the past year. If the Company
cannot be supplied with the raw materials necessary and at favorable prices, the
Company could be adversely affected by having to discontinue certain flavors,
substitute traditional ingredients for others and/or raise prices. Alteration of
products may affect consumer choices and sales and may have a materially adverse
effect on the Company's business. See "Business--Manufacturing".
8. LACK OF PATENT PROTECTION FOR MANUFACTURING PROCESSES OR RECIPES. The
Company holds no patents on either its manufacturing processes or recipes.
Management believes that it provides better protection of its recipes from
competitors by not patenting them, thereby keeping them secret. No assurances
can be made that any of the recipes or the manufacturing process would satisfy
the requirements for a patent, or if a patent were issued, that it would be
enforceable. See "Business--Patents and Trademarks".
9
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9. SEASONAL FLUCTUATION IN COMPANY'S BRANDED SALAD DRESSING SALES. The
Company's business, particularly its retail branded dressing segment, is subject
to the seasonal variations of the refrigerated salad dressing industry that
revolve around the prime produce season in the spring and summer months.
Beginning in March through May, the Company increases its production and sales
of goods. The Company also experiences surges in sales during November and
December. The seasonality of its business has been substantially decreased as a
result of the Company's increase in the food service segment, private label
business and non-salad dressing products such as sauces, which is consistent
throughout the year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
10. DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend
to a significant extent on the efforts of key management personnel, including
Renee Unger, its President, Arnold Unger, its Chief Executive Officer, and other
key personnel. The Company has entered into employment agreements with Arnold
Unger and Renee Unger and other key employees. The loss of one or more of these
key employees could have a material adverse effect on the Company's business.
The Company anticipates acquiring key-person life insurance policies on its
executive officers. In addition, the Company believes that its future success
will depend in large part upon its continued ability to attract and retain
highly qualified management, technical and sales personnel. There can be no
assurance that the Company will be able to attract and retain the qualified
personnel necessary for its business. See "Management".
11. CONTROL BY EXISTING STOCKHOLDERS. Upon the completion of this
Offering, the Company's management collectively beneficially own 70% (67% if the
Underwriters' Over-Allotment Option is exercised in full) of the Company's
outstanding Common Stock. Because of their beneficial stock ownership, these
stockholders will be in a position to continue to elect the majority members of
the Board of Directors and decide matters requiring stockholder approval. See
"Principal Stockholders and Selling Securityholders".
12. PRODUCT LIABILITY CLAIMS. Although the Company has not been subject to
any claims for product liability, the Company could be subject to future product
liability claims in connection with the food products that it sells. As the
Company expands its food products lines and distributes more products into the
marketplace, the Company's exposure to such potential liability will also
increase. The Company currently maintains product liability insurance in the
amount of Cdn$2,000,000 (Cdn$50,000 limit for product recall), however, this
policy only covers certain claims and the cost of legal fees involved in the
defense of such claims which are either covered under the policy or alleged in
such manner as to invoke the insurer's duty to defend the Company. The Company
also maintains umbrella liability coverage in excess of comprehensive coverage
in the amount of Cdn$5,000,000. There is no assurance that such coverage would
be adequate in terms and scope to protect the Company in the event of a
successful product liability claim. No assurance can be given that the Company
will be able to maintain the existing coverage or obtain additional coverage at
commercially reasonable rates. To the extent product liability losses are beyond
the limits or scope of the Company's insurance coverage, the Company could
experience a material adverse effect upon its business, operations,
profitability, and assets.
13. DEPENDENCE ON THIRD PARTY FREIGHT HAULERS. The Company is dependent on
independent freight haulers to ship the Company's products to distribution
facilities. The ability of the Company to control its freight expenses is a
significant factor in the Company's gross profit margin. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations". There
is no assurance that the Company will be able to maintain acceptable freight
pricing and arrangements. Furthermore, a labor slowdown, strike or other matters
beyond management's control may adversely affect the Company's ability to ship
its products on a timely basis or at all. See "Business".
14. DEPENDENCE ON MAJOR CUSTOMER. Approximately 11% of the Company's
revenues is derived from sales to Scott Hospitality/KFC. Although the Company
has entered into a written agreement with Scott Hospitality/KFC, either party
may elect not to renew the agreement when it terminates on December 1, 1997.
There is no assurance that the Company will maintain its relationship with Scott
Hospitality/KFC, or that Scott Hospitality/KFC will renew the agreement with the
Company. In the event
10
<PAGE>
Scott Hospitality/KFC does not renew the agreement or otherwise continues
acquiring product from the Company, the Company's business and results of
operations would be materially adversely effected.
15. POTENTIAL REINSTATEMENT OF SETTLED CLAIMS. In 1996, the Company
entered into written agreements with several of its trade creditors, with
respect to claims of past due trade payables. The agreements provided for
foregiveness of those claims in the amount of approximately $557,415, net of
related expenses. Some of these agreements provide that if the Company defaults
on payments to a trade creditor for the amount remaining owed under such
agreement then the Company would be liable for the entire claimed amount owed to
such creditor. Default by the Company on such agreements would have a material
adverse effect on the Company's financial condition and results of operation.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
16. NO PRIOR PUBLIC MARKET. Prior to this Offering, there has been no
public market for the Common Stock and/or Warrants. Accordingly, there can be no
assurance that an active trading market will develop and be sustained upon the
completion of this Offering. The initial public offering price of the Common
Stock and/or Warrants has been determined by negotiations between the Company
and the Representative and does not necessarily bear any relation to the
Company's asset value, earnings or other objective criteria. See "Underwriting".
The stock market has, from time to time, experienced extreme price and volume
fluctuations which often have been unrelated to the operating performance of
particular companies. Although it has no obligation to do so, the Representative
intends to engage in market-making activities or solicited brokerage activities
with respect to the purchase or sale of the Common Stock and Warrants in the
Nasdaq SmallCap Market. However, no assurance can be given that the
Representative will continue to participate as a market-maker in the securities
of the Company or that other broker/ dealers will make a market in such
securities which may adversely impact the liquidity of the securities.
Regulatory developments and economic and other external factors, as well as
period-to-period fluctuations in financial results, may also have a significant
impact on the market price of such securities. See "Description of Securities".
17. IMMEDIATE AND SUBSTANTIAL DILUTION. This Offering involves an
immediate and substantial dilution to investors. Purchasers of Shares in the
Offering will incur an immediate dilution of $3.79 per Share in the net tangible
book value of their investment from the initial public offering price, which
dilution amounts to approximately 76% of the initial public offering price per
Share. Investors in the Offering will pay $5.00 per Share, as compared with an
average cash price of $.26 per share of Common Stock paid by existing
stockholders. See "Dilution".
18. BROAD DISCRETION IN APPLICATION OF PROCEEDS; UNSPECIFIED ACQUISITIONS;
SUBSTANTIAL PROCEEDS TO REPAY DEBT. Approximately 31% of the net proceeds of
this Offering will be applied to working capital and general corporate purposes.
This includes a portion of the net proceeds of this Offering currently allocated
to working capital for potential acquisitions. As of the Effective Date, the
Company has not identified any particular acquisition targets. Stockholders of
the Company may have no opportunity to approve specified acquisitions or to
review the financial condition of any potential target. Accordingly, management
of the Company will have broad discretion over the use of proceeds.
Approximately 18% of the net proceeds of this Offering will be used to repay
Company indebtedness, including $681,250, or 16% of the net proceeds, to repay
the bridge financing incurred in May 1997. See "Use of Proceeds".
19. NEED FOR ADDITIONAL FINANCING. The Company believes that the proceeds
of the Offering will, together with revenues from operations, be sufficient to
finance the Company's working capital requirements for a period of at least 24
months following the completion of this Offering. In addition, a part of the
Company's strategy is to acquire companies with related and complementary
businesses, although the Company has not presently identified any specific
acquisitions. The continued expansion and operation of the Company's business
beyond such 24 month period and its ability to make acquisitions may be
dependent upon its ability to obtain additional financing. There can be no
assurance that additional
11
<PAGE>
financing will be available on terms acceptable to the Company, or at all. In
the event that the Company is unable to obtain such additional financing as it
becomes necessary, the Company may not be able to achieve all of its business
plans. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
20. SHARES ELIGIBLE FOR FUTURE SALE. Of the 4,075,000 shares of Common
Stock of the Company to be outstanding upon completion of this Offering, 65,000
are being registered and resold by the Underwriters for the Selling
Securityholders and 2,835,000 shares shall be "restricted securities," which are
owned by "affiliates" of the Company, as those terms are defined in Rule 144
promulgated under the Act. Absent registration under the Act, the sale of such
shares is subject to Rule 144, as promulgated under the Act. All of the
"restricted securities" are eligible for resale under Rule 144. In general,
under Rule 144, subject to the satisfaction of certain other conditions, a
person, including an affiliate of the Company, who has beneficially owned
restricted shares of Common Stock for at least one year is permitted to sell in
a brokerage transaction, within any three-month period, a number of shares that
does not exceed the greater of 1% of the total number of outstanding shares of
the same class, or if the Common Stock is quoted on Nasdaq or a stock exchange,
the average weekly trading volume during the four calendar weeks preceding the
sale. Rule 144 also permits a person who presently is not and who has not been
an affiliate of the Company for at least three months immediately preceding the
sale and who has beneficially owned the shares of Common Stock for at least two
years to sell such shares without regard to any of the volume limitations as
described above. Holders of 2,900,000 shares of Common Stock are affiliates of
the Company. All of the Company's shareholders who are affiliates have agreed
not to sell or otherwise dispose of any of their shares of Common Stock now
owned or issuable upon the exercise of any option for a period of 18 months from
the Effective Date, without the prior written consent of the Representative. The
remaining 175,000 shares or Common Stock outstanding are eligible for resale
under Rule 144 on May 22, 1998, subject to a 12 month lock up during which such
shares may not be sold without the prior written consent of the Representative
who has agreed not to release such lock-up. No prediction can be made as to the
effect, if any, that sales of shares of Common Stock or the availability of such
shares for sale will have on the market prices of the Company's securities
prevailing from time to time. The possibility that substantial amounts of Common
Stock may be sold under Rule 144 into the public market may adversely affect
prevailing market prices for the Common Stock and Warrants and could impair the
Company's ability to raise capital in the future through the sale of equity
securities. See "Shares Eligible for Future Sale".
21. NO DIVIDENDS AND NONE ANTICIPATED. To date, no dividends have been
declared or paid on the Common Stock, and the Company does not anticipate
declaring or paying any dividends in the foreseeable future, but rather intends
to reinvest profits, if any, in its business. Investors should, therefore, be
aware that it is unlikely that any dividends will be paid on the Common Stock in
the foreseeable future. The Company is also restricted from declaring dividends
under certain covenants with debt holders. See "Dividends".
22. NASDAQ ELIGIBILITY AND MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF
COMMON STOCK FROM NASDAQ SMALLCAP MARKET. Prior to this Offering, there has
been no established public trading market for the Company's Common Stock or
Warrants and there is no assurance that a public trading market for the
Company's securities will develop after the completion of this Offering. If a
trading market does in fact develop for the securities offered hereby, there can
be no assurance that it will be sustained.
The Company's Common Stock and Warrants have been approved for listing on
the Nasdaq SmallCap Market upon the Effective Date. The Commission has recently
approved new rules imposing criteria for listing of securities on the Nasdaq
SmallCap Market, including standards for maintenance of such listing. In order
to qualify for initial quotation of securities on the Nasdaq SmallCap Market, an
issuer, among other things, must have at least $4,000,000 in net tangible
assets, $5,000,000 in market value of the public float and a minimum bid price
of $4.00 per share. For continued listing, an issuer, among other things, must
have $2,000,000 in net tangible assets, $1,000,000 in market value of securities
in the public float and
12
<PAGE>
a minimum bid price of $1.00 per share. If the Company is unable to satisfy the
Nasdaq SmallCap Market's maintenance criteria in the future, its Common Stock
and Warrants may be delisted from the Nasdaq SmallCap Market. In such event,
trading, if any, in the Company's Common Stock or Warrants, would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or the
NASD's "Electronic Bulletin Board." As a consequence of such delisting, an
investor would likely find it more difficult to dispose of, or to obtain
quotations as to, the price of the Company's Common Stock or Warrants.
23. PENNY STOCK REGULATION. In the event that the Company is unable to
satisfy the maintenance requirements for the Nasdaq SmallCap Market and its
Common Stock falls below the minimum bid price of $5.00 per share for the
initial quotation, trading would be conducted on the "pink sheets" or the NASD's
Electronic Bulletin Board. In the absence of the Common Stock being quoted on
Nasdaq, or listed on an exchange, trading in the Common Stock would be covered
by Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") if the Common Stock is a "penny stock." Under such rule,
broker-dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. Securities are exempt from this rule if the market
price is at least $5.00 per share.
The Commission adopted regulations that generally define a penny stock to be
any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Such exceptions include an equity security listed
on Nasdaq, and an equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000, if such issuer has been in continuous operation
for three years, (ii) net tangible assets of at least $5,000,000, if such issuer
has been in continuous operation for less than three years, or (iii) average
revenue of at least $6,000,000 for the preceding three years. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
If the Company's Common Stock were to become subject to the regulations
applicable to penny stocks, the market liquidity for the Common Stock and
Warrants would be severely affected, limiting the ability of broker-dealers to
sell the Common Stock and Warrants and the ability of purchasers in this
Offering to sell their Common Stock and Warrants in the secondary market. There
is no assurance that trading in the Common Stock and Warrants will not be
subject to these or other regulations that would adversely affect the market for
such securities.
24. POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants
offered hereby are redeemable, in whole or in part, at a price of $.10 per
Warrant, commencing one year after the Effective Date (or earlier with the
consent of the Underwriters) and prior to their expiration; provided that (i)
prior notice of not less than 30 days is given to the Warrantholders; (ii) the
closing bid price of the Common Stock on each of the 20 consecutive business
days ending on the third business day prior to the date on which the Company
gives notice of redemption has been at least $9.00; and (iii) Warrantholders
shall have exercise rights until the close of the business day preceding the
date fixed for redemption. Notice of redemption of the Warrants could force the
holders to exercise the Warrants and pay the Exercise Price at a time when it
may be disadvantageous for them to do so, or to sell the Warrants at the current
market price when they might otherwise wish to hold them, or to accept the
redemption price, which may be substantially less then the market value of the
Warrants at the time of redemption. See "Description of Securities--Warrants".
25. REQUIREMENTS OF CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN
CONNECTION WITH THE EXERCISE OF THE WARRANTS. The Warrants offered hereby are
not exercisable unless, at the time of exercise, (i) there is a current
prospectus relating to the Common Stock issuable upon the exercise of the
Warrants under an effective registration statement filed with the Securities and
Exchange Commission, and (ii) such Common Stock is then qualified for sale or
exempt therefrom under applicable state securities laws in the jurisdictions in
which the various holders of Warrants reside. There can be no assurance,
however, that the
13
<PAGE>
Company will be successful in maintaining a current registration statement.
After a registration statement becomes effective, it may require updating by the
filing of a post-effective amendment. A post-effective amendment is required (i)
any time after nine months subsequent to the effective date when any information
contained in the prospectus is over sixteen months old, (ii) when facts or
events have occurred which represent a fundamental change in the information
contained in the registration statement, or (iii) when any material change
occurs in the information relating to the plan or distribution of the securities
registered by such registration statement. The Company anticipates that this
Registration Statement will remain effective for at least nine months following
the date of this Prospectus or until July 8, 1998 assuming a post effective
amendment is not filed by the Company. The Warrants will be separately tradeable
and separately transferable from the Common Stock offered hereby immediately
commencing on the Effective Date. The Company intends to qualify the Warrants
and the shares of Common Stock issuable upon exercise of the Warrants in a
limited number of states, although certain exemptions under state securities
("blue sky") laws may permit the Warrants to be transferred to purchasers in
states other than those in which the Warrants were initially qualified. The
Company will be prevented, however, from issuing shares of Common Stock upon
exercise of the Warrants in those states where exemptions are unavailable and
the Company has failed to qualify the Common Stock issuable upon exercise of the
Warrants. The Company may decide not to seek, or may not be able to obtain,
qualification of the issuance of such Common Stock in all of the states in which
the holders of the Warrants reside. In such a case, the Warrants of those
holders will expire and have no value if such Warrants cannot be exercised or
sold. See "Description of Securities".
26. NON-REGISTRATION IN CERTAIN JURISDICTIONS OF SHARES UNDERLYING THE
WARRANTS. Although the Common Stock and the Warrants will not knowingly be sold
to purchasers in jurisdictions in which they are not registered or otherwise
qualified for sale, purchasers may buy the Common Stock or Warrants in the
aftermarket or may move to jurisdictions in which the shares of Common Stock
issuable upon exercise of the Warrants are not so registered or qualified during
the period that the Warrants are exercisable. In such event, the Company could
be unable to issue shares to those persons desiring to exercise their Warrants
unless and until the shares could be registered or qualified for sale in the
jurisdiction in which such purchasers reside, or an exemption to such
qualification exists or is granted in such jurisdiction. If the Company was
unable to register or qualify the shares in a particular state and no exemption
to such registration or qualification was available in such jurisdiction, in
order to realize any economic benefit from the purchase of the Warrants, a
holder might have to sell the Warrants rather than exercising them. No assurance
can be given, however, as to the ability of the Company to effect any required
registration or qualification of the Common Stock or Warrants in any
jurisdiction in which registration or qualification has not already been
completed. See "Description of Securities--Warrants".
14
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Securities
offered hereby at public offering prices of $5.00 per Share and $.10 per
Warrant, after deducting underwriting commissions and offering expenses to be
paid by the Company, is estimated to be $4,120,850. The Company expects to apply
the net proceeds of the Offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE OF
APPLICATION OF PROCEEDS AMOUNT NET PROCEEDS
- ------------------------------------------------------------------ ------------ -------------
<S> <C> <C>
Repayment of Bridge Notes (1)..................................... $ 681,250 16%
Sales and Marketing(2)............................................ $ 627,000 15%
Purchase of Currently Leased Facilities(3)........................ $ 525,000 13%
Property and Equipment(4)......................................... $ 500,000 12%
Hire Additional Sales and Operations Personnel(5)................. $ 200,000 5%
Research and Development.......................................... $ 150,000 4%
Payment of Financial Advisory Fee(6).............................. $ 88,000 2%
Repayment of Long Term Debt(7).................................... $ 68,000 2%
Working Capital(8)................................................ $ 1,281,600 31%
------------ -----
Total............................................................. $ 4,120,850 100%
-----
-----
</TABLE>
- ------------------------
(1) On the consummation of this Offering, the Company is obligated to repay the
principal of the Bridge Notes in the aggregate principal amount of $625,000,
plus accrued and unpaid interest of approximately $56,250. The Bridge Notes
accrue interest on the principal amount at the rate of 12% per annum. The
proceeds from the Bridge Notes were used for working capital purposes and to
repay certain debt. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
(2) The net proceeds allocated to marketing and sales are expected to be applied
towards the promotion of the Company's main brands in their respective key
markets, including the United States, over the next 24 months. The proceeds
are intended to be applied to product development, market research, point of
sale materials, event participation and sponsorships, paid media
advertising, distributor incentive programs and sales person incentive
programs.
