<PAGE>
As filed with the Securities and Exchange Commission on May 4, 1998
Registration No. 333-44655
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2 TO
Form SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SHERWOOD BRANDS, INC.
(Exact name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
North Carolina 2060 56-1349259
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
6110 Executive Blvd.
Suite 1080
Rockville, Maryland 20852
(301) 881-9340
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
----------------
Uziel Frydman
President and Chief Executive Officer
Sherwood Brands, Inc.
6110 Executive Blvd.
Suite 1080
Rockville, Maryland 20852
(301) 881-9340
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
----------------
Copies of all communications to:
GARY EPSTEIN, ESQ. ROBERT J. MITTMAN, ESQ.
Greenberg Traurig Hoffman Tenzer Greenblatt LLP
Lipoff Rosen & Quentel, P.A. The Chrysler Building
1221 Brickell Avenue 405 Lexington Avenue
Miami, Florida 33131 New York, New York 10174-0208
Telephone: (305) 579-0500 Telephone: (212) 885-5000
Facsimile: (305) 579-0717 Facsimile: (212) 885-5001
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective. If this Form is filed to
register additional securities for an offering pursuant to Rule 462(b) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. If delivery of the prospectus is expected to
be made pursuant to Rule 434, please check the following box. -/X/
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================
Proposed
Proposed Maximum Maximum
Title of Each Class of Amount Offering Price Aggregate Amount of
Securities to be Registered to be Registered Per Security(1) Offering Price(1) Registration Fee
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, par
value $0.01 per share(2)....... 1,782,500 $ 5.95 $10,605,875 $ 3,128.73
- ----------------------------------------------------------------------------------------------------------------
Warrants, each to purchase
one share of Class A
Common Stock(2) ............... 891,250 $ .10 $ 89,125 $ 26.29
- ----------------------------------------------------------------------------------------------------------------
Class A Common Stock, par
value $0.01 per share,
issuable upon exercise of
the Warrants(2)(3) ............ 891,250 $ 7.50 $ 6,684,375 $ 1,971.89
- ----------------------------------------------------------------------------------------------------------------
Underwriter's Warrants(4) ...... 155,000 -- (5)
- ----------------------------------------------------------------------------------------------------------------
Class A Common Stock, par
value $0.01 per share(6)....... 155,000 $ 7.14 $ 1,106,700 $ 326.48
- ----------------------------------------------------------------------------------------------------------------
Underwriter's Option
Warrants(7) ................... 77,500 $ .12 $ 9,300 $ 2.74
- ----------------------------------------------------------------------------------------------------------------
Class A Common Stock, par
value $0.01 per share(8)....... 77,500 $ 7.50 $ 581,250 $ 171.47
- ----------------------------------------------------------------------------------------------------------------
Total ..................................................................................... $ 5,627.60(9)
================================================================================================================
</TABLE>
- ------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Assumes the Underwriter's over-allotment option to purchase up to 232,500
additional shares of Class A Common Stock and/or 116,250 Warrants is
exercised in full.
(3) Pursuant to Rule 416, there are also being registered such indeterminable
additional shares of Class A Common stock as may become issuable upon
exercise of the Warrants pursuant to anti-dilution provisions contained in
the Warrants.
(4) To be issued to the Underwriter, as set forth in the Prospectus comprising
a portion of this Registration Statement under the caption "Underwriting."
(5) Pursuant to Rule 457(g), no fee is being paid.
(6) Issuable upon exercise of the Underwriter's Warrants, together with such
indeterminate number of shares of Class A Common Stock as may be issuable
by reason of the anti-dilution provisions contained therein.
(7) Issuable upon exercise of the Underwriter's Warrants.
(8) Issuable upon the Underwriter's exercise of Option Warrants.
(9) Such registration fee was paid upon the original filing of the Registration
Statement on January 21, 1998.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS, DATED MAY 4, 1998
SUBJECT TO COMPLETION
[LOGO]
SHERWOOD BRANDS, INC.