(3) The Company anticipates purchasing the facilities it is currently leasing.
See "Business--Properties and Facilities". The net proceeds allocated to
purchasing the leased facilities are expected to be applied towards a
portion of the purchase price. The balance of the purchase price is expected
to be financed and paid over time from the Company's operations.
(4) The net proceeds allocated to property and equipment purchases in the next
24 months are expected to be applied towards the expansion and improvement
of the Company's production capacity.
(5) The Company anticipates hiring additional sales and operations employees and
has allocated these net proceeds to fund certain incremental costs over the
next 24 months.
(6) $88,000 will be paid to the Underwriters pursuant to a three-year financial
advisory agreement, all of which is payable upon consummation of the
Offering.
(7) The net proceeds allocated to repayment of long term debt is to pay in full
the outstanding principal balance and accrued and unpaid interest of the
Business Development Bank of Canada loan due August 2001. The loan is
repayable in blended monthly payments of $1,200 principal and interest at a
floating commercial and industrial loan rate, plus 2.5% per annum. The loan
is secured by personal guarantees by Arnold Unger and Renee Unger in the
amount of Cdn$50,000 each and a lien on the Company's assets. See "Certain
Transactions".
15
<PAGE>
(8) The net proceeds allocated to working capital includes funds for general
corporate purposes including possible strategic acquisitions, although the
Company has not identified any definite acquisition candidate.
The foregoing represents the Company's estimate of the allocation of the net
proceeds of the Offering, based upon the current status of its operations and
anticipated business needs. It is possible, however, that the application of
funds will differ considerably from the estimates set forth herein due to
changes in the economic climate and/or the Company's planned business operations
or unanticipated complications, delays and expenses, as well as any potential
acquisitions that the Company may consummate, although no specific acquisition
has been identified. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations". Any reallocation of the net proceeds will
be at the discretion of the Board of Directors of the Company.
Any additional net proceeds realized from the exercise of the Over-Allotment
Option (up to approximately $689,377) will be added to the Company's working
capital.
Pending application, the net proceeds will be invested principally in
short-term certificates of deposit, money market funds or other short-term
interest-bearing investments.
The Company estimates that the net proceeds from this Offering will be
sufficient to meet the Company's liquidity and working capital requirements for
a period of 24 months from the completion of this Offering. In the event that
the Company consummates any acquisition, although no specific acquisition has
been identified, such funds will be derived from the funds currently allocated
to working capital or from revenues generated from the Company's operations.
DIVIDEND POLICY
The Company has never paid or declared dividends on its Common Stock. The
payment of cash dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements, financial condition and other relevant factors. The Company
intends, for the foreseeable future, to retain future earnings for use in the
Company's business. The Company is restricted from declaring dividends under
loan agreements between the Company and certain lenders. Unless the Company
obtains the lenders' consent, or the Company repays or refinances the loan
agreements, the Company may not declare or pay dividends.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of April
30, 1997 and as adjusted to reflect the sale of 1,000,000 Shares and 1,065,000
Warrants offered hereby and the estimated net proceeds therefrom and the Bridge
Financing of up to $625,000 12% promissory notes and 175,000 shares of Common
Stock and 175,000 Common Stock purchase warrants and the estimated net proceeds
therefrom. The information provided below should be read in conjunction with the
other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
APRIL 30, 1997
----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
------------ --------------
Long-term debt, less current maturities............................................. $ 698,926 $ 630,926
------------ --------------
Shareholders' equity:
Capital Stock, unlimited shares authorized: 2,900,000 issued and outstanding 380 4,121,230
(1); and 4,075,000 issued and outstanding as adjusted (2).....................
Foreign currency transaction adjustment............................................. -41,213 -41,213
Retained earnings................................................................... 923,164 841,914
------------ --------------
Total shareholders' equity...................................................... 882,331 4,921,931
------------ --------------
Total capitalization............................................................ $ 1,581,257 $ 5,552,857
------------ --------------
------------ --------------
</TABLE>
- ------------------------
(1) Represents the rollover of the 200 Shares in the existing companies into
2,900,000 shares of Common Stock of the Company. Does not include 500,000
shares of Common Stock provided for issuance under the Company's Stock
Option Plan of which options to purchase up to 200,000 shares have been
granted.
(2) Reflects 175,000 shares of Common Stock issued in conjunction with bridge
financing and the issuance of the 1,000,000 Shares by the Company. Assumes
no exercise of the Warrants, the Underwriters' Warrant or the Over-Allotment
Option.
17
<PAGE>
DILUTION
Dilution represents the difference between the initial public offering price
paid by the purchasers in the Offering and the net tangible book value per share
immediately after completion of the Offering. Net tangible book value per Share
represents the amount of the Company's total assets minus the amount of its
liabilities and intangible assets divided by the number of shares outstanding.
As of April 30, 1997, after giving effect to the Bridge Financing of $625,000
12% promissory notes, 175,000 shares of Common Stock and 175,000 common stock
purchase warrants, the net tangible book value of the Company's Common Stock was
$801,081 or $0.26 per share. Without taking into account any changes in net
tangible book value after April 30, 1997, other than to give effect to the
Bridge Financing, and other than to give effect to the sale of the Shares and
Warrants offered hereby and the receipt of the net proceeds of this Offering,
the pro forma net tangible book value of the Company as of April 30, 1997 would
have been $4,921,931 or $1.21 per Share. Consequently, there will be an
immediate increase in net tangible book value of $0.95 per Share to the existing
shareholders and an immediate substantial dilution (i.e. the difference between
the offering price of $5.00 and the pro forma net tangible book value per Share
after the Offering) of $3.79 or 76% to new investors purchasing the Shares
offered hereby.
The following table illustrates, as of April 30, 1997, this per share
dilution:
<TABLE>
<S> <C> <C>
Public offering price per Share................................. 5.00
Net tangible book value before Offering(1).................. 0.26
Increase per Share attributable to new investors............ 0.95
---
Pro forma net tangible book value per Share after Offering(1)... 1.21
---
Dilution per Share to new investors(1).......................... 3.79
---
---
</TABLE>
The following table summarizes, as of April 30, 1997, the total number of
shares of Common Stock purchased from the Company, the total consideration paid,
and the average price per share paid by the existing shareholders, after giving
effect to the Bridge Financing, and by new investors who purchase shares of
Common Stock pursuant to this Offering. The computation excludes any value
ascribed to or proceeds relating to the Warrants.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE AVERAGE
SHARES OF TOTAL AGGREGATE OF TOTAL PRICE
PURCHASED (1) SHARES CONSIDERATION CONSIDERATION PER SHARE
------------- ----------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Existing Shareholders........................ 3,075,000 75% 801,081 14% $ 0.26
New Investors................................ 1,000,000 25% 5,000,000 86% 5.00
------------- ----- ------------- ----- -----
Total........................................ 4,075,000 100% 5,801,081 100%
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
- ------------------------
(1) This information does not include (i) 106,500 Shares issuable upon the
exercise of the Underwriters' Warrant; (ii) 500,000 Shares that may be
issued under the Company's Stock Option Plan or (iii) 150,000 Shares
available from the Company under the Over-Allotment Option.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The statements contained in this Prospectus that are not historical are
forward looking statements, including statements regarding the Company's
expectations, intentions, beliefs or strategies regarding the future. Forward
looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward looking statements included in this Prospectus are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward looking statements. Among the factors that could cause actual results to
differ materially are the factors detailed in the risks discussed in the "Risk
Factors" section included in this Prospectus at page 8.
The salad dressing market is highly competitive, in both the refrigerated
and non-refrigerated dressing markets, and consists of foreign manufacturers
most of whom are larger with greater resources. The diverse distribution
channels in which the Company markets its products involve different competitive
factors. The ability to provide specialized services is important to mass
merchandisers and discount stores. Product availability and the ability to offer
consistent product quality at competitive prices is a key competitive factor.
See "Business--Competition".
The Company's future success as a manufacturer and merchandiser of
high-quality salad dressings, sauces, dips and marinades will be influenced by
several factors including the ability of the Company to efficiently meet the
production, quality and taste requirements of its customers, management's
ability to evaluate the public's quality and taste requirements and to achieve
market acceptance of its dressings. Further factors impacting the Company's
operations are increases in expenses associated with continued sales growth, the
ability of the Company to control costs, to develop products with satisfactory
profit margins and the ability to develop and manage the introduction of new
products and competition. Quality control as well as use of natural ingredients
are also essential to the Company's success.
The Company's customer base is divided among retail and private label
customers, and food service establishments. Scotts Hospitality/KFC, a food
service establishment, accounts for approximately 11% of the Company's sales. No
other customer accounts for more than 10% of the Company's sales. Approximately
31% of the Company's sales are to major retail customers, 18% are to major
private label customers, 16% are to food service establishments and the
remaining 35% are to smaller customers.
The Company is not dependent upon any major customer for a significant
portion of its revenues. However, there are customers which do represent between
5-11% of the Company's revenues. These include National Grocer's, Oshawa Foods,
Provigo, A&P and Scotts Hospitality/KFC in Canada and Shaws Supermarkets in the
United States. The Company has contracts with a number of private label
accounts, including Scotts Hospitality/KFC, Shaws, Horizons (IGA) and Sobey's.
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 1997 COMPARED TO THREE MONTHS ENDED APRIL 30,
1996.
Revenues for three months ended April 30, 1997 were $2,780,557, a 20.4%
increase over prior year revenues of $2,309,733. This increase was due to growth
in Renee's branded business (launch of incrementally new Renee's Gourmet
Naturally Light-TM- dressings in May 1996), food service (incremental Scotts
Hospitality/KFC business) and private label (Shaw's, Wegman's in the United
States and Horizon's launch across Canada in April 1997).
Gross profit for three months ended April 30, 1997 was 32.6% of net
revenues, a substantial improvement as compared to the same quarter one year
ago, which was 29.0%. This positive change can be attributed to improvements in
operational efficiency and cost of goods. Lower contracted prices for oil,
cheese and other primary ingredients have contributed as well as lower than
planned factory overhead and
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direct labor expenses (attributable to reduced overtime and temporary help).
Gross margins were not affected by price changes, which, for the most part,
remained unchanged, as compared to the prior year.
Selling and Marketing expenses increased by $171,686 in the three months
ended April 30, 1997 over 1996. A percentage of the increase over the prior year
reflects a continuation of incremental support costs against the launch of
Renee's Gourmet Naturally Light-TM- and a focused strategy to invest in the
growth of branded business through increased advertising and consumer
promotions. General and Administrative expenses of $197,031 were 23.3% higher
than prior year, reflecting both timing differences and increased spending to
support sales growth.
Income from operations increased $18,594, to $135,224 for the three months
ended April 30, 1997 versus the prior year. As a percent of net revenues, income
for the first quarter of 1997 was in line with the first quarter of the prior
year at 5.2%. This increase in income from operations is directly a result of
continued sales growth and improved gross margins, which more than offset the
investment in consumer promotions and advertising.
FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED TO FISCAL YEAR ENDED JANUARY 31,
1996.
Revenues for fiscal year January 31, 1997 were $10,459,655, a 23.7% increase
over the prior year revenues of $8,457,288. This increase was due to double
digit growth in each primary business segment (Retail Branded, Food Service and
Private Label). Renee's branded business growth was impacted by the launch of a
new line of Renee's Gourmet Naturally Light-TM- dressings and three new Renee's
regular line extensions (Mighty Caesar, Light Poppy and Mandarin Orange). Food
Service growth came from incremental Scotts Hospitality/KFC business across
Canada and the private label business was impacted by the launch of a number of
new products under the Shaws label.
Gross Profit for fiscal year ended January 31, 1997 was 29.8% of net
revenues, a substantial improvement as compared to the prior year, which was
26.7%. From the total Gross Profit in the last fiscal year of $2,859,721,
approximately $297,000 can be attributed to improvements in the operational
efficiency and costs of goods, (versus the prior year). The remaining increase
in Gross Profit ($492,000), traces to the mix of goods and incremental volume of
business. Manufacturing efficiencies were impacted by average yield improvements
of 6.0%, aided by capital additions, reduced downtime, improved fill levels, and
increased minimum batch sizes. Lower primary ingredient costs were negotiated
(oil, cheeses, and sugar) which contributed to improved margins. Gross margins
were not affected by price changes, which, for the most part, remained
unchanged, as compared to the prior year.
Selling and Marketing expenses increased by $390,451 in fiscal 1997 over
1996. As a percentage of net revenues, these expenses increased from 12.0% to
13.8%. The increase over the prior year reflects incremental support costs
against the launch of Renee's Gourmet Naturally Light-TM- and a focused strategy
to invest in the growth of branded business through increased advertising and
consumer promotions (demonstrations and couponing).
General and Administrative expenses increased by $120,893 in fiscal 1997
over 1996, however, as a percentage of net revenues, they decreased marginally
from 8.1% to 7.8%. The increase is a result of costs necessitated by sales
growth, however, continued efforts at internal cost controls have ensured
spending is effective.
Income from operations increased $302,234 in fiscal 1997, from $182,218 to
$484,452 an increase of 166%. As a percentage of net revenues, income improved
to 5.1%, as compared to 2.3% for 1996. This increase is a direct result of sales
growth, and improved gross margins, which more than offset the investment in
consumer promotions and advertising.
Interest expense decreased by $9,109 in fiscal 1997, from $86,233 to
$77,124. This change reflects the Company's decision to refinance operating and
term loans, and negotiate a substantially improved banking facility with the
National Bank of Canada in the first half of fiscal 1997.
Net income after including extraordinary items decreased in fiscal 1997 from
$421,431 in fiscal year 1996 to $293,961 in fiscal year 1997 due to the
settlement of past due trade account payables of $557,415 less $156,329 write
off of deferred financing costs in fiscal year 1996.
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LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1996, the Company had a net decrease in cash of $130,839 from
operations. The principal source of cash was from net income of $421,431, a
decrease in inventory of $138,595, prepaid expenses of $29,800 and an addback of
amortization which totaled $230,776. The Company's long term debt borrowing
increased by $314,317 which was used to purchase capital equipment. Bank
indebtedness was reduced by $135,390. Accounts payable and accrued liabilities
decreased by $292,695, primarily reflecting negotiations with certain unsecured
creditors to forgive a substantial portion of amounts owing, and to reclassify
an agreed amount of the debt as long term. During the 1996 fiscal year, the
Company settled certain past due accounts payable in the amount of $918,178 with
certain key suppliers resulting in a one time foregiveness of those accounts
(net of related expenses of $35,534), in the amount of $557,415. As of April 30,
1997, $194,408 remained owing under the settlement agreements, which require
monthly payments of $8,700 until January 1999. Cash used in investing activities
was $112,555 as a result of the purchase of capital equipment, primarily for the
production process. In addition, cash was used for an increase in accounts
receivable by $221,540, directly as a result of increased sales volumes.
In 1997, the Company had a net increase in cash of $416,043 from operations.
The principal source of cash was from net income of $293,961, a decrease in
accounts receivable of $151,567 and an addback of amortization which totaled
$285,320. Accounts payable and accrued liabilities decreased by $190,191,
reflecting improved internal controls, and cash management, which reduced aged
payables in the range of 30-45 days. Cash flow from investing activities was
reduced by $270,481 as a result of the purchase of capital equipment, primarily
for the production process. (The additional capital spent ultimately had a
direct impact on improved margins during fiscal 1997). Excess cash balances were
used to reduce bank indebtedness by $879,717.
The Company's net increase in cash flow from operations for the quarter
ending April 30, 1997 was $123,953, an increase of $72,342, or 140% over the
quarter ending April 30, 1996. Cash flows used in investing activities during
the quarter ended April 30, 1997 were $186,202 compared to $16,273 for the
quarter ended April 30, 1996. This was due to the Company's continuing
acquisition of capital equipment. Net cash provided from financing activities
for the quarter ending April 30, 1997 was $980,575 compared to $930,459 for the
quarter ending April 30, 1996. The source of financing was bank indebtedness
used for working capital purposes.
In June 1997, the Company entered into a secured credit arrangement with
National Bank of Canada. This new facility included a credit line of
Cdn$900,000, that is due on demand and bears interest at prime plus 1.0%. All
borrowings are collateralized by the assets of the Company.
In May 1997, the Company completed a private placement of its securities
("Bridge Financing") in which it sold 12% promissory notes in the aggregate
principal amount of $625,000 ("Bridge Notes"), an aggregate 175,000 shares of
Common Stock and 175,000 redeemable common stock purchase warrants and raised
aggregate gross proceeds of $625,000. The net proceeds of $543,750 were
initially applied to pay bank loans and trade payables as well as expenses of
the Company. The principal and accrued interest on the Bridge Notes are due and
payable upon the earlier of 18 months from the close of the private placement, a
public equity or debt offering by the Company, or the exchange of the majority
of the Company's securities with the securities of another company.
The Company will receive net proceeds of this Offering in an amount
estimated to be $4,120,850. The Company believes that the net proceeds of the
Offering, coupled with income from operations will fulfill the Company's working
capital needs for at least the next two years. It is the Company's intention to
utilize a significant portion of the net proceeds to aggressively seek
synergistic acquisitions which would utilize currently available capacity. The
Company also intends to support its branded Renee's business through increased
marketing, advertising and distribution throughout North America. As the Company
continues to grow, bank borrowings, other debt placements and equity offerings
may be considered, in part, or in combination, as the situation warrants.
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BUSINESS
PRODUCTS
The Company manufactures, markets and distributes over 200 products
including salad dressings, dips, sauces, marinades and mayonnaise. The salad
dressings are marketed throughout Canada and to a lesser degree in the United
States. The Company distributes a line of gourmet salad dressings to
supermarkets, gourmet stores and specialty shops, primarily in Canada, under the
name "Renee's Gourmet-TM-." Salad dressings, dips, sauces, marinades and
mayonnaise are also distributed under the brand name "Excelle" and under private
labels for both retail and food service establishments, including supermarkets,
restaurants, hotels, hospitals, schools and other institutional cafeterias
throughout Canada and the United States. The private labels are sold under one
of such names or the supermarkets' own name. The Company's private labels
include Shaw's (USA), Sobey's, President's Choice for Loblaw Companies, Master
Choice for A&P and Wegman's.
All of the products in the Renee's Gourmet-TM- line are made primarily from
natural ingredients and are preservative and MSG free, as well as being low in
sodium. Certain of the Company's products are also designed to serve certain
specific health conscience markets. For example, the Company markets some
products which are made without milk, sugars or preservatives for consumers who
are lactose intolerant, diabetics, or allergy-prone. The Renee's line also
includes Ranch, Caesar, Chunky Blue Cheese and Coleslaw, as well as more exotic
flavors such as Poppy Seed, Greek Feta and Mandarin Orange. Renee's has the
largest market share of any refrigerated salad dressing in Canada, according to
a recent AC Nielsen report.
The Company recently introduced its "Renee's Gourmet Naturally Light-TM-"
line which is low in fat and intended for the growing diet and health conscience
market. The low-fat line includes, Mandarin Orange, Country Ranch, Ravin'
Raspberry Vinegrette, Mediterranean Vinegrette, Roasted Red Pepper and Garlic,
Spring Herb Garlic Vinegrette and Jazzy Blue Cheese. Management intends to
introduce an extension of the Renee's Gourmet-TM- line which would include
low-fat marinades and sauces, as well as exploring the possibility of converting
a line of its products to a kosher designation.
Excelle products are made from premium ingredients. The Company produces
many salad dressings, dips, sauces, marinades and mayonnaise, including sauces
such as Peanut Sauce, Hickory Sauce and Wing Sauces. In addition, the Company
products include other more exotic sauces such as Key Lime Sauce & Marinade,
Thai and spicy sauces. The Company markets these products to supermarkets under
the Excelle label as well as the supermarkets' own brand under private label
arrangements.
The Company also makes exclusive specialty dressings for restaurants under
their own names. Such dressings are made for Kentucky Fried Chicken, East Side
Mario's, Cultures Restaurant's, and other restaurants.
The Company's products are sold to supermarkets in a variety of bottle sizes
and in one gallon containers and individual portion cups and pouches for food
service establishments. The salad dressings are sold in the produce section of
supermarkets and require refrigeration. Management believes that it is an
advantage to sell its products in the produce section because fewer competing
products are generally sold in the produce section and because such products
naturally complement lettuce and other vegetables sold in the produce section.
Where possible, the Company seeks to display its sauces and marinades in the
meat and poultry sections of supermarkets. The dressings have a three to nine
month refrigerated shelf life.
The Company adheres to strict quality standards and uses many fresh, natural
ingredients where feasible. The Company attracts customers by providing salad
dressings, sauces and other products which have unusual combinations of flavors
and taste ranges, which are not offered by competitors, and because of its focus
on healthy products.
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MANUFACTURING
The Company manufacturers its salad dressings and other products at its
Toronto, Ontario facility. The Company utilizes an integrated assembly process
and packaging line for its products which mixes the ingredients, bottles the
dressings, adds the appropriate labels and seals the bottles for consumer
protection. Because no preservatives or MSG are added to the salad dressings,
they are refrigerated on-site immediately and remain refrigerated through their
shipping to various supermarkets, gourmet stores or food service providers. The
Company believes that new processing techniques and other food science methods
will increase shelf lives of the products by as much as 25%, thereby increasing
the profitability of the products.
The Company has made significant changes in its operations over the last
four years since moving to the new facility. These improvements have
significantly improved product yields and line speed while at the same time
improving product quality. The Company currently produces 400,000 to 500,000
pounds of its products per week while utilizing only 33% of its manufacturing
capacity. There are two complete production lines that run all of the bottled
products. In addition, the Company has a one gallon line for food service and
the capability to produce one and two quart pouches, one to three ounce portion
packs, and drums and large totes. As demand for the Company's products
increases, the Company intends to add an additional shift to meet the increased
demands.
The Company purchases the ingredients for its products from a variety of
sources, focusing on the freshest possible sources. These ingredients include
vegetables, milk, eggs and a variety of seasonings. The availability of
vegetables and other raw materials necessary for the manufacture of the
Company's products and the price of many of such materials are factors over
which the Company has little or no control except that the Company purchases
certain ingredients such as canola oil and sugar on a fixed price basis over a
set time period to avoid extreme price increases.
ADVERTISING, MARKETING AND DISTRIBUTION
Management believes, based on the number of grocery stores chains and
gourmet stores that carry its products, that the Renee's Gourmet-TM- line and
the Excelle line are available in over 2,500 retail outlets.
The Company utilizes its own marketing department under the direction of its
Chief Executive Officer, Arnold Unger, as well as independent marketing agencies
and brokers. The independent brokers generally are individuals and/or companies
with well established connections to grocery and gourmet food stores, as well as
other food service establishments including restaurants, hotels, hospitals, etc.
These brokers sell a variety of products produced by other manufacturers,
although they do not sell competing products. The brokers receive a commission
that ranges between 2% for sales of private label products and 5% for sales of
products from the Renee's Gourmet-TM- Line and the Excelle line. The brokers
each receive a territory and are responsible to ensure that each product is
properly code-dated and shelved. The Company's primary brokers are A.S. May
(Ontario) and Belmont Powell (Quebec) for retail sales and C.W. Shasky for food
service sales.
The Company's customer base is divided among retail and private label
customers, and food service establishments. Scotts Hospitality/KFC, a food
service establishment, accounts for approximately 11% of the Company's sales. No
other customer accounts for more than 10% of the Company's sales. Approximately
31% of the Company's sales are to major retail customers, 18% are to major
private label customers, 16% are to food service establishments and the
remaining 35% are to smaller customers.
The Company markets and advertises all of its products through a combination
of in-store demonstrations and promotional ads on racks, signs, and inside
displays, national magazine ads, radio commercials, coupon circulars and food
shows. The Company believes that the key to merchandising is providing quality
products at reasonable prices to a variety of retail establishments to reach the
maximum amount of customers. The Company uses outside agencies in addition to
its in-house marketing department. The
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Company's employees and its outside agencies conduct sales demonstrations and
distribute point of sale materials, develop custom labels and designs for new
Renee's Gourmet-TM- product launches and handle customer relations and special
events. The outside agencies include Act Media, which conducts both sales
demonstrations and point of sale materials for the Company, Dollery Rudman,
which focuses on label development and design for new Renee's Gourmet-TM-
product launches, and McBlain and Associates, which handles customer and public
relations and special events.
The Company has been very successful marketing its products including those
sold under private label agreements, and hopes to continue to meet the
reputation that it believes it has gained in the industry for its quality
private label products and services. The Company has recently expanded into the
"club" business and has distributed its products to wholesaler stores, among
which are Price Club and Costco. The Company intends to aggressively pursue the
U.S. market, as well as other markets for marketing private label dressings. The
Company, which entered the United States market in 1992, currently markets
private label dressings in the United States. The Company estimates it has less
than one percent of the United States dressing market. The Company intends to
use a portion of the net proceeds of the Offering to increase its advertising
and marketing efforts. See "Use of Proceeds".
COMPETITION
The salad dressing market is highly competitive. The Company competes with
refrigerated dressings as well as shelf-stable products. Outside the
refrigerated sector of the industry, Kraft is the largest competitor in the
retail section. While the Company does produce shelf-stable products under the
Excelle label and for private labels, it is not a significant competitor in this
area.
The Company's Renee's Gourmet-TM- brand products and Excelle products
compete with other larger and better capitalized food companies that manufacture
refrigerated dressings. The larger competitors who also place their products in
the refrigerated produce or dairy sections in the United States include Dean's
Foods which distributes Marie's brand salad dressings, T. Marzetti's, an
independent manufacturer, and Naturally Fresh, which three comprise
approximately 85% of the United States Market. The Company believes that its
competitive standing in the refrigerated section in Canada is maintained by its
ability to respond quicker and more individually to customers' needs than its
larger competitors.
The primary food service section competitors that the Company faces in
Canada are Kraft, Select, Hellmann's and Richardson's. These companies also
produce specialty dressings for restaurants.
The Company believes that it holds a competitive advantage because its
products are made utilizing primarily natural ingredients and are beneficial to
those who have health concerns, including those who are lactose intolerant,
diabetic, weight conscious or allergy-prone. The Company also believes that its
products are attractive to those who desire a flavorful variety of tastes and
enjoy different and unusual blends of ingredients. The Company believes that
these qualities will enable it to penetrate the United States market. Management
emphasizes the versatility of each product as a dressing, dip, sauce, spread or
marinade.
The private label industry is also highly competitive. Manufacturers compete
on price, quality and taste, and contracts are awarded based primarily on that
criterion. The Company has been successful in competing for private label
agreements with several supermarket chains and food service institutions.
There are also regional competitors that compete with the Company. The
Company endeavors to compete in the premium segment of the industry, by selling
high quality, innovative products with flavor and appearance which it believes
compare favorably with its competitors' products. Management intends to increase
its presence by increasing the variety of products offered, increasing its
advertising efforts, as well as its production capability, thereby increasing
name recognition of the Company's products.
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<PAGE>
NEW PRODUCT DEVELOPMENT
The Company is constantly evaluating potential new products in order to
expand its line of products. The Company is reformulating recipes to develop new
flavors. The Company recently developed the Renee's Gourmet Naturally Light-TM-
line which is low in fat and calories to appeal to the growing weight and health
conscious market. The Company intends to introduce Renee's Gourmet-TM- brand
marinades and sauces for meat and seafood in the coming year. The Company is
currently investigating the possibility of converting many of its products to
the kosher designation. In addition, the Company may make acquisitions of
complementary companies or purchase the rights to distribute or manufacture a
particular product.
EMPLOYEES
As of May 31, 1997, the Company employs 52 persons, which includes 3 senior
executives, 11 managers, 13 support staff and 25 full-time non-unionized hourly
laborers. The Company has no unionized employees and believes that its
relationship with its employees is satisfactory.
PROPERTIES AND FACILITIES
The Company leases the Excelle plant, a 75,000 square foot facility located
in Toronto, Ontario. The lease was amended July 1, 1995 for a five-year term,
with an annual base rent of Cdn$105,000. The plant houses the Company's complete
production facilities, warehouse and gymnasium-sized cooler for storage, a
research and development department which includes a full lab, a shipping and
receiving department, order desk, customer service department and executive
offices. Management believes that this space is adequate for its production
needs in the foreseeable future as this facility operates at only 33% of its
capacity. Management also believes that there is ample room for expansion in the
future. The Company currently sublets certain unused space for approximately
Cdn$35,000 in rent per year. The Company has an option to purchase the building
and land for Cdn$2,300,000 (plus CPI increases since 1993) until March 1, 1998.
The Company is currently negotiating with the lessor to purchase the
building and land upon completion of the Offering for Cdn$1,950,000. The Company
anticipates paying one-third of the purchase price as a down payment from the
proceeds of this Offering and financing the balance of the purchase price
through a loan from National Bank of Canada to be secured by the building and
land. See "Use of Proceeds."
PATENTS AND TRADEMARKS
The Company holds trademarks in Canada on both "Renee's Gourmet-TM-" and
"Renee's Gourmet Naturally Light-TM-." The Company believes that its trademarks
have significant value and are an important factor in the marketing of its
products. The Company has recently applied for trademark registration in the
United States of "Renee's Gourmet-TM-." The Company does not hold any patents on
its recipes or manufacturing processes. Management believes that it provides
better protection of its recipes and its market position from competitors by not
patenting them, thereby keeping them secret. Management also believes that its
unique modifications and improvements of its manufacturing processes are more
appropriately protected by remaining a trade secret rather than applying for a
patent. The Company requires all of its employees to execute confidentiality
agreements. The Company cannot guarantee that any of its recipes or processes
would be protectable under a patent.
GOVERNMENT REGULATION
The Company is subject to various Canadian and United States regulations
relating to health and safety standards. The Company is also responsible for
adhering to environmental standards for manufacturing facilities. Because the
Company sells a portion of its products in the United States, the Company
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must comply with federal regulations administered by the United States Food and
Drug Administration (the "FDA") and the United States Department of Agriculture.
Food labeling regulations administered by the Secretary of Health and Human
Services through the FDA subject the Company to uniform labeling and certain
other labeling requirements for its products. Although the cost of compliance
with such regulations is not material, changes to existing regulations may have
a material adverse effect on the Company's business and result of operations.
LEGAL PROCEEDINGS
The Company has one claim against it from a former employee that was filed
in March, 1997 alleging wrongful termination. The suit which has been brought in
the Ontario Court (General Division) seeks total damages of Cdn$115,000, plus
interest. The Company believes that it has a meritorious defense and intends to
vigorously contest the action. The Company is not aware of any other material
legal proceedings now pending or threatened against the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Directors
and Executive Officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Arnold Unger......................................... 59 Chief Executive Officer and Co-Chairman
Renee Unger.......................................... 54 President and Co-Chairman
Fred Burke........................................... 39 Chief Operating Officer, Chief Financial
Officer/Principal Accounting Officer, Secretary, and
Director
Lori Gutmann......................................... 28 Manager of Retail Marketing and Sales and Director
Alysse Unger......................................... 30 Manager of Private Label Marketing and Sales and
Director
John Rothschild...................................... 47 Director
Taketo Murata........................................ 59 Director
</TABLE>
Set forth below is a biographical description of each director and executive
officer of the Company based on information supplied by each of them.
Arnold Unger is a co-founder of the Company and has been its Chief Executive
Officer since 1987. Prior to founding the Company, he worked in the sales and
marketing industry since 1970 for Global Incentives and Aztec Building Company.
He has lectured extensively at the University of Western Ontario, Ryerson
University, and York University on sales and marketing skills. Arnold Unger has
received several awards of industry distinction, including a Gold Award at the
Canadian Awards for Business Excellence.
Renee Unger is a co-founder of the Company and has been its President since
1985. She is the creator of all of the Company's original recipes. She has
received many awards of industry distinction including Entrepreneur of the Year,
and Gold Medal at the Canadian Business Excellence Awards in 1988, North York
Chamber of Commerce Business Woman of the Year, and Ontario Chamber of Commerce
Award of Merit. Renee Unger has been the keynote speaker at several business and
industry dinners and conferences, and has made television appearances on cooking
and daytime programs. She continues to head the Company's Research and
Development department, and Quality Control departments, as well as
participation in the administration of the Company as a manager.
Fred Burke joined the Company in 1994 as the Chief Operating Officer. He is
a Certified General Accountant, and is currently a member of the Board of
Governors of the Certified General Accountants of Ontario. From 1987 until he
joined the Company, he was the Corporate Planning Director of Effem Foods, Ltd.
Prior to that he was the Manager of cost accounting for Robinhood Multifoods,
Inc. and an accountant for Canadian General Electric Company beginning in 1980.
Fred Burke presents seminars on personal and business strategic planning. He
holds positions on the Certified General Accountant board committees and
lectures on accounting and business development to business groups and local
universities.
Lori Gutmann has been with the Company since its inception in 1985 and
joined the Company full time in 1990. Her role with the Company is that of
Manager of Retail Marketing and Sales for Branded Products. In 1992, she earned
a Diploma in Marketing Management and in 1993 she earned a Bachelor Degree in
Business Management from Ryerson University in Toronto. In addition to her many
extra curricular activities, she is currently Vice-President and Bazaar
Chairperson of her chapter in Hadassah WIZO (Women's International Zionist
Organization). She as well acts as an advisor for the newly formed Ryerson
Business Alumni Association, Executive Committee.
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Alysse Unger has been with the Company since inception. Currently, she is
the Manager of Private Label Marketing and Sales. She was also Research and
Development Director and has developed many award winning sauces such as the
President's Choice Peanut Szechuan Sauce. She has also been the keynote speaker
for numerous events and volunteers with many charities. She graduated from York
University in Toronto with her B.A. in 1988. Since then, she has studied
Foodscience and is now studying part time for her business diploma at Seneca
College in Toronto and will graduate in Spring 1998.
John Rothschild has been a director of the Company since June 1997. Since
1994, he has been the President and Chief Executive Officer of Prime Restaurant
Group, Inc., a holding company of restaurant chains. From 1984 to 1994, he was
President of Rothschild Holding Limited. From 1980 to 1984, he was Assistant
Vice President of CEMP Investments, Ltd. From 1978 to 1980, he was a partner at
Rothschild & Muskat. From 1973 to 1977, he was a senior field auditor for Price
Waterhouse in Toronto and Milan, Italy. John Rothschild, who is also a chartered
accountant, earned a Bachelor of Arts degree from University of Toronto in 1971
and a Master of Business Administration Degree from University of Westen Ontario
in 1973.
Taketo Murata has been a director of the Company since August 1997. Since
1992, he has been President International of ConAgra Grocery Products
Companies/Hunt-Wesson, Inc. Other senior executive positions with
ConAgra/Hunt-Wesson include Vice President International since 1990, Chairman of
V - H Foods since 1985 and President of Hunt-Wesson Canada since 1973. Taketo
Murata earned a Bachelor of Science in Psychology from McGill University in 1958
and earned Masters Degrees in Psychology and Sociology from Yale University in
1960 and 1962, respectively.
Lori Gutmann and Alysse Unger are daughters of Arnold Unger and Renee Unger.
The term of office of each Director is until the next annual meeting of
shareholders and until a successor is elected and qualified or until the
Director's earlier death, resignation or removal from office. Executive officers
hold office until their successors are chosen and qualified, subject to earlier
removal by the Board of Directors.
For the period of three years after the effective date of this registration
statement, the Company has agreed to invite a designee of the Representative to
attend all meetings of the board of directors, but such designee will not be
entitled to vote or be compensated. See "Underwriting".
COMMITTEES OF THE BOARD
The Company's Board of Directors will have an Audit Committee, comprised of
John Rothschild, Taketo Murata and Fred Burke, and a Compensation Committee,
comprised of John Rothschild, Taketo Murata and Renee Unger.
COMPENSATION OF DIRECTORS
The Company has not paid compensation to any director for acting in such
capacity. The Company is currently reviewing its policy on compensation of
outside directors and may pay outside directors in the future.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company during each of the last two fiscal years to the Company's
Chief Executive Officer and to each of the Company's executive officers who
earned in excess of $100,000.
28
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------------
OTHER
ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION
- -------------------------------------------------------------------- --------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Arnold Unger........................................................ 1997 $ 135,000 $ 20,000 $ 20,000
Chief Executive Officer and Co-Chairman 1996 70,000 11,500 20,000
1995 65,000 0 18,500
Renee Unger......................................................... 1997 $ 135,000 $ 20,000 $ 20,000
President and Co-Chairman 1996 70,000 11,500 20,000
1995 65,000 0 15,000
Fred Burke.......................................................... 1997 $ 85,000 $ 20,000 $ 15,000
Chief Operating Officer and Chief Financial Officer 1996 70,000 11,500 15,000
1995 61,500 0 10,000
</TABLE>
EMPLOYMENT AGREEMENTS
Arnold Unger and Renee Unger both have three-year employment agreements with
the Company. Arnold Unger will be retained as Chief Executive Officer and Vice
president of Sales and Marketing at an annual salary of $135,000. Renee Unger
will be retained as President at an annual salary of $135,000.
The employment agreements with Arnold Unger and Renee Unger provide that
upon the death of any of the two employees that two years full salary will be
paid to a designee of the employee. They also provide for reimbursement of
reasonable business expenses and their respective salaries for the remainder of
the term of the agreement in the event of disability.
Each of the above officers are entitled to bonuses based on achieving sales
and profitability as predetermined by the Board or compensation committee and
other subjective criteria as determined by the Board or compensation committee.
Arnold Unger and Renee Unger shall each receive $20,000 per year additional
compensation including a car allowance, insurance, retirement savings matched
contributions, and other perquisites.