1,550,000 Shares of Class A Common Stock and Redeemable Warrants
To Purchase 775,000 Shares of Class A Common Stock
-------------------
The Company is offering hereby 1,550,000 shares of Class A Common Stock
(the "Class A Common Stock") and redeemable warrants to purchase 775,000 shares
of Class A Common Stock (the "Warrants"). The shares of Class A Common Stock
and Warrants may be purchased separately and will be transferable immediately
upon issuance. Each Warrant entitles the registered holder thereof to purchase
one share of Class A Common Stock at a price of $7.50, subject to adjustment in
certain circumstances, at any time commencing , 1999 through and including
, 2003. The Warrants are redeemable by the Company at any time commencing
, 1999, upon notice of not less than 30 days, at a price of $.10 per
Warrant, provided that the closing bid quotation of the Class A Common Stock on
all 20 trading days ending on the third day prior to the day on which the
Company gives notice (the "Call Date") has been at least 134% (currently
$10.05, subject to adjustment) of the then effective exercise price of the
Warrants and the Company obtains the written consent of the Underwriter to such
redemption prior to the Call Date. See "Description of Securities."
Prior to this offering there has been no public market for the Class A
Common Stock or Warrants and there can be no assurance that any such market
will develop. The Class A Common Stock and Warrants have been approved for
listing on the American Stock Exchange upon official notice of issuance under
the symbols "SHD" and "SHDW," respectively. The offering prices of the Class A
Common Stock and Warrants, and the exercise price of the Warrants, were
determined pursuant to negotiations between the Company and the Underwriter and
do not necessarily relate to the Company's book value or any other established
criteria of value. For a discussion of the factors considered in determining
the offering prices, see "Underwriting."
The Company's capital stock consists of Class A Common Stock and Class B
Common Stock (collectively, the "Common Stock"), which classes are
substantially identical, except that the Class A Common Stock is entitled to
one vote per share and the Class B Common Stock is entitled to seven votes per
share on all matters, including the election of directors. Upon the
consummation of this offering, Uziel Frydman, Chairman, President and Chief
Executive Officer of the Company, will beneficially own 1,000,000 shares of
Class A Common Stock and all of the 1,000,000 shares of Class B Common Stock
outstanding and will be able to control the Company. See "Principal
Stockholders" and "Description of Securities."
-------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
COMMENCING ON PAGE 7.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
===============================================================================
Price Underwriting Proceeds
to Discounts and to
Public Comissions(1) Company(2)
- -------------------------------------------------------------------------------
Per Share ........... $ 5.95 $ .5355 $ 5.4145
Per Warrant ......... $ .10 $ .009 $ .091
Total (3) ........... $9,300,000 $837,000 $8,463,000
===============================================================================
(1) The Company has agreed to pay to the Underwriter a 3% nonaccountable
expense allowance, to sell to the Underwriter warrants (the "Underwriter's
Warrants") to purchase up to 155,000 shares of Class A Common Stock and/or
77,500 Warrants and to retain the Underwriter as a financial consultant.
The Company has also agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
Underwriter's nonaccountable expense allowance in the amount of $279,000
($320,850 if the Underwriter's over-allotment option is exercised in
full), estimated at $600,000.
(3) The controlling shareholder of the Company has granted to the Underwriter
an option, exercisable within 45 days from the date of this Prospectus, to
purchase up to 232,500 additional shares of Class A Common Stock and the
Company has granted to the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 116,250
additional Warrants on the same terms as set forth above, solely for the
purpose of covering over-allotments, if any. If the Underwriter's
over-allotment option is exercised in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$10,695,000, $962,550 and $8,473,230, respectively, and the proceeds to
the selling shareholder will be $1,217,370. See "Underwriting."
The shares of Class A Common Stock and Warrants are being offered, subject
to prior sale, when, as and if delivered to and accepted by the Underwriter,
and subject