Based upon any wrongful termination, which includes changes in control of
the Company (through an acquisition where any person acquires or announces a
tender offer or exchange for 25% of the Company, a sale of substantially all of
the assets or merger, acquisition of the Company or its consolidation with
another, or certain types of board changes), the Company shall pay the above, a
lump sum payment, based upon his or her then compensation, including benefits
and perquisites, from such termination. Such payment shall be the balance of
their respective compensation for the remainder of the term. If the payment is
in excess of $100,000, then such excess shall be payable in equal quarterly
payments with interest at the legal rate. The employment agreements will contain
non-compete provisions.
The Company anticipates entering into employment agreements with Fred Burke,
Lori Gutmann and Alysse Unger.
STOCK OPTION PLAN
In May 1997, the board of directors and shareholders adopted the Intercorp
Excelle Inc. Stock Option Plan (the "1997 Plan"), pursuant to which 500,000
shares of Common Stock are reserved for issuance.
The 1997 Plan will be administered by the compensation committee or the
board of directors, who determine among other things, those individuals who
shall receive options, the time period during which the options may be partially
or fully exercised, the number of shares of Common Stock issuable upon the
exercise of the options and the option exercise price.
29
<PAGE>
The 1997 Plan is for a period for ten years, expiring in May, 2007. Options
may be granted to officers, directors, consultants, key employees, advisors and
similar parties who provide their skills and expertise to the Company. Options
granted under the 1997 Plan may be exercisable for up to ten years, may require
vesting, and shall be at an exercise price all as determined by the board.
Options are non-transferable except by the laws of descent and distribution or a
change in control of the Company, as defined in the 1997 Plan, and are
exercisable only by the participant during his or her lifetime. Change in
control includes (i) the sale of substantially all of the assets of the Company
and merger or consolidation with another, or (ii) a majority of the board
changes other than by election by the shareholders pursuant to board
solicitation or by vacancies filled by the board caused by death or resignation
of such person.
If a participant ceases affiliation with the Company by reason of death,
permanent disability or retirement at or after age 70, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other termination gives the participant three months to
exercise, except for termination for cause which results in immediate
termination of the option.
Options granted under the 1997 Plan, at the discretion of the compensation
committee or the board, may be exercised either with cash, Common Stock having a
fair market equal to the cash exercise price, the participant's personal
recourse note, or with an assignment to the Company of sufficient proceeds from
the sale of the Common Stock acquired upon exercise of the Options with an
authorization to the broker or selling agent to pay that amount to the Company,
or any combination of the above.
The exercise price of an option may not be less than the fair market value
per share of Common Stock on the date that the option is granted in order to
receive certain tax benefits under the Income Tax Act of Canada (the "ITA"). The
exercise price of all future options will be at least 85% of the fair market
value of the Common Stock on the date of grant of the options. A benefit equal
to the amount by which the fair market value of the shares at the time the
employee acquires them exceeds the total of the amount paid for the shares or
the amount paid for the right to acquire the shares shall be deemed to be
received by the employee in the year the shares are acquired pursuant to
paragraph 7(1) of the ITA. Where the exercise price of the option is equal to
the fair market value of the shares at the time the option is granted, paragraph
110(1)(d) of the ITA allows a deduction from income equal to one quarter of the
benefit as calculated above. If the exercise price of the option is less than
the fair market value at the time it is granted, no deduction under paragraph
110(1)(d) is permitted. Options granted to any non-employees, whether directors
or consultants or otherwise will confer a tax benefit in contemplation of the
person becoming a shareholder pursuant to subsection 15(1) of the ITA.
Options may not be transferred by an optionee other than by will or the laws
of descent and distribution, and, during the lifetime of an optionee, the option
will be exercisable only the optionee.
Options under the 1997 Plan must be issued within ten years from the
effective date of the 1997 Plan.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the 1997 Plan.
The 1997 Plan may be terminated or amended at any time by the board of
directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the 1997 Plan may not be
increased without the consent of the shareholders of the Company.
In May 1997, the Board granted 200,000 Options under the 1997 Plan to five
individuals, including officers, directors and key employees. The Options are
exercisable at $3.50 per share for ten years expiring May 1, 2007. 40% of the
Options are immediately exercisable, an additional 30% become exercisable in May
1998 and all of the Options are exercisable in November 1998. See the Options
Grant Table below.
30
<PAGE>
OPTION GRANTS
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/ EXERCISE
OPTIONS SARS GRANTED PRICE EXPIRATION
NAME GRANTED (#) TO EMPLOYEES ($/SH) DATE
- ---------------------------------------------------------- ------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C>
Arnold Unger.............................................. 50,000 25.0% $ 3.50 May 1, 2007
Renee Unger............................................... 50,000 25.0% $ 3.50 May 1, 2007
Fred Burke................................................ 50,000 25.0% $ 3.50 May 1, 2007
Alysse Unger.............................................. 25,000 12.5% $ 3.50 May 1, 2007
Lori Gutmann.............................................. 25,000 12.5% $ 3.50 May 1, 2007
</TABLE>
31
<PAGE>
PRINCIPAL STOCKHOLDERS AND SELLING SECURITYHOLDERS
The following table sets forth certain information, as of the date hereof,
and as adjusted to give effect to the sale of 1,000,000 Shares and 1,065,000
Warrants by the Company and 65,000 Shares of Common Stock by the Selling
Securityholders, with respect to the beneficial ownership of the Common Stock by
each beneficial owner of more than 5% of the outstanding shares thereof, by each
director, each nominee to become a director and each executive named in the
Summary Compensation Table and by all executive officers, directors and nominees
to become directors of the Company as a group, both before and after giving
effect to the Offering. Each of the Selling Securityholders are executive
officers or directors of the Company or are related to such executive officers
or directors. Arnold Unger is the Chief Executive Officer and Co-Chairman of the
Board, Renee Unger is the President and Co-Chairman of the Board, Lori Gutmann
is Manager of Retail Marketing and Sales and a Director, and Alysse Unger is
Manager of Private Label Marketing and a Director. Lori Gutmann, Alysse Unger
and Karen Unger are daughters of Arnold Unger and Renee Unger.
PERCENTAGE OF OUTSTANDING COMMON STOCK BENEFICIALLY OWNED
<TABLE>
<CAPTION>
SHARES
NUMBER OF BENEFICIALLY
SHARES OF SHARES OWNED
COMMON STOCK OFFERED BY AFTER THE
NAME AND ADDRESS OF BENEFICIALLY BEFORE AFTER SELLING OFFERING
BENEFICIAL OWNER(1) OWNED OFFERING OFFERING SECURITYHOLDERS(7) NUMBER PERCENT
----------------------- -------------- --------- ----------- ----------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Arnold Unger(2)(6)............................. 1,810,248 60.7% 45.5% 40,000 1,770,248 44.5%
Renee Unger(3)(6).............................. 1,854,752 62.2% 46.6% 40,000 1,814,752 45.6%
Fred Burke(4).................................. 20,000 * * 0 20,000 *
Lori Gutmann(5)................................ 10,000 * * 0 10,000 *
Alysse Unger(5)................................ 10,000 * * 0 10,000 *
Karen Unger(5)................................. 0 0 0 0 0 0
The Unger Family Trust(6)...................... 725,000 24.3% 18.2% 15,000 710,000 17.8%
John Rothschild................................ 0 0 0 0 0 0
Taketo Murata.................................. 0 0 0 0 0 0
All Executive Officers and Directors as a
Group........................................ 2,980,000 100.0% 74.9%
</TABLE>
- ------------------------
* Less than 1%
(1) Unless otherwise indicated, the address is c/o Intercorp Excelle Inc., 1880
Ormont Drive, Toronto, Ontario, Canada M9L 2V4.
(2) Includes 20,000 shares of Common Stock issuable upon exercise of the stock
options granted under the 1997 Stock Option Plan which are immediately
exercisable. See "Management--Stock Option Plan". Includes 213,235 shares of
Common Stock owned by 1239414 Ontario Inc. of which Arnold Unger is the sole
shareholder.
(3) Includes 20,000 shares of Common Stock issuable upon exercise of the stock
options granted under the 1997 Stock Option Plan which are immediately
exercisable. See "Management--Stock Option Plan". Includes 85,294 shares of
Common Stock owned by 1239415 Ontario Inc. of which Renee Unger is the sole
shareholder.
(4) Includes 20,000 shares of Common Stock issuable upon exercise of the stock
options granted under the 1997 Stock Option Plan which are immediately
exercisable. See "Management--Stock Option Plan".
(5) The Unger Family Trust owns 725,000 shares of Common Stock held in trust for
the benefit of Lori Gutmann, Alysse Unger and Karen Unger. Arnold Unger and
Renee Unger are trustees of The
32
<PAGE>
Unger Family Trust. Under the terms of the trust instrument, the trustees
have the power to vote the shares.
(6) Includes 725,000 shares held by The Unger Family Trust. Arnold Unger and
Renee Unger are trustees of The Unger Family Trust, which owns 725,000
shares of Common Stock held in trust for the benefit of Lori Gutmann, Alysse
Unger and Karen Unger. Under the terms of the trust instrument, the trustees
have the power to vote the shares. Of the 725,000 shares owned by the trust,
529,250 shares of Common Stock are owned by 1239416 Ontario Inc. of which
The Unger Family Trust is the sole shareholder.
(7) Of the 65,000 shares of Common Stock being sold for the Selling
Securityholders, 25,000 shares are being sold for Arnold Unger, 25,000
shares are being sold for Renee Unger and 15,000 shares are being sold for
The Unger Family Trust. See note 6 above.
33
<PAGE>
CERTAIN TRANSACTIONS
Arnold Unger, Chief Executive Officer and Co-Chairman of the Board and Renee
Unger, President and Co-Chairwoman of the Board, each have loaned to Excelle
Brands Food Corporation, a subsidiary of the Company $76,200 in March and July,
1994. These loans bear interest at the prime interest rate and are without any
specific repayment terms. The Company believes that the loans were made on terms
no less favorable to the Company than terms for similar loans from unaffiliated
parties. All future transactions and loans between the Company and its officers,
directors and 5% shareholders will be on terms no less favorable than could be
obtained from unaffiliated third parties and will be approved by a majority of
the independent, disinterested directors of the Company.
The loans are also subordinated to credit facilities which Excelle Brand
Foods Corporation ("Excelle"), a wholly-owned subsidiary of the Company, has
with National Bank of Canada ("NBC"). The NBC credit facility consists of a
Cdn$900,000 revolving demand loan, Cdn$1,332,536 in non-revolving demand loans,
all bearing interest at the banks prime rate plus 1% to 1.5% which at April 30,
1997 was 5.75% and a Cdn$350,000 U.S. currency forward contract. The NBC credit
facility is secured with the assets of the Company subject only to prior
encumbrances on specific fixed assets which are senior to NBC. See "Managements'
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources". Arnold Unger and Renee Unger have
each personally guaranteed the NBC credit facility to the extent of Cdn$250,000,
which is to be released if Excelle's debt to equity ratio is no greater than 2
to 1. In addition, the term life insurance of Cdn$200,000 on the life of Arnold
Unger and for Cdn$150,000 on the life of Renee Unger, each of whom are the
beneficiaries of their respective insurance policy which premiums are paid for
by the Company, have been assigned to NBC as further security. NBC also holds
all the voting equity of the subsidiary companies of the Company. Voting control
of the Company must remain with the Ungers, including their family trusts and
children, absent NBC's prior written consent. See "Principal Shareholders and
Selling Securityholders".
The Company has a loan with Business Development Bank of Canada ("BDC"). The
principal amount owed as of June 30, 1997 is approximately $61,000 bearing
interest at 2.5% above the bank's floating base interest rate. The loan is
secured by the assets of Excelle and Intercorp Foods Ltd., wholly-owned
subsidiaries of the Company. The loan is further secured by personal guarantees
by Arnold Unger and Renee Unger in the amount of $50,000 each, and assignment of
loans owed to Arnold Unger and Renee Unger. A portion of the proceeds of this
Offering is allocated to repayment of the BDC loan.
34
<PAGE>
DESCRIPTION OF SECURITIES
The total authorized capital stock of the Company consist of an unlimited
number of shares of Common Stock, with no par value, and unlimited number of
Preferred Stock, with no par value per share. The following descriptions contain
all material terms and features of the Securities of the Company, are qualified
in all respects by reference to the Certificate of Incorporation and By laws of
the Company, copies of which are filed as Exhibits to the Registration Statement
of which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue an unlimited number of shares of Common
Stock, no par value per share, of which as of the date of this Prospectus
3,075,000 shares of Common Stock are outstanding, not including the Shares
offered herein.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Holders of Common
Stock are entitled to receive ratably dividends as may be declared by the board
of directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining, if any, after
payment of liabilities. Holders of Common Stock have no preemptive rights and
have no rights to convert their Common Stock into any other securities.
Pursuant to the Business Corporation Act, Ontario ("BCA"), a shareholder of
an Ontario Corporation has the right to have the corporation pay the shareholder
the fair market value for his shares of the corporation in the event such
shareholder dissents to certain actions taken by the corporation such as
amalgamation or the sale of all or substantially all of the assets of the
corporation and such shareholder follows the procedures set forth in the BCA.
WARRANTS
Warrants will be issued pursuant to a Warrant Agreement between the Company
and Continental Stock Transfer & Trust Company (the "Transfer and Warrant
Agent") and will be in registered form. Each Warrant entitles its holder to
purchase, during the four year period commencing on the date of this Prospectus,
one share of Common Stock at an exercise price of $6.00 per share, subject to
adjustment in accordance with the anti-dilution and other provision referred to
below.
The Warrants may be redeemed by the Company at any time commencing one year
from the date of this Prospectus (or earlier with the consent of the
Representative) and prior to their expiration, at a redemption price of $.10 per
Warrant, on not less than 30 days' prior written notice to the holders of such
Warrants, provided that the closing bid price of the Common Stock if traded on
the Nasdaq SmallCap Market, or the last sale price per share of the Common
Stock, if listed on the Nasdaq National Market or on a national exchange, is at
least 150% ($9.00 per share, subject to adjustment) of the exercise price of the
Warrants for a period of 20 consecutive business days ending on the third day
prior to the date the notice of redemption is given. Holders of Warrants shall
have exercise rights until the close of the business day preceding the date
fixed for redemption.
The exercise price and the number of shares of Common Stock purchasable upon
the exercise of the Warrants are subject to adjustment upon the occurrence of
certain events, including stock dividends, stock splits, combinations or
classification of the Common Stock. The Warrants do not confer upon holders any
voting or any other rights of shareholders of the Company.
No Warrant will be exercisable unless at the time of exercise the Company
has filed with the Commission a current prospectus covering the issuance of
Common Stock issuable upon the exercise of the Warrant and the issuance of
shares has been registered or qualified or is deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of the Warrant. The Company has undertaken to use its
best efforts to maintain a current prospectus relating to the
35
<PAGE>
issuance of shares of Common Stock upon the exercise of the Warrants until the
expiration of the Warrants, subject to the terms of the Warrant Agreement. While
it is the Company's intention to maintain a current prospectus, there is no
assurance that it will be able to do so. See "Risk Factors-Requirements of
Current Prospectus and State Blue Sky Registration in Connection with the
Exercise Warrants".
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of an
unlimited number of shares of Preferred Stock with designations, rights and
preferences determined from time to time by its Board of Directors. Accordingly,
the Company's Board of Directors is empowered, without stockholder approval, to
issue Preferred Stock with dividend, liquidation, conversion, or other rights
that could adversely affect the rights of the holders of the Common Stock.
Although the Company has no present intention to issue any shares of its
Preferred Stock, there can be no assurance that it will not do so in the future.
BRIDGE WARRANTS
In May 1997 the Company issued an aggregate of 175,000 Warrants (the "Bridge
Warrants"). The Bridge Warrants entitle the holder to purchase one share of
Common Stock for $3.75 per share for a period of four years. The Bridge Warrants
are redeemable by the Company at $.10 per Warrant in the event the Company does
not complete an initial public offering of its securities by December 31, 1997.
The Bridge Warrants are exchangeable at the option of the holder for a like
number of warrants with identical terms as the Warrants.
REGISTRATION RIGHTS
The Company has granted holders of the 175,000 shares of Common Stock
purchased in connection with the Bridge Financing piggyback registration rights
with respect to certain offerings of the Company registered under the Securities
Act following the Effective Date, to the extent the inclusion of such shares is
permitted by the managing underwriter for such offering. The Company has no
present plans to file any such additional or new registration statement. This
Common Stock is also redeemable at $.50 per share if the Company does not
complete a public offering of its securities by December 31, 1997.
Bridge Warrants, which are restricted from public sale for at least one year
through May 22, 1998, have piggyback registration rights and may be exchanged at
the option of the warrantholder, for Warrants that are being offered hereby,
which Warrants are exercisable at $6.00 per share and will be tradeable.
TRANSFER AGENT, REGISTRAR AND REDEEMABLE WARRANT AGENT
The transfer agent, registrar and warrant agent for the Common Stock and
Warrants is Continental Stock Transfer & Trust Company, 2 Broadway, New York,
New York 10005.
36
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, the Company will have 4,075,000
shares of Common Stock outstanding. In addition, the Company has reserved for
issuance 500,000 shares upon the exercise of options eligible for grant under
the Company's Stock Option Plan, 200,000 of which have been granted. Of the
shares to be issued and outstanding after this Offering, the 1,000,000 Shares
offered hereby (plus any additional Shares sold upon exercise of the
Over-Allotment Option) will be freely tradeable without restriction or further
registration under the Act, except for any shares purchased or held by an
"affiliate" of the Company (in general, a person who has a control relationship
with the Company) which will be subject to the limitations of Rule 144 adopted
under the Act ("Rule 144"). In general, under Rule 144, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company, who has beneficially owned restricted shares of Common Stock for at
least one year is permitted to sell in a brokerage transaction, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class, or if the Common Stock
is quoted on Nasdaq or a stock exchange, the average weekly trading volume
during the four calendar weeks preceding the sale. Rule 144 also permits a
person who presently is not and who has not been an affiliate of the Company for
at least three months immediately preceding the sale and who has beneficially
owned the shares of Common Stock for at least two years to sell such shares
without regard to any of the volume limitations as described above. 65,000
shares of Common Stock are being registered along with the securities being sold
in this Offering and are being sold by the Underwriters for the Selling
Securityholders. The remaining 3,010,000 shares of Common Stock are "restricted
securities" as that term is defined under Rule 144, and may not be sold unless
registered under the Act or exempted therefrom. Of the 3,010,000 restricted
shares, 2,835,000 are currently eligible to be sold in accordance with the
exemptive provisions and the volume limitations of Rule 144, however, the owners
of such shares have agreed with the Representative not to sell or otherwise
dispose their shares for 18 months from the Effective Date without the consent
of the Representative, except pursuant to gifts or pledges in which the donee or
pledgee agrees to be bound by such restrictions. The remaining 175,000 shares of
Common Stock outstanding are eligible for resale under Rule 144 on May 22, 1998,
subject to a 12 month lock up during which such shares may not be sold without
the prior written consent of the Representative. The Representative has agreed
not to release such lock-up earlier.
All of the Company's directors and executive officers, (who hold in the
aggregate 2,900,000 shares), have agreed not to sell, offer to sell or otherwise
dispose of the 2,835,000 shares of the Company's Common Stock not being sold to
the Underwriter until 18 months from the Effective Date, except pursuant to
gifts or pledges in which the donee or pledgee agrees to be bound by such
restrictions, without the prior written consent of the Representative. These
agreements are enforceable only by the parties thereto, and are subject to
rescission or amendment at any time without approval of other stockholders.
Sales of the Company's Common Stock by certain of the present stockholders
in the future, under Rule 144, may have a depressive effect on the price of the
Company's Common Stock.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following describes the principal United States federal income tax
consequences of the purchase, ownership and disposition of the Common Stock and
the Warrants and upon the exercise, redemption or expiration of the Warrants by
a Warrant holder, that is a citizen or resident of the United States or a United
States domestic corporation or that otherwise will be subject to United States
federal income tax (a "U.S. Holder"). This summary is based on the United States
Internal Revenue Code of 1986, as amended (the "Code"), administrative
pronouncements, judicial decisions and existing and proposed Treasury
Regulations, changes to any of which subsequent to the date of this Prospectus
may affect the tax consequences described herein. This summary discusses only
the principal United States federal income tax consequences to those beneficial
owners holding the securities as capital assets within the meaning of Section
1221 of the Code and does not address the tax treatment of a beneficial owner
that owns 10% or
37
<PAGE>
more of the Common Stock. It does not address the consequences applicable to
certain specialized classes of taxpayers such as certain financial institutions,
insurance companies, dealers in securities or foreign currencies, or United
States persons whose functional currency (as defined in Section 985 of the Code)
is not the United States dollar. Persons considering the purchase of these
securities should consult their tax advisors with regard to the application of
the United States and other income tax laws to their particular situations. In
particular, a U.S. Holder should consult his tax advisor with regard to the
application of the United States federal income tax laws to his situation.
COMMON STOCK
A U.S. Holder generally will realize, to the extent of the Company's current
and accumulated earnings and profits, foreign source ordinary income on the
receipt of cash dividends, if any, on the Common Stock equal to the United
States dollar value of such dividends determined by reference to the exchange
rate in effect on the day they are received by the U.S. Holder (with the value
of such dividends computed before any reduction for any Canadian withholding
tax). U.S. Holders should consult their own tax advisors regarding the treatment
of foreign currency gain or loss, if any, on any dividends received which are
converted into United States dollars on a date subsequent to receipt. Subject to
the requirements and limitations imposed by the Code, a U.S. Holder may elect to
claim Canadian tax withheld or paid with respect to dividends on the Common
Stock as a foreign credit against the United States federal income tax liability
of such holder. Dividends on the Common Stock generally will constitute "passive
income" or, in the case of certain U.S. Holders, "financial services income" for
United States foreign tax credit purposes. U.S. Holders who do not elect to
claim any foreign tax credits may claim a deduction for Canadian income tax
withheld. Dividends paid on the Common Stock will not be eligible for the
dividends received deduction available in certain cases to United States
corporations.
Upon a sale or exchange of a share of Common Stock, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized on
such sale or exchange and the tax basis of such Common Stock. Any such gain or
loss will be capital gain or loss, and will be long term capital gain or loss if
at the time of sale or exchange the Common Stock has been held for more than one
year.
WARRANTS
No gain or loss will be recognized by the holder of a Warrant upon the
exercise of the Warrant. The cost basis of the Common Stock acquired upon such
exercise will be the cost basis of the Warrant plus any additional amount paid
upon the exercise of the Warrant. Gain or loss will be recognized upon the
subsequent sale or exchange of the Common Stock acquired by the exercise of the
Warrant, measured by the difference between the amount realized upon the sale or
exchange and the cost basis of the Common Stock so acquired.
If a Warrant is not exercised, but is sold or exchanged (whether pursuant to
redemption or otherwise), gain or loss will be recognized upon such event,
measured by the difference between the amount realized by the holder of the
Warrant as a result of sale, exchange or redemption and the cost basis of the
Warrant.
If a Warrant is not exercised and is allowed to expire, the Warrants will be
deemed to be sold or exchanged on the date of expiration. In such event, the
holder of the Warrant will recognize a loss to the extent of the cost basis of
the Warrant.
Generally, any gain or loss recognized as a result of the foregoing will be
a capital gain or loss and will either be long-term or short-term depending upon
the period of time the Common Stock sold or exchanged or the Warrant sold,
exchanged, redeemed, or allowed to expire, as the case may be, was held. A
holding period of more than one year results in long-term gain or loss
treatment. If a Warrant is exercised, the holding period of the Common Stock so
acquired will not include the period during which the Warrant was held.
38
<PAGE>
THIS SUMMARY IS OF GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND SHOULD
NOT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PROSPECTIVE INVESTOR AND NO
REPRESENTATION WITH RESPECT TO THE TAX CONSEQUENCES TO ANY PARTICULAR INVESTOR
IS MADE.
INVESTMENT CANADA ACT
The Investment Canada Act is a Federal Canadian statute which regulates the
acquisition of control of existing Canadian businesses and the establishment of
new Canadian businesses by an entity that is a "non-Canadian" as that term is
defined in the Investment Canada Act.
The Company believes that it is not currently a "non-Canadian" for purposes
of the Investment Canada Act. If the Company were to become a "non-Canadian" in
the future, acquisitions of control of Canadian businesses by the Company would
become subject to the Investment Canada Act. Generally, the direct acquisition
by a "non-Canadian" of an existing Canadian business with gross assets of
$5,000,000 or more is reviewable under the Investment Canada Act, with a
threshold of $168 million for 1996 for "NAFTA investors" as defined under the
Investment Canada Act.
Indirect acquisitions of existing Canadian businesses (with gross assets
over certain threshold levels) as well as acquisitions of businesses related to
Canada's cultural heritage or national identity (regardless of the value of
assets involved) may also be reviewable under the Investment Canada Act. In
addition, acquisitions of control of existing investments to establish new,
unrelated businesses are not generally reviewable but do require that a notice
of the investment be given under the Investment Canada Act. An investment in a
new business that is related to the non-Canadian's existing business in Canada
is not notifiable under the Investment Canada Act unless such investment relates
to Canada's cultural heritage or national identity.
Investments which are reviewable under the Investment Canada Act are
reviewed by the Minister, designated as being responsible for the administration
of the Investment Canada Act. Reviewable investments may not be implemented
prior to the Minister determining that the investment is likely to be of "net
benefit to Canada" based on the criteria set out in the Investment Canada Act.
39
<PAGE>
UNDERWRITING
The Company and the Selling Securityholders have agreed to sell, and the
Underwriters have severally and not jointly agreed, subject to the time and
conditions of the Underwriting Agreement, to purchase from the Company and the
Selling Securityholders on a firm commitment basis, the respective number of
Shares and Warrants set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
--------------------------
<S> <C> <C>
UNDERWRITER COMMON STOCK WARRANTS
- ------------------------------------------------------------------------------------- -------------- ----------
Sharpe Capital, Inc.................................................................. 355,000 355,000
Aegis Capital Corp................................................................... 355,000 355,000
Klein Maus and Shire Incorporated.................................................... 355,000 355,000
-------------- ----------
Total............................................................................ 1,065,000 1,065,000
-------------- ----------
-------------- ----------
</TABLE>
The Underwriters have advised the Company that they propose to offer the
Shares and Warrants to the public at the public offering price set forth on the
cover page of this Prospectus and that they may allow to selected dealers who
are members of the NASD, concessions of not in excess of $.20 per Share and $0
per Warrant, of which not more than $.10 per Share and $0 per Warrant may be
re-allowed to certain other dealers who are members of the NASD. After the
public offering, the public prices, concessions and reallowances may be changed
by the Underwriters.
The Underwriting Agreement further provides that the Underwriters will
receive from the Company and Selling Securityholders a non-accountable expense
allowance of 3% of the aggregate public offering price of the Shares and
Warrants sold (including any Shares and Warrants sold pursuant to the
Underwriters' Over-Allotment Option), which allowance amounts to $153,195 and
$9,750, respectively (or $176,174 or $11,213, respectively, if the Underwriters'
Over-Allotment Option is exercised in full), of which $50,000 has been paid by
the Company to date.
The Company and the Selling Securityholders have granted to the Underwriters
the Over-Allotment Option, which is exercisable for a period of 45 days after
the Closing, to purchase up to an aggregate 159,750 additional Shares and
159,750 additional Warrants (up to 15% of the Shares and Warrants being offered)
at the public offering price, less underwriting discounts and commissions,
solely to cover over-allotments, if any.
The Representative has informed the Company that the Underwriters will not
make sales of the Shares and Warrants offered by this Prospectus to accounts
over which they exercise discretionary authority.
The Company has agreed to sell to the Underwriters for a nominal
consideration the Underwriters' Warrant to purchase 106,500 Shares and 106,500
Warrants, exclusive of the Over-Allotment Option. The Underwriters' Warrant will
be nonexercisable for one year after the date of this Prospectus. Thereafter,
for a period of four years, the Underwriters' Warrant will be exercisable at
$8.25 per Share of Common Stock and $.165 per Warrant. The Warrants underlying
the Underwriters' Warrant will be substantially identical to the Warrants
offered to the public except they are not subject to redemption by the Company
until the Underwriters' Warrant has been exercised and the underlying Warrants
are outstanding, and that the exercise price of such Warrants shall be $9.90 per
share of Common Stock. The Underwriters' Warrant is not transferable for a
period of one year after the date of this Prospectus, except to officers and
stockholders of the Underwriters and to members of the selling group and their
officers and partners. The Company has agreed to file, during the four year
period beginning one year from the Effective Date of this Prospectus, on one
occasion at the Company's cost, at the request of the holders of a majority of
the Underwriters' Warrant and the underlying shares of Common Stock and
Warrants, and to use its best efforts to cause to become effective, a
post-effective amendment to the Registration Statement or a new registration
statement under the Securities Act, as required to permit the public sale of
Common Stock
40
<PAGE>
and Warrants issued or issuable upon exercise of the Underwriters' Warrant. In
addition, the Company has agreed to give advance notice to holders of the
Underwriters' Warrant of its intention to file certain registration statements
commencing one year and ending four years after the Effective Date, and in such
case, holders of such Underwriters' Warrant or underlying shares of Common Stock
and Warrants shall have the right to require the Company to include all or part
of such shares of Common Stock and Warrants underlying such Underwriters'
Warrant in such registration statement at the Company's expense.
For the life of the Underwriters' Warrant, the holders thereof are given, at
nominal costs, the opportunity to profit from a rise in the market price of the
Company's securities with a resulting dilution in the interest of other
shareholders. Further, the holders may be expected to exercise the Underwriters'
Warrant at a time when the Company would in all likelihood be able to obtain
equity capital on terms more favorable than those provided in the Underwriters'
Warrant.
The Company has agreed that upon closing of this Offering, it will for a
period of not less than three years, invite a designee of the Representative to
attend all meetings of the board of directors. Such designee will be entitled to
the same notices and communications sent by the Company to its directors and to
attend directors meetings, but will not be entitled to vote or be compensated
therefor.
The Company has agreed to retain the Underwriters as financial consultants
for a period of three years to commence on the closing of this Offering, at a
monthly fee of $2,444.44 all of which ($88,000) shall be payable in advance on
the closing of the Offering. Pursuant to this agreement, the Underwriters will
be obligated to provide general financial advisory services to the Company on an
"as needed" basis with respect to possible future financing or acquisitions by
the Company and related matters. The agreement does not require the Underwriters
to provide any minimum number of hours of consulting services to the Company.
The public offering price of the Shares and Warrants offered hereby and the
exercise price and other terms of the Warrants have been determined by
negotiation between the Company and the Underwriters. Factors considered in
determining the offering price of the Shares and Warrants offered hereby and the
exercise price of the Warrants included the business in which the Company is
engaged, the Company's financial condition, an assessment of the Company's
management, the general condition of the securities markets and the demand for
similar securities of comparable companies.
The Company has agreed, for a period of one year from the date of this
Prospectus not to issue any shares of Common Stock, Warrants or any options or
other rights to purchase Common Stock without the prior written consent of the
Representative, except Warrants to be issued upon closing of this Offering, as
discussed herein. Notwithstanding the foregoing, the Company may issue shares
upon exercise or conversion of any options under the 1997 Plan up to 10% of the
Company's outstanding Common Stock immediately after the closing of this
Offering. Except for the 65,000 shares of Common Stock being offered by the
Underwriters on behalf of the Selling Securityholders, Arnold Unger, Renee
Unger, Lori Gutmann, Karen Unger, Alysse Unger and The Unger Family Trust, who
own in the aggregate 2,900,000 shares of Common Stock, have agreed not to
publicly sell or otherwise dispose of any of their Common Stock for a period of
18 months following the Effective Date without the consent of the Underwriters
which most likely will not be granted earlier than three months from the date of
this Prospectus and would be subject to the nature of the market for the
Company's securities, the volume and price of the Common Stock, and the
operations and financial condition of the Company.
In connection with this Offering, the Underwriters and selling group members
and their respective affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Common Stock and Warrants.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock or Warrants for the purpose of stabilizing their
respective market prices. The Underwriters also may create a short position for
the account of the Underwriters by selling more shares of Common Stock or
Warrants in connection with the Offering than they are committed to purchase
from the Company, and in
41
<PAGE>
such case may purchase shares of Common Stock or Warrants in the open market
following completion of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position by exercising the Over-Allotment Option. In addition, the Underwriters
may impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or dealer participating in the
Offering) for the account of other Underwriters, the selling concession with
respect to shares of Common Stock and Warrants that are distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock and Warrants at a level above
that which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if they are undertaken they may be
discontinued at any time.
Commencing one year after the date of this Prospectus, the Company will pay
the Underwriters a fee of 5% of the exercise price of each Warrant exercised,
provided (i) the market price of the Common Stock on the date the Warrant was
exercised was greater than the Warrant exercise price on that date; (ii) the
exercise price of the Warrant was solicited by a member of the NASD; (iii) the
Warrant was not held in discretionary account; (iv) the disclosure of
compensation arrangements was made both at the time of this Offering and at the
time of exercise of the Warrant; (v) the solicitation of the exercise of the
Warrant was not a violation of Regulation M promulgated under the Exchange Act;
and (vi) the Warrant holder designates in writing which broker-dealer made the
solicitation. The Underwriters and any other soliciting broker-dealers may be
prohibited from engaging in any market-making activities or solicited brokerage
activities with regard to the Company's securities during the periods prescribed
by Regulation M, five business days (or other applicable period as Regulation M
may provide) before the solicitation of the exercise of any Warrant until the
later of the termination of such solicitation activity or the termination of any
right the Underwriters and any other soliciting broker/dealer may have to
receive a fee for the solicitation of the exercise of the Warrants.
The Underwriting Agreement provides for reciprocal indemnification between
the Selling Securityholders, the Company and the Underwriters against certain
liabilities in connection with this Offering, including liabilities under the
Securities Act.
The foregoing is a summary of the material terms of the Underwriting
Agreement, the Underwriters' Warrant and the Consulting Agreement. Reference is
made to the copies of the Underwriting Agreement, the Underwriters' Warrant and
the Consulting Agreement, which are filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
42
<PAGE>
LEGAL OPINIONS
Certain legal matters relating to Canadian law, including the validity of
the issuance of the Common Stock and Warrants offered herein, will be passed
upon for the Company by Wildeboer Rand Thomson Apps & Dellelce. Certain legal
matters in connection with the Offering will be passed upon for the Company by
its United States counsel, Gersten, Savage, Kaplowitz & Fredericks, LLP, 101
East 52nd Street, New York, New York 10022. Certain legal matters will be passed
upon for the Underwriters by Singer Zamansky LLP, 40 Exchange Place, New York,
New York 10005.
EXPERTS
The combined financial statements of Excelle Brand Foods Corporation and
Intercorp Foods Ltd. at January 31, 1997, and for each of the two fiscal years
in the period ended January 31, 1996 and 1995, and the balance sheet of
Intercorp Excelle Inc. at April 30, 1997, appearing in this Prospectus and
Registration Statement have been audited by Schwartz Levitsky Feldman, Chartered
Accountants, as set forth in their reports thereon appearing elsewhere herein
and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
43
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Act with respect to the Securities offered hereby. This Prospectus omits certain
information contained in the Registration Statement and the exhibits thereto,
and reference is made to the Registration Statement and the exhibits thereto for
further information with respect to the Company and the Securities offered
hereby. Each such statement is qualified in its entirety by such reference. The
Registration Statement, including exhibits and schedules filed therewith, may be
inspected without charge at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials may be obtained from the Public Reference Section of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and its public reference facilities in New York, New York and Chicago,
Illinois upon payment of the prescribed fees. Electronic registration statements
filed through the Electronic Data Gathering, Analysis, and Retrieval System are
publicly available through the Commission's Website (http://www.sec.gov). At the
date hereof, the Company was not a reporting company under the Securities
Exchange Act of 1934, as amended.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The by-laws of the Company provide that the Company shall indemnify to the
fullest extent permitted by Canadian law directors and officers (and former
officers and directors) of the Company. Such indemnification includes all costs
and expenses and charges reasonably incurred in connection with the defense of
any civil, criminal or administrative action or proceeding to which such person
is made a party by reason of being or having been an officer or director of the
Company if such person was substantially successful on the merits in his or her
defense of the action and he or she acted honestly and in good faith with a view
to the best interests of the Company, and if a criminal or administrative action
that is enforced by a monetary penalty, such person had reasonable grounds to
believe his or her conduct was lawful.
The Underwriting Agreement provides for reciprocal indemnification between
the Selling Securityholders, the Company and the Underwriters against certain
liabilities in connection with this Offering, including liabilities under the
Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
and the Underwriters pursuant to the foregoing provisions, or otherwise, the
Company 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 Company of expenses,
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person or by the Underwriters in connection
with the securities being registered, the Company will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of 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.
44
<PAGE>
INDEX TO
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Combined Balance Sheets.............................................................. F-3
Combined Statements of Income........................................................ F-4
Combined Statements of Cash Flows.................................................... F-5
Combined Statements of Stockholders' Equity.......................................... F-6
Notes to Combined Financial Statements............................................... F-7
Review Engagement Report............................................................. F-15
Interim Combined Balance Sheets...................................................... F-16
Interim Combined Statements of Income................................................ F-17
Interim Combined Statements of Cash Flow............................................. F-18
Interim Combined Statements of Stockholders' Equity.................................. F-19
Notes to Interim Combined Financial Statements....................................... F-20
Report of Independent Auditors....................................................... F-30
Balance Sheet........................................................................ F-31
Notes to Financial Statement......................................................... F-32
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Excelle Brands Food Corporation/Intercorp Foods Ltd.
We have audited the accompanying combined balance sheets of Excelle Brands
Food Corporation/ Intercorp Foods Ltd. (incorporated in Canada) as at January
31, 1997 and 1996 and the related combined statements of income, cash flows and
changes in stockholders' equity for the years ended January 31, 1997, 1996 and
1995. These combined financial statements are the responsibility of the
management of Excelle Brands Food Corporation and Intercorp Foods Ltd. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Excelle Brands Food
Corporation/Intercorp Foods Ltd. as at January 31, 1997 and 1996 and the results
of its operations and its cash flows for the years ended January 31, 1997, 1996
and 1995, in conformity with generally accepted accounting principles in the
United States of America.
Toronto, Ontario /s/ SCHWARTZ LEVITSKY FELDMAN
March 12, 1997 Chartered Accountants
Except for note 9(b)
which is August 11, 1997
F-2
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
COMBINED BALANCE SHEETS
AS OF JANUARY 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
$ $
ASSETS
CURRENT ASSETS
Cash (note 5)......................................................................... 176,117 915,626
Accounts receivable (note 2).......................................................... 578,210 717,581
Investment tax credits recoverable.................................................... 184,755 136,413
Inventory (note 3).................................................................... 729,604 621,080
Income taxes recoverable.............................................................. -- 27,189
Prepaid expenses and sundry assets.................................................... 79,198 39,478
---------- ----------
Total current assets.................................................................. 1,747,884 2,457,367
PROPERTY, PLANT AND EQUIPMENT (note 4).................................................. 1,310,863 1,291,115
---------- ----------
Total assets.......................................................................... 3,058,747 3,748,482
---------- ----------
---------- ----------
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (note 5)............................................................ 286,749 1,166,466
Accounts payable and accrued expenses (note 6)........................................ 834,255 1,007,052
Income taxes payable.................................................................. 5,864 --
Current portion of long-term debt..................................................... 253,716 231,846
---------- ----------
Total current liabilities............................................................. 1,380,584 2,405,364
LONG-TERM DEBT (note 7)................................................................. 591,205 599,023
DUE TO DIRECTORS (note 8)............................................................... 154,990 81,712
DUE TO PARENT COMPANY................................................................... -- 70,299
DEFERRED INCOME TAXES (note 12)......................................................... 119,726 87,319
---------- ----------
Total liabilities..................................................................... 2,246,505 3,243,717
---------- ----------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 9).................................................................. 160 160
RETAINED EARNINGS....................................................................... 844,011 550,050
CUMULATIVE TRANSLATION ADJUSTMENTS...................................................... (31,929) (45,445)
---------- ----------
Total stockholders' equity............................................................ 812,242 504,765
---------- ----------
Total liabilities and stockholders' equity............................................ 3,058,747 3,748,482
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
$ $ $
SALES.................................................................... 10,459,655 8,457,288 8,380,776
Trade expenditures................................................... 876,139 711,317 825,539
------------ ---------- ----------
NET SALES................................................................ 9,583,516 7,745,971 7,555,237
Cost of sales........................................................ 6,723,795 5,675,567 5,376,395
------------ ---------- ----------
GROSS PROFIT............................................................. 2,859,721 2,070,404 2,178,842
------------ ---------- ----------
OPERATING EXPENSES
Selling.............................................................. 1,327,760 937,309 1,253,972
General and administrative........................................... 749,366 628,473 611,090
Research and development cost (note 10).............................. 12,823 91,628 59,783
Amortization......................................................... 285,320 230,776 298,748
------------ ---------- ----------
Total operating expenses............................................. 2,375,269 1,888,186 2,223,593
------------ ---------- ----------
OPERATING INCOME (LOSS).................................................. 484,452 182,218 (44,751)
INTEREST EXPENSE......................................................... 77,124 86,233 78,181
------------ ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS................ 407,328 95,985 (122,932)
Income taxes (recoverable) (note 11)................................. 113,367 14,605 (5,600)
------------ ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS................................. 293,961 81,380 (117,332)
Extraordinary items (note 12)........................................ -- 340,051 --
------------ ---------- ----------
NET INCOME (LOSS)........................................................ 293,961 421,431 (117,332)
------------ ---------- ----------
------------ ---------- ----------
NET INCOME PER WEIGHTED AVERAGE COMMON SHARE BEFORE EXTRAORDINARY
ITEMS.................................................................. 0.10 0.03 (0.04)
------------ ---------- ----------
------------ ---------- ----------
EXTRAORDINARY ITEMS PER WEIGHTED AVERAGE COMMON SHARE.................... -- 0.11 --
------------ ---------- ----------
------------ ---------- ----------
NET INCOME PER WEIGHTED AVERAGE COMMON SHARE............................. 0.10 0.14 (0.04)
------------ ---------- ----------
------------ ---------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (note 9(b))......... 3,075,000 3,075,000 3,075,000
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
$ $ $
Cash flows from operating activities:
Net Income (loss).......................................................... 293,961 421,431 (117,332)
---------- ---------- ----------
Adjustments to reconcile net income (loss) to net cash (used in) provided
by operating activities:
Amortization............................................................. 285,320 230,776 298,748
Gain on disposal property, plant and equipment........................... (9,350) -- --
Forgiveness of debt...................................................... -- (557,415) --
Loss on write off of deferred charge..................................... -- 76,606 --
Decrease/(increase) in accounts receivable............................... 151,567 (221,540) (38,014)
Increase in investment tax credits....................................... (45,112) (53,439) (83,461)
Decrease/(increase) in inventory......................................... (95,178) 138,595 (171,249)
Decrease/(increase) in prepaid expenses.................................. (38,473) 29,800 (22,756)
Increase/(decrease) in accounts payable and accrued expenses............. (190,191) (292,695) 436,064
Increase in income taxes payable/recoverable............................. 33,177 21,480 --
Increase/(decrease) in deferred income taxes............................. 30,322 75,562 (5,600)
---------- ---------- ----------
Total adjustments........................................................ 122,082 (552,270) 413,732
---------- ---------- ----------
Net cash (used in)/provided by operating activities...................... 416,043 (130,839) 296,400
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment.................... 14,229 -- --
Purchases of property, plant and equipment................................. (284,710) (112,555) (396,891)
---------- ---------- ----------
Net cash used in investing activities...................................... (270,481) (112,555) (396,891)
---------- ---------- ----------
Cash flows from financing activities:
Advances (repayment) of bank indebtedness.................................. (879,717) (135,390) 833,480
Additions to deferred financing charges.................................... -- -- (76,982)
Proceeds from advances to directors........................................ 70,804 -- 108,274
Advances by (repayment to) advances by parent company...................... (70,804) -- 51,192
Long-term debt borrowings.................................................. 181,455 376,354 189,448
Long-term debt repayments.................................................. (183,659) (62,037) (81,145)
---------- ---------- ----------
Net cash (used in)/provided by financing activities........................ (881,921) 178,927 1,024,267
---------- ---------- ----------
Effect of foreign currency exchange rate changes............................. (3,150) (9,779) 20,705
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents......................... (739,509) (74,246) 944,481
Cash and cash equivalents
Beginning of year.......................................................... 915,626 989,872 45,391
---------- ---------- ----------
End of year................................................................ 176,117 915,626 989,872
---------- ---------- ----------
---------- ---------- ----------
Income taxes paid (refunds received)......................................... (87,312) (18,241) 275
---------- ---------- ----------
---------- ---------- ----------
Interest paid................................................................ 77,124 86,233 78,181
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------
<S> <C> <C> <C> <C>
CUMULATIVE
NUMBER OF RETAINED TRANSLATION
SHARES AMOUNT EARNINGS ADJUSTMENTS
----------------- ----------- ----------- -----------
<CAPTION>
$ $ $
<S> <C> <C> <C> <C>
Balance as of January 31, 1994................................ 200 160 245,951 (39,226)
Foreign currency translation.............................. -- -- -- (7,981)
Net loss for the year..................................... -- -- (117,332) --
--- --- ----------- -----------
Balance as of January 31, 1995................................ 200 160 128,619 (47,207)
Foreign currency translation.............................. -- -- -- 1,762
Net income for the year................................... -- -- 421,431 --
--- --- ----------- -----------
Balance as of January 31, 1996................................ 200 160 550,050 (45,445)
Foreign currency translation.............................. -- -- -- 13,516
Net income for the year................................... -- -- 293,961 --
--- --- ----------- -----------
Balance as of January 31, 1997................................ 200 160 844,011 (31,929)
--- --- ----------- -----------
--- --- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
These financial statements combine the accounts of two affiliated companies
and Kalmath Investments Ltd., the parent company of Excelle Brands Food
Corporation. All material inter-company accounts and transactions have been
eliminated.
b) Principle Activities
The companies, Excelle Brands Foods Corporation and Intercorp Foods Ltd.,
were incorporated in Canada on February 7, 1987 and December 20, 1982,
respectively. The companies are principally engaged in the production of food
products in Canada and its distribution in Canada and the U.S. The activity of
Kalmath Investments Ltd. is immaterial in the aggregate, as its only activity is
to hold the invesment in Excelle Brands Food Corporation.
c) Cash and Cash Equivalents (Bank Indebtedness)
Cash and cash equivalents (bank indebtedness) include cash on hand, amounts
due from and to banks, and any other highly liquid investments purchased with a
maturity of three months or less. The carrying amount approximates fair value
because of the short maturity of those instruments.
d) Other Financial Instruments
The carrying amount of the companies' accounts receivables and payables
approximates fair value because of the short maturity of these instruments.
e) Inventory
Inventory is valued at the lower of cost and net realizable value. Cost is
determined on the first-in, first-out basis.
f) Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are amortized on the
basis over their estimated useful lives at the undernoted rates and methods:
<TABLE>
<S> <C> <C>
Equipment.................................................. 20% Declining
balance
Leasehold improvements..................................... 10% Straight-line
Vehicle.................................................... 30% Declining
balance
Computer equipment......................................... 30% Declining
balance
Office furniture........................................... 20% Declining
balance
</TABLE>
Amortization for assets acquired during the year are recorded at one-half of
the indicated rates, which approximates when they were put into use.
g) Income Taxes
The companies account for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the liability
method, deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.
h) Foreign Currency Translation
The companies maintain their books and records in Canadian dollars. Foreign
currency transactions are translated using the temporal method. Under this
method, all monetary items are translated into Canadian funds at the rate of
exchange prevailing at balance sheet date. Non-monetary items are
F-7
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
translated at historical rates. Income and expenses are translated at the rate
in effect on the transaction dates. Transaction gains and losses are included in
the determination of earnings for the year.
The translation of the financial statements from Canadian dollars ("CDN $")
into United States dollars is performed for the convenience of the reader.
Balance sheet accounts are translated using closing exchange rates in effect at
the balance sheet date and income and expenses accounts are translated using an
average exchange rate prevailing during each reporting period. No representation
is made that the Canadian dollar amounts could have been or could be, converted
into United States dollars at the rates on the respective dates and or at any
other certain rates. Adjustments resulting from the translation are included in
the cumulative translation adjustments in stockholders' equity.
i) Sales
Sales represent the invoiced value of goods supplied to customers. Sales are
recognized upon delivery of goods and passage of title to customers.
j) Government Assistance and Investment Tax Credits
Government assistance and investment tax credits are recorded on the accrual
basis and are accounted for as a reduction of the related current or capital
expenditures.
k) Net Income per Weighted Average Common Share
Net income per common share is computed by dividing net income for the year
by the weighted average number of common shares outstanding during the year.
l) Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosures 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.
m) Accounting Changes
On February 1, 1996, the company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires that long-lived assets to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicates that the carrying amount of an asset may not be
recoverable. This statement is effective for financial statements for fiscal
years beginning after December 15, 1995. Adoption of SFAS No. 121 did not have a
material impact on the company's results of operations.
2. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
$ $
Accounts receivable......................................................................... 595,200 728,488
Less: Allowance for doubtful accounts....................................................... 16,990 10,907
--------- ---------
Accounts receivable, net.................................................................... 578,210 717,581
--------- ---------
--------- ---------
</TABLE>
F-8
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
3. INVENTORY
Inventory comprised the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
$ $
Raw materials....................................................................... 187,546 200,899
Finished goods...................................................................... 542,058 420,181
--------- ---------
729,604 621,080
--------- ---------
--------- ---------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
$ $
Equipment............................................................................... 2,293,607 2,016,295
Leasehold improvements.................................................................. 339,652 325,729
Vehicle................................................................................. 51,339 46,841
Computer equipment...................................................................... 86,887 66,595
Office furniture........................................................................ 90,390 82,850
---------- ----------
Cost............................................................................ 2,861,875 2,538,310
---------- ----------
Less: Accumulated amortization
Equipment......................................................................... 1,274,178 1,016,282
Leasehold improvements............................................................ 122,805 87,131
Vehicle........................................................................... 44,890 42,564
Computer equipment................................................................ 51,828 52,393
Office furniture.................................................................. 57,311 48,825
---------- ----------
1,551,012 1,247,195
---------- ----------
Net..................................................................................... 1,310,863 1,291,115
---------- ----------
---------- ----------
</TABLE>
5. CASH AND BANK INDEBTEDNESS
Bank indebtedness bears interest at the bank's prime rate plus 1 1/2% per
annum and represents an operating loan which revolves in multiples of $18,500.
The bank indebtedness is secured by an assignment of book debts, a general
security agreement, guarantees of the shareholder and directors of Excelle
Brands Food Corporation, a fixed charge on equipment, a pledge of inventory,
assignment of fire insurance, assignment of life insurance on the lives of the
directors, a charge against property of a director and a postponement of amounts
due to directors.
The affiliated companies have a centralized banking transfer of funds
agreement wherein the companies maintain a number of operating current accounts
and overdraft facilities with a single bank in order to facilitate their banking
transactions. In determining the balance upon which interest is charged and
lending limits and covenants are measured the bank notionally consolidates all
cash and overdraft balances on a net basis.
F-9
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
$ $
Accounts payable and accrued expenses comprise the following:
Trade payables........................................................................ 420,656 750,319
Accrued expenses...................................................................... 413,599 256,733
--------- ----------
834,255 1,007,052
--------- ----------
--------- ----------
</TABLE>
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C> <C> <C>
$ $
a) Ontario Development Corporation Loans
Ontario Development Corporation loan under the Food Industry Financial Assistance
Program. Effective on October 23, 1996 the loan is repayable in blended monthly
payments of $3,100 principal and interest at 8% per annum, due October, 1999....... 170,707 182,030
Ontario Development Corporation loan under the Food Industry Financial Assistance
Program. The loan is repayable in blended monthly payments of $1,600 principal and
interest at 6 1/2% per annum, due October, 1999.................................... 48,122 62,404
b) Business Development Bank Loan
Business Development Bank loan, repayable in blended monthly payments of $1,200
principal and interest at the floating commercial and industrial loan interest rate
plus 2 1/2% per annum, due August, 2001............................................ 67,372 --
c) Bank Term Loans
Commercial investment loan, repayable monthly, $1,000 principal plus interest at
the bank's prime rate plus 1 1/2% per annum, repaid in full during the year........ -- 910
Commercial investment loan, repayable monthly, $3,100 principal plus interest at
the bank's prime rate plus 1 1/2% per annum, due October, 1998..................... 68,043 100,110
d) Capital Loans
Capital loan, repayable monthly, $2,700 principal plus interest at the bank's prime
rate plus 1 1/2% per annum, due June, 2001......................................... 144,271 160,186
Capital loan, repayable monthly, $2,000 principal plus interest at the bank's prime
rate plus 1 1/2% per annum, due November, 2002..................................... 116,321 --
e) Accounts payable under settlement agreements, non-interest bearing, with monthly
payments of approximately $8,700 until January, 1999............................... 230,085 325,229
--------- ---------
844,921 830,869
Less: Current portion.............................................................. 253,716 231,846
--------- ---------
591,205 599,023
--------- ---------
--------- ---------
</TABLE>
f) Bank term loans are secured by the security as described in note 5.
F-10
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
7. LONG-TERM DEBT (CONTINUED)
g) Ontario Development Corporation loans are secured by a first and fixed
mortgage charge on specific equipment and a floating charge on all other assets.
h) Business Development Bank loan is secured by a general security
agreement, assignment of claims and an assignment of insurance on specific
assets.
i) Capital loan is secured by a second and fixed mortgage charge on specific
equipment and a postponement of amounts due to directors and an assignment of
life insurance on the life of a director.
j) Capital loan is secured by a first and fixed mortgage charge on specific
equipment and a floating charge on all other assets.
k) Future principal payment obligations are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
$ $
1997.................................................................................. -- 231,846
1998.................................................................................. 253,716 321,169
1999.................................................................................. 231,510 200,074
2000.................................................................................. 246,431 45,743
2001.................................................................................. 71,566 32,037
2002.................................................................................. 41,698 --
--------- ---------
844,921 830,869
--------- ---------
--------- ---------
</TABLE>
8. DUE TO DIRECTORS
The amounts due to directors are unsecured, bear interest at the directors'
effective borrowing rate, are without any specific repayment terms, and are not
expected to be repaid prior to February 1, 1998.
The directors' effective borrowing rate is the same as the Canadian bank
prime rate, which at January 31, 1997 was 4.75%.
9. CAPITAL STOCK
A) AUTHORIZED
An unlimited number of the following classes of shares without par value
Class A Preference shares, 12% non-cumulative, non-participating,
non-voting, redeemable at the paid-up amount
Class B Special shares, non-cumulative, participating, non-voting,
redeemable at the paid-up amount
Common shares
ISSUED
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
$ $
200 Common shares........................................................................... 160 160
--- ---
--- ---
</TABLE>
B)WEIGHTED AVERAGED NUMBER OF COMMON SHARES
For the purpose of determining earnings per share, the weighted average
number of common shares has been presented on a pro-forma basis, giving
effect to the following subsequent events:
F-11
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
9. CAPITAL STOCK (CONTINUED)
i) In May 1997, a newly incorporated holding company, Intercorp Excelle
Inc. (the "Registrant") obtained bridge financing for the purpose of
funding the planned initial public offering. As part consideration for
this transaction, the Registrant issued 175,000 common shares to the
participants in the bridge financing, resulting in 175,300 issued and
outstanding common shares.
ii) Subsequent to the above noted bridge financing, the shareholders of the
companies transferred all the outstanding common shares of the
companies to the Registrant, in exchange for 2,899,700 common shares of
that company. The transfer was done in anticipation of an eventual
initial public offering by the Registrant.
Accordingly, the total weighted average number of common shares on a
pro-forma basis is 3,075,000 common shares.
10. RESEARCH AND DEVELOPMENT COSTS
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
$ $ $
Research and development costs are comprised of:
Expenses incurred.......................................................... 191,762 171,768 178,386
Less: Investment tax credits............................................... (178,939) (80,140) (118,603)
---------- --------- ----------
Net expense................................................................ 12,823 91,628 59,783
---------- --------- ----------
---------- --------- ----------
</TABLE>
11. INCOME TAXES
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
$ $ $
a) Current 83,045 (60,957) --
Deferred................................................................... 30,322 75,562 (5,600)
--------- --------- ---------
113,367 14,605 (5,600)
--------- --------- ---------
--------- --------- ---------
b) Current income taxes consists of:
Amount calculated at basic Federal and Provincial rates.................... 96,621 21,625 (30,186)
Increase (decrease) resulting from:
Application of losses carried forward from prior year................ -- (22,585) --
Operating loss for which no current income tax benefit is
recognized........................................................... -- -- 24,586
Investment tax credits............................................... -- (16,757) --
Permanent and other differences...................................... 16,746 2,992 --
Portion of above adjustments allocable to extraordinary items........ -- 29,330 --
Timing differences................................................... (30,322) (75,562) 5,600
--------- --------- ---------
83,045 (60,957) --
--------- --------- ---------
--------- --------- ---------
</TABLE>
c) The companies have operating losses which can be used to reduce future
provincial taxable income. The potential tax benefits of the losses have been
recorded as a reduction of deferred taxes. The deductibility of these losses,
which amount to approximately $204,000, expires in 2002.
F-12
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
11. INCOME TAXES (CONTINUED)
d) Deferred income taxes represent the tax benefits derived from timing
differences between amortization of property, plant and equipment charged to
operations and amounts deducted from taxable income.
12. EXTRAORDINARY ITEMS
a) During the 1996 fiscal year, the companies settled certain past due
accounts payable in the amount of $918,178 with certain key suppliers resulting
in a one time forgiveness of those accounts (net of related expenses of
$35,534), in the amount of $557,415. The balance of the accounts payable are to
be repaid by January 31, 1999 (see note 7).
b) During the 1996 fiscal year, the companies aborted efforts at obtaining
new financing until settlement was reached with trade creditors. Accordingly,
deferred financing costs pertaining to these efforts, in the amount of $156,329,
of which $74,723 was incurred in 1995, were written off.
c) Income taxes on the forgiveness and the amounts written off during 1996
amounted to $61,035.
13. SALES TO MAJOR CUSTOMERS
The breakdown of sales by geographic area is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<CAPTION>
$ $ $
<S> <C> <C> <C>
Canada............................................................ 8,843,699 7,103,089 7,016,717
United States of America.......................................... 739,817 642,882 538,520
----------- ----------- -----------
9,583,516 7,745,971 7,555,237
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
14. MINIMUM LEASE COMMITMENTS
Minimum payments under an operating lease for premises amount to $81,000,
exclusive of insurance and other occupancy charges. The lease expires June 30,
2000. The future minimum lease payments over the next four years are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
$ $ $
Payable during the following periods:
Within one year.............................................................. 81,586 78,319 109,449
Over 1 year but not exceeding 2 years........................................ 77,002 81,051 109,449
Over 2 years but not exceeding 3 years....................................... 77,002 76,497 109,449
Over 3 years but not exceeding 4 years....................................... 32,084 76,497 141,371
Over 4 years but not exceeding 5 years....................................... -- 31,874 164,173
--------- --------- ---------
267,674 344,238 633,891
--------- --------- ---------
--------- --------- ---------
</TABLE>
The companies have sub-leased a portion of the premises for approximately
$24,000 per annum in renewable one year terms for a period of three years.
15. COMPARATIVE FIGURES
Certain figures in the 1996 and 1995 financial statements have been
reclassified to conform with the basis of presentation used in the current year.
F-13
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
16. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the statements of income:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
$ $ $
Amortization of property, plant and equipment............................ 285,320 230,776 254,576
Amortization of deferred charges......................................... -- -- 44,172
--------- --------- ---------
285,320 230,776 298,748
--------- --------- ---------
Operating lease rentals for rental premises (net of rent received)....... 51,141 89,247 77,360
Interest expense on Bank indebtedness.................................... 26,891 33,984 40,157
Stockholders' loans...................................................... 14,696 17,241 14,965
Long-term debt........................................................... 35,537 35,008 23,059
--------- --------- ---------
77,124 86,233 78,181
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
REVIEW ENGAGEMENT REPORT
To the Board of Directors and Stockholders of
Excelle Brands Food Corporation/Intercorp Foods Ltd.
We have reviewed the interim combined balance sheets of Excelle Brands Food
Corporation/ Intercorp Foods Ltd. (incorporated in Canada) as at April 30, 1997
and 1996 and the interim combined statements of income, cash flows and changes
in stockholders' equity for the three months ended April 30, 1997 and 1996. Our
review was made in accordance with generally accepted standards for review
engagements and accordingly consisted primarily of enquiry, analytical
procedures and discussion related to information supplied to us by the
companies.
A review does not constitute an audit and consequently we do not express an
audit opinion on these financial statements.
Based on our reviews, nothing has come to our attention that causes us to
believe that these financial statements are not, in all material respects, in
accordance with generally accepted accounting principles in the United States of
America.
Toronto, Ontario /s/ SCHWARTZ LEVITSKY FELDMAN
June 24, 1997 Chartered Accountants
Except for note 9(b)
which is dated August 11, 1997
F-15
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
INTERIM COMBINED BALANCE SHEETS
AS OF APRIL 30, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
ASSETS $ $
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash (note 5)...................................................... 1,076,132 1,859,172
Accounts receivable (note 2)....................................... 1,020,942 706,029
Investment tax credits recoverable................................. 201,320 157,746
Inventory (note 3)................................................. 967,187 743,789
Income taxes recoverable........................................... -- 15,062
Prepaid expenses and sundry assets................................. 136,450 69,172
--------- ---------
Total current assets............................................... 3,402,031 3,550,970
PROPERTY, PLANT AND EQUIPMENT (note 4)................................. 1,405,748 1,229,770
--------- ---------
Total assets........................................................... 4,807,779 4,780,740
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
1997 1996
$ $
---------- ----------
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (note 5)............................................................ 1,287,787 2,136,703
Accounts payable and accrued expenses (note 6)........................................ 1,565,713 1,043,040
Income taxes payable.................................................................. 8,985 9,850
Current portion of long-term debt..................................................... 244,531 233,786
---------- ----------
Total current liabilities............................................................. 3,107,016 3,423,379
LONG-TERM DEBT (note 7)................................................................. 549,547 564,206
DUE TO DIRECTORS (note 8)............................................................... 149,379 82,395
DUE TO PARENT COMPANY................................................................... -- 70,888
DEFERRED INCOME TAXES (note 12)......................................................... 119,726 87,320
---------- ----------
Total liabilities..................................................................... 3,925,668 4,228,188
---------- ----------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 9).................................................................. 160 160
RETAINED EARNINGS....................................................................... 923,164 623,886
CUMULATIVE TRANSLATION ADJUSTMENTS...................................................... (41,213) (71,494)
---------- ----------
Total stockholders' equity............................................................ 882,111 552,552
---------- ----------
Total liabilities and stockholders' equity............................................ 4,807,779 4,780,740
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
INTERIM COMBINED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED APRIL 30
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
$ $
SALES................................................................................... 2,780,557 2,309,733
Trade expenditures.................................................................. 183,431 229,042
---------- ----------
NET SALES............................................................................... 2,597,126 2,080,691
Cost of sales....................................................................... 1,749,127 1,476,460
---------- ----------
GROSS PROFIT............................................................................ 847,999 604,231
---------- ----------
OPERATING EXPENSES
Selling............................................................................. 399,054 227,368
General and administrative.......................................................... 197,031 159,791
Research and development costs (note 10)............................................ 25,372 23,054
Amortization........................................................................ 91,318 77,388
Total operating expenses............................................................ 712,775 487,601
---------- ----------
OPERATING INCOME........................................................................ 135,224 116,630
INTEREST EXPENSE........................................................................ 19,926 20,739
---------- ----------
INCOME BEFORE INCOME TAXES.............................................................. 115,298 95,891
Income taxes (note 12).............................................................. 36,145 22,055
---------- ----------
NET INCOME.............................................................................. 79,153 73,836
---------- ----------
---------- ----------
NET INCOME PER WEIGHTED AVERAGE
COMMON SHARE............................................................................ 0.03 0.02
---------- ----------
---------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING (note 9(b))................................................... 3,075,000 3,075,000
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
INTERIM COMBINED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
$ $
Cash flows from operating activities:
Net Income........................................................................... 79,153 73,836
----------- -----------
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Amortization....................................................................... 91,318 77,388
Loss on write off of deferred change............................................... -- --
(Increase)/decrease in accounts receivable......................................... (468,459) 17,536
(Increase)/decrease in investment tax credits...................................... (23,495) (20,164)
(Increase)/decrease in inventory................................................... (266,727) (117,356)
(Increase)/decrease in prepaid expenses............................................ (60,741) (29,326)
Increase in accounts payable and accrued expenses.................................. 769,536 27,522
Increase in income taxes payable/recoverable....................................... 3,368 22,175
Increase/(decrease) in deferred income taxes....................................... -- --
----------- -----------
Total adjustments.................................................................. 44,800 (22,225)
----------- -----------
Net cash provided by operating activities.......................................... 123,953 51,611
----------- -----------
Cash flows from investing activities:
Cash used to acquire property, plant and equipment................................. (186,202) (16,273)
----------- -----------
Cash flows from financing activities:
Advances of bank indebtedness........................................................ 1,001,038 970,237
Long-term debt repayments............................................................ (20,463) (39,778)
----------- -----------
Cash provided by financing activities................................................ 980,575 930,459
----------- -----------
Effect of foreign currency exchange rate changes....................................... (18,311) (22,251)
----------- -----------
Net increase in cash and cash equivalents.............................................. 900,015 943,546
Cash and cash equivalents
Beginning of period.................................................................. 176,117 915,626
----------- -----------
End of period........................................................................ 1,076,132 1,859,172
----------- -----------
----------- -----------
Income taxes paid (refunds received)................................................... -- (18,358)
----------- -----------
Interest paid.......................................................................... 19,926 20,739
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
INTERIM COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED APRIL 30
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK RETAINED TRANSLATION
NUMBER OF AMOUNT EARNINGS ADJUSTMENTS
SHARES $ $ $
----------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Balance as of January 30, 1997................................. 200 160 844,011 (31,929)
Foreign currency translation................................. -- -- -- (9,284)
Net income for the period.................................... -- -- 79,153 --
--- --- --------- -----------
Balance as of April 30, 1997................................... 200 160 923,164 (41,213)
--- --- --------- -----------
--- --- --------- -----------
Balance as of January 30, 1996................................. 200 160 550,050 (45,445)
Foreign currency translation................................. -- -- -- (26,049)
Net income for the period.................................... -- -- 73,836 --
--- --- --------- -----------
Balance as of April 30, 1996................................... 200 160 623,886 (71,494)
--- --- --------- -----------
--- --- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BASIS OF PRESENTATION
These interim financial statements combined the accounts of two affiliated
companies and Kalmath Investments Ltd., the parent company of Excelle Brands
Food Corporation. All material inter-company accounts and transactions have been
eliminated.
B) PRINCIPLE ACTIVITIES
The companies, Excelle Brands Foods Corporation and Intercorp Foods Ltd.,
were incorporated in Canada on February 7, 1987 and December 20, 1982,
respectively. The companies are principally engaged in the production of food
products in Canada and its distribution in Canada and the U.S. The activity of
Kalmath Investments Ltd. is immaterial in the aggregate, as its only activity is
to hold the investment in Excelle Brands Food Corporation.
C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks, and
any other highly liquid investments purchased with a maturity of three months or
less. The carrying amount approximates fair value because of the short maturity
of those instruments.
D) OTHER FINANCIAL INSTRUMENTS
The carrying amount of the companies' accounts receivable and payable
approximates fair value because of the short maturity of these instruments.
E) INVENTORY
Inventory is valued at the lower of cost and net realizable value. Cost is
determined on the first-in, first-out basis.
F) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are amortized on the
basis over their estimated useful lives at the undernoted rates and methods:
<TABLE>
<S> <C> <C>
Equipment 20% Declining balance
Leasehold improvements 10% Straight-line
Vehicle 30% Declining balance
Computer equipment 30% Declining balance
Office furniture 20% Declining balance
</TABLE>
F-20
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amortization for assets acquired during the period are recorded at one-half
of the indicated rates, which approximates when they were put into use.
G) INCOME TAXES
The companies account for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the liability
method, deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.
H) FOREIGN CURRENCY TRANSLATION
The companies maintain their books and records in Canadian dollars. Foreign
currency transactions are translated using the temporal method. Under this
method, all monetary items are translated into Canadian funds at the rate of
exchange prevailing at balance sheet date. Non-monetary items are translated at
historical rates. Income and expenses are translated at the rate in effect on
the transaction dates. Transaction gains and losses are included in the
determination of earnings for the period.
The translation of the financial statements from Canadian dollars ("CDN $")
into United States dollars is performed for the convenience of the reader.
Balance sheet accounts are translated using closing exchange rates in effect at
the balance sheet date and income and expenses accounts are translated using an
average exchange rate prevailing during each reporting period. No representation
is made that the Canadian dollar amounts could have been or could be, converted
into United States dollars at the rates on the respective dates and or at any
other certain rates. Adjustments resulting from the translation are included in
the cumulative translation adjustments in stockholders' equity.
I) SALES
Sales represent the invoiced value of goods supplied to customers. Sales are
recognized upon delivery of goods and passage of title to customers.
J) GOVERNMENT ASSISTANCE AND INVESTMENT TAX CREDITS
Government assistance and investment tax credits are recorded on the accrual
basis and are accounted for as a reduction of the related current or capital
expenditures.
K) NET INCOME PER WEIGHTED AVERAGE COMMON SHARE
Net income per common share is computed by dividing net income for the
period by the weighted average number of common shares outstanding during the
period.
F-21
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
L) USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosures 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.
M) ACCOUNTING CHANGES
On February 1, 1996, the company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. SFAS No. 121 requires that long-lived assets to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicates that the carrying amount of an asset may not be
recoverable. This statement is effective for financial statements for fiscal
years beginning after December 15, 1995. Adoption of SFAS No. 121 did not have a
material impact on the company's results of operations.
In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation, was
issued. It introduces the use of a fair value-based method of accounting for
stock-based compensation. It encourages, but does not require, companies to
recognize compensation expense for stock-based compensation to employees based
on the new fair value accounting rules. Companies that choose not to adopt the
new rules will continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. However, SFAS No. 123 requires companies that choose not to adopt the
new fair value accounting rules to disclose pro forma net income and earnings
per share under the new method. SFAS No. 123 is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company has
adopted the disclosure provisions of SFAS No. 123 [see Note 15(b)].
2. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
$ $
Accounts receivable................................................... 1,037,099 713,491
Less: Allowance for doubtful accounts................................. 16,157 7,462
---------- ---------
Accounts receivable, net.............................................. 1,020,942 706,029
---------- ---------
---------- ---------
</TABLE>
F-22
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
3. INVENTORY
Inventory comprised the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
$ $
Raw materials........................................................... 240,723 255,663
Finished goods.......................................................... 726,464 488,126
--------- ---------
967,187 743,789
--------- ---------
--------- ---------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
$ $
Equipment........................................................... 2,477,019 2,028,295
Leasehold improvements.............................................. 340,519 325,729
Vehicle............................................................. 51,339 46,865
Computer equipment.................................................. 88,525 66,938
Office furniture.................................................... 90,381 86,204
---------- ----------
Cost.............................................................. 3,047,780 2,554,201
---------- ----------
Less: Accumulated amortization
Equipment......................................................... 1,360,241 1,089,932
Leasehold improvements............................................ 122,805 93,138
Vehicle........................................................... 45,103 42,697
Computer equipment................................................ 52,055 53,128
Office furniture.................................................. 61,828 45,536
---------- ----------
1,642,032 1,324,431
---------- ----------
Net................................................................. 1,405,748 1,229,770
---------- ----------
---------- ----------
</TABLE>
5. CASH AND BANK INDEBTEDNESS
Bank indebtedness bears interest at the bank's prime rate plus 1 1/2% per
annum and also comprises an operating loan which revolves in multiples of
$18,500. These are secured by an assignment of book debts, a general security
agreement, guarantees of the shareholder and directors of Excelle Brands Food
Corporation, a fixed charge on equipment, a pledge of inventory, assignment of
fire insurance, assignment of life insurance on the lives of the directors, a
charge against property of a director and a postponement of amounts due to
directors.
The affiliated companies have a centralized banking transfer of funds
agreement wherein the companies maintain a number of operating current accounts
and overdraft facilities with a single bank in order to facilitate their banking
transactions. In determining the balance upon which interest is charged and
lending limits and covenants are measured, the bank notionally consolidates all
cash and overdraft balances on a net basis.
F-23
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
$ $
Accounts payable and accrued expenses comprised the following:
Trade payable..................................................... 519,440 640,403
Accrued expenses.................................................. 1,046,273 402,637
---------- ----------
1,565,713 1,043,040
---------- ----------
---------- ----------
</TABLE>
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<C> <S> <C> <C>
$ $
a) Ontario Development Corporation Loans
Ontario Development Corporation loan under the Food Industry Financial Assistance
Program. Effective on October 23, 1996 the loan is repayable in blended monthly
payments of $3,100 principal and interest at 8% per annum, due October, 1999........ 160,731 180,996
Ontario Development Corporation loan under the Food Industry Financial Assistance
Program. The loan is repayable in blended monthly payments of $1,600 principal and
interest at 6 1/2% per annum, due October, 1999..................................... 40,576 61,647
b) Business Development Bank Loan
Business Development Bank loan, repayable in blended monthly payments of $1,200
principal and interest at the floating commercial and industrial loan interest rate
plus 2 1/2% per annum, due August, 2001............................................. 61,391 --
c) Bank Term Loans
Commercial Investment Loan, repayable monthly, $1,000 principal plus interest at the
bank's prime rate plus 1 1/2% per annum, repaid in full during the year............. -- 137
Commercial Investment Loan, repayable monthly, $3,100 principal plus interest at the
bank's prime rate plus 1 1/2% per annum, due October, 1998.......................... 53,653 91,769
d) Capital Loans
Capital loan, repayable monthly, $2,700 principal plus interest at the bank's prime
rate plus 1 1/2% per annum, due June, 2001.......................................... 134,159 161,527
Capital loan, repayable monthly, $2,000 principal plus interest at the bank's prime
rate plus 1 1/2% per annum, due November, 2002...................................... 149,161 --
</TABLE>
F-24
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
7. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
$ $
<C> <S> <C> <C>
e) Accounts payable under settlement agreements, non-interest bearing, with monthly
payments of approximately $8,700 until January, 1999................................ 194,408 301,916
--------- ---------
794,078 797,992
Less: Current portion............................................................... 244,531 233,786
--------- ---------
549,547 564,206
--------- ---------
--------- ---------
</TABLE>
f) Bank term loans are secured by the security as described in note 5.
g) Ontario Development Corporation loans are secured by a first and fixed
mortgage charge on specific equipment and a floating charge on all other assets.
h) Business Development Bank loan is secured by a general security
agreement, assignment of claims and an assignment of insurance on specific
assets.
i) Capital loan is secured by a second and fixed mortgage charge on
specific equipment and a postponement of amounts due to directors and an
assignment of life insurance on the life of a director.
j) Capital loan is secured by a first and fixed mortgage charge on specific
equipment and a floating charge on all other assets.
k) Future principal payment obligations are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
$ $
1997............................................................. -- 233,786
1998............................................................. 244,531 311,287
1999............................................................. 238,875 161,492
2000............................................................. 202,715 67,399
2001............................................................. 93,957 24,028
2002............................................................. 14,000 --
---------- ----------
794,078 797,992
---------- ----------
---------- ----------
</TABLE>
8. DUE TO DIRECTORS
The amounts due to directors are unsecured, bear interest at the directors'
effective borrowing rate, are without any specific repayment terms, and are not
expected to be repaid prior to April 1, 1998. The directors' effective borrowing
rate is the same as the Canadian bank prime rate, which at April 30, 1997 was
4.75%
F-25
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
9. CAPITAL STOCK
a) Authorized
An unlimited number of the following classes of shares without par value
Class A Preference shares, 12% non-cumulative, non-participating,
non-voting, redeemable at the paid-up amount
Class B Special shares, non-cumulative, participating, non-voting,
redeemable at the paid-up amount
Common shares
Issued
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
$ $
200 Common shares............................................................... 160 160
--- ---
--- ---
</TABLE>
b) Weighted Average Number of Common Shares
On April 16, 1997, a newly incorporated holding company, Intercorp Excelle
Inc. (the "Registrant"), was formed by the shareholders of the companies for the
purpose of consolidating their 100% ownership interests in anticipation of an
initial public offering. The initial capitalization consisted of 300 common
shares.
For the purpose of determining earnings per share, the weighted average
number of common shares has been presented on a pro-forma basis, giving effect
to the following subsequent events:
i) In May 1997, the registrant completed a private placement of its
securities in which it sold 12% promissory bridge notes in the aggregate
principal amount of $625,000, 175,000 common shares and 175,000
redeemable common share bridge warrants for gross proceeds of $625,000.
The net proceeds of this private placement of $543,750 will be used to
pay bank loans and trade payables of the companies and a portion of the
initial expenses of the planned initial public offering.
ii) Subsequent to the above noted bridge financing, the shareholders of the
companies completed the transfer of all of the outstanding common
shares of the companies to the Registrant in exchange for 2,899,700
common shares of that company.
After giving effect to the above transactions, there are 3,075,000 issued
and outstanding common shares of the Registrant. Accordingly, the total weighted
average number of common shares as presented on a pro-forma basis is 3,075,000.
F-26
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
10. RESEARCH AND DEVELOPMENT COSTS
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
$ $
Research and development costs are comprised of:
Expenses incurred........................................................ 47,258 43,218
Less: Investment tax credits............................................. (21,886) (20,164)
--------- ---------
Net expense.............................................................. 25,372 23,054
--------- ---------
--------- ---------
</TABLE>
11. INCOME TAXES
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<C> <S> <C> <C>
$ $
a) Current............................................................ 36,145 16,156
Deferred........................................................... -- (5,899)
--------- ---------
36,145 22,055
--------- ---------
--------- ---------
b) Current income taxes consists of:
Amount calculated at basic Federal and Provincial rates............ 20,151 18,797
Increase (decrease) resulting from:
Application of losses carried forward from prior year............ -- --
Operating loss for which no current income tax benefit is
recognized....................................................... -- --
Investment tax credits........................................... -- --
Permanent and other differences.................................. 3,684 3,258
Timing differences............................................... 12,310 (5,899)
--------- ---------
36,145 16,156
--------- ---------
</TABLE>
c) Deferred income taxes represent the tax benefits derived from timing
differences between amortization of plant and equipment charged to
operations and amounts deducted from taxable income.
12. SALES TO MAJOR CUSTOMERS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
$ $
Sales to major customers............................................ 597,750 247,873
% of total sales.................................................... 26.9% 13.9%
</TABLE>
F-27
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
12. SALES TO MAJOR CUSTOMERS (CONTINUED)
The breakdown of sales by geographic area is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
$ $
Canada.............................................................. 2,013,157 1,596,656
United States of America............................................ 209,468 187,160
---------- ----------
2,222,625 1,783,816
---------- ----------
---------- ----------
</TABLE>
13. MINIMUM LEASE COMMITMENTS
Minimum payments under an operating lease for premises amount to keep
$81,000, exclusive of insurance and other occupancy charges. The lease expires
June 30, 2000. The future minimum lease payments over the next four years are as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
$ $
Payable during the following periods:
Within one year......................................................... 76,918 84,435
Over 1 year but not exceeding 2 years................................... 75,129 78,928
Over 2 years but not exceeding 3 years.................................. 75,129 77,093
Over 3 years but not exceeding 4 years.................................. 12,521 77,093
Over 4 years but not exceeding 5 years.................................. -- 12,849
--------- ---------
239,697 330,398
--------- ---------
--------- ---------
</TABLE>
The companies have sub-leased a portion of the premises for approximately
$24,000 per annum in renewable one year terms for a period of three years.
14. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the statements of income:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
$ $
Amortization of property, plant and equipment.............................. 91,318 77,388
Amortization of deferred charges........................................... -- --
--------- ---------
91,318 77,388
--------- ---------
--------- ---------
Operating lease rentals for rental premises (net of rent received)......... 12,785 22,312
--------- ---------
--------- ---------
Interest expense on
Bank indebtedness........................................................ 4,094 6,422
Stockholders' loans...................................................... 3,674 4,310
Long-term debt........................................................... 12,158 10,007
--------- ---------
19,926 20,739
--------- ---------
</TABLE>
F-28
<PAGE>
EXCELLE BRANDS FOOD CORPORATION/INTERCORP FOODS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
15. STOCK OPTION PLAN
A) DESCRIPTION OF PLAN
In May 1997, the board of directors and shareholders adopted the Intercorp
Excelle Inc. Stock Option Plan (the "1997 Plan"), pursuant to which 500,000
shares of Common Stock are reserved for issuance.
The 1997 Plan will be administered by the compensation committee or the
board of directors, who determine among other things, those individuals who
shall receive options, the time period during which the options may be partially
or fully exercised, the number of shares of Common Stock issuable upon the
exercise of the options and the option exercise price.
The 1997 Plan is for a period of ten years, expiring in May, 2007. Options
may be granted to officers, directors, consultants, key employees, advisors and
similar parties who provide their skills and expertise to the Company. Options
granted under the 1997 Plan may be exercisable for up to ten years, may require
vesting, and shall be at an exercise price all as determined by the board.
Options are non-transferable except by the laws of descent and distribution or a
change in control of the Company, as defined in the 1997 Plan, and are
exercisable only by the participant during his or her lifetime. Change in
control includes (i) the sale of substantially all of the assets of the Company
and merger or consolidation with another, or (ii) a majority of the board
changes other than by election by the shareholders pursuant to board
solicitation or by vacancies filled by the board caused by death or resignation
of such person.
If a participant ceases affiliation with the Company by reason of death,
permanent disability or retirement at or after age 70, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other termination gives the participant three months to
exercise, except for termination for cause which results in immediate
termination of the option.
Options granted under the 1997 Plan, at the discretion of the compensation
committee or the board, may be exercised either with cash, Common Stock having a
fair market equal to the cash exercise price, the participant's personal
recourse note, or with an assignment to the Company of sufficient proceeds from
the sale of the Common Stock acquired upon exercise of the Options with an
authorization to the broker or selling agent to pay that amount to the Company,
or any combination of the above.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the 1997 Plan.
The 1997 Plan may be terminated or amended at any time by the board of
directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the 1997 Plan may not be
increased without the consent of the shareholders of the Company.
In May 1997, the Board granted 200,000 Options under the 1997 Plan to five
individuals, including officers, directors and key employees. The options are
exercisable at $3.50 per share for ten years expiring May 1, 2007. 40% of the
Options are immediately exercisable, an additional 30% become exercisable in May
1998 and all of the Options are exercisable in November 1998.
B) APPLICATION OF SFAS 123: ACCOUNTING FOR STOCK-BASED COMPENSATION
No pro-forma calculation of compensation cost has been performed as of the
date of these financial statements as the options were granted subsequent to the
period end of these financial statements.
F-29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Intercorp Excelle Inc.
We have audited the accompanying balance sheet of Intercorp Excelle Inc.
(incorporated in Canada) as at April 30, 1997. This financial statement is the
responsibility of the management of Intercorp Excelle Inc. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Intercorp Excelle Inc. as at
April 30, 1997, in conformity with generally accepted accounting principles in
the United States of America.
Toronto, Ontario
August 18, 1997
/s/ SCHWARTZ LEVITSKY FELDMAN
Chartered Accountants
F-30
<PAGE>
INTERCORP EXCELLE INC.
BALANCE SHEET
AS AT APRIL 30, 1997
(AMOUNTS EXPRESSED IN U.S. DOLLARS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash............................................................................... $ 220
---------
---------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 3)............................................................... $ 220
---------
---------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-31
<PAGE>
INTERCORP EXCELLE INC.
NOTES TO FINANCIAL STATEMENT
AS AT APRIL 30, 1997
(AMOUNTS EXPRESSED IN U.S. DOLLARS)
1. INCORPORATION AND ACTIVITY
The company was incorporated under the laws of the Province of Ontario,
Canada on April 16, 1997. The company was formed by the shareholders for the
purpose of consolidating their 100% ownership interests in Intercorp Foods Ltd.
and Kalmath Investments Limited, the parent of Excelle Brands Food Corporation,
in anticipation of an initial public offering [see note 4(b)]. The principal
activity of the companies to be acquired is to engage in the production of food
products in Canada and the distribution of these food products in Canada and the
U.S.
The company is inactive up to the date of this financial statement.
It is expected that the fiscal year end will be January 31, in order to
coincide with the fiscal year end of the operating entities to be acquired.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from and to
banks, and any other highly liquid investments purchased with a maturity period
of three months or less. The carrying amount approximates fair value because of
the short maturity of those instruments.
b) Foreign Currency Translation
The company maintains its books and records in Canadian dollars. Foreign
currency transactions are translated using the temporal method. Under this
method, all monetary items are translated into Canadian dollars at the rate of
exchange prevailing at balance sheet date. Non-monetary items are translated at
historical rates. Income and expenses are translated at the rate in effect on
the transaction dates. Translation gains and losses are included in the
determination of earnings for the year.
The translation of the financial statement from Canadian dollars ("CDN $")
into United States dollars is performed for the convenience of the reader.
Balance sheet accounts are translated using the closing exchange rate in effect
at the balance sheet date and income and expenses accounts are translated using
an average exchange rate prevailing during each reporting period. No
representation is made that the Canadian dollar amounts could have been or could
be, converted into United States dollars at the rates on the respective dates
and/or at any other certain rates. Adjustments resulting from the translation
are included in the cumulative translation adjustments in stockholders' equity.
c) Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosures 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.
d) Accounting Charges
The company has adopted the provisions of SFAS No. 121,--"Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS No. 121 requires that long-lived assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
F-32
<PAGE>
INTERCORP EXCELLE INC.
NOTES TO FINANCIAL STATEMENT (CONTINUED)
AS AT APRIL 30, 1997
(AMOUNTS EXPRESSED IN U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
indicates that the carrying amount of an asset may not be recoverable. This
statement is effective for financial statements for fiscal years beginning after
December 15, 1995.
In December 1995, SFAS No. 123,--"Accounting for Stock-Based Compensation",
was issued. It introduced the use of a fair value-based method of accounting for
stock-based compensation. It encourages, but does not require, companies to
recognize compensation expense for stock-based compensation to employees based
on the new fair value accounting rules. Companies that choose not to adopt the
new rules will continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion No. 25,--"Accounting for Stock Issued to
Employees". However, SFAS No. 123 requires companies that choose not to adopt
the new fair value accounting rules to disclose pro forma net income and
earnings per share under the new method. SFAS No. 123 is effective for financial
statements for fiscal years beginning after December 15, 1995. The company has
adopted the disclosure provisions of SFAS No. 123 [see Note 4(d)].
3. CAPITAL STOCK
AUTHORIZED
An unlimited number of common and preference shares
The preference shares are issuable in series upon approval by the directors
with the appropriate designation, rights, privileges and conditions attaching to
each shares of such series.
ISSUED
<TABLE>
<S> <C>
300 Common shares.................................................... $ 220
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</TABLE>
4. SUBSEQUENT EVENTS
a) Private Placement Bridge Financing
In May 1997, the company completed a private placement of its securities in
which it sold 12% promissory bridge notes in the aggregate principal amount of
$625,000, 175,000 common shares and 175,000 redeemable common share bridge
warrants for gross proceeds of $625,000. The net proceeds of this private
placement of $543,750 will be used to pay bank loans and trade payables of
Excelle Brands Food Corporation and Intercorp Foods Ltd. and a portion of the
initial expenses of the initial planned offering.
The principal and accrued interest on the promissory bridge notes are due
and payable upon the earlier of 18 months from the issue or a public equity or
debt offering by the company.
Each of the 175,000 common share bridge warrants entitle the holder to
purchase one common share for $3.75 per share for a period of four years. The
warrants are redeemable by the company at $0.10 per warrant in the event the
company does not complete an initial public offering of its securities by
December 31, 1997.
F-33
<PAGE>
INTERCORP EXCELLE INC.
NOTES TO FINANCIAL STATEMENT (CONTINUED)
AS AT APRIL 30, 1997
(AMOUNTS EXPRESSED IN U.S. DOLLARS)
4. SUBSEQUENT EVENTS (CONTINUED)
The 175,000 common shares are also redeemable at $0.50 per share if the
company does not complete a public offering of its securities by December 31,
1997.
The combined redemption price for the 175,000 common shares and 175,000
warrants issued in conjunction with the private placement is $105,000, in the
event that a public offering is not completed. This amount will be accounted for
as a financing expense during the company's fiscal year. In the event that a
public offering is completed, the difference between the then offering price and
the redemption price will be accounted for as a share issuance cost and deducted
from the share capital raised from such an offering.
b) Share Purchase Acquisition
On May 22, 1997, the shareholders transferred their 100% ownership interests
in Kalmath Investments Limited and Intercorp Foods Ltd. to the company in
exchange for the issuance of 2,899,700 common shares, resulting in a total of
3,075,000 issued common shares.
c) Stock Option Plan
In May, 1997, the board of directors and shareholders adopted the Intercorp
Excelle Inc. Stock Option Plan (the "1997 Plan"), pursuant to which 500,000
shares of Common Stock are reserved for issuance.
The 1997 Plan will be administered by the compensation committee or the
board of directors, who will determine, those individuals who shall receive
options, the time period during which the options may be partially or fully
exercised, the number of shares of Common Stock issuable upon the exercise of
the options and the option exercise price.
The 1997 Plan is for a period for ten years, expiring in May, 2007. Options
may be granted to officers, directors, consultants, key employees, advisors and
similar parties who provide their skills and expertise to the Company. Options
granted under the 1997 Plan may be exercisable for up to ten years, may require
vesting, and shall be at an exercise price as determined by the board. Options
are non-transferable except by the laws of descent and distribution or a change
in control of the Company, as defined in the 1997 Plan, and are exercisable only
by the participant during his or her lifetime. Change in control includes (i)
the sale of substantially all of the assets of the Company and merger or
consolidation with another, or (ii) a majority of the board changes other than
by election by the shareholders pursuant to board solicitation or by vacancies
filled by the board caused by death or resignation of such person.
If a participant ceases affiliation with the Company by reason of death,
permanent disability or retirement at or after age 70, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other termination gives the participant three months to
exercise, except for termination for cause which results in immediate
termination of the option.
Options granted under the 1997 Plan, at the discretion of the compensation
committee or the board, may be exercised either with cash, Common Stock having a
fair market equal to the cash exercise price, the participant's personal
recourse note, or with an assignment to the Company of sufficient proceeds from
the sale of the Common Stock acquired upon exercise of the Options with an
authorization to the broker or selling agent to pay that amount to the Company,
or any combination of the above.
F-34
<PAGE>
INTERCORP EXCELLE INC.
NOTES TO FINANCIAL STATEMENT (CONTINUED)
AS AT APRIL 30, 1997
(AMOUNTS EXPRESSED IN U.S. DOLLARS)
4. SUBSEQUENT EVENTS (CONTINUED)
Any unexercised options that expire or terminate upon an employee's ceasing
to be employed by the Company become available again for issuance under the 1997
Plan.
The 1997 Plan may be terminated or amended at any time by the board of
directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the 1997 Plan may not be
increased without the consent of the shareholders of the Company.
In May 1997, the Board granted 200,000 Options under the 1997 Plan to five
individuals, including officers, directors and key employees. The options are
exercisable at $3.50 per share for ten years expiring May 1, 2007. 40% of the
Options are immediately exercisable, an additional 30% become exercisable in May
1998 and all the Options are exercisable in November 1998.
d) Application of SFAS 123: Accounting for Stock-Based Compensation
No pro-forma calculation of compensation cost has been performed as of the
date of these financial statements as the options were granted subsequent to the
balance sheet date.
5. PRO-FORMA INFORMATION
The pro-forma combined balance sheet as of April 30, 1997 for Intercorp
Excelle Inc. giving retroactive effect to the acquisitions referred to in note
4(b) is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
------------
<S> <C>
ASSETS
Current assets...................................................................................... $ 2,326,119
Property, plant and equipment....................................................................... 1,405,748
Total Assets.................................................................................... $ 3,731,867
LIABILITIES
Current liabilities................................................................................. $ 2,030,884
Long-term debt...................................................................................... 549,547
Due to directors.................................................................................... 149,379
Deferred income taxes............................................................................... 119,726
Total Liabilities............................................................................... 2,849,536
STOCKHOLDERS' EQUITY
Capital stock....................................................................................... 380
Retained earnings................................................................................... 923,164
Cumulative translation adjustments.................................................................. (41,213)
Total Stockholders' Equity...................................................................... 882,331
Total Liabilities and Stockholders' Equity...................................................... $ 3,731,867
</TABLE>
F-35
<PAGE>
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NO UNDERWRITER, DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE AND REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANY PERSON IN ANY JURISDICTION
WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................... 4
Risk Factors..................................... 8
Use of Proceeds.................................. 15
Dividend Policy.................................. 16
Capitalization................................... 17
Dilution......................................... 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 19
Business......................................... 22
Management....................................... 27
Principal Stockholders and Selling
Securityholders................................ 32
Certain Transactions............................. 34
Description of Securities........................ 35
Shares Eligible for Future Sale.................. 37
Certain United States Federal Income Tax
Considerations................................. 37
Investment Canada Act............................ 39
Underwriting..................................... 40
Legal Opinions................................... 43
Experts.......................................... 43
Additional Information........................... 44
Indemnification for Securities Act Liabilities... 44
Financial Statements............................. F-1
</TABLE>
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UNTIL NOVEMBER 3, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS AFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. IN
ADDITION, DEALERS ARE OBLIGATED TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTION.
INTERCORP EXCELLE INC.
1,065,000 SHARES OF COMMON STOCK
1,065,000 REDEEMABLE COMMON
STOCK PURCHASE WARRANTS
SHARPE CAPITAL, INC.
AEGIS CAPITAL CORP.
KLEIN MAUS AND SHIRE
INCORPORATED
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PROSPECTUS
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OCTOBER 9, 1997
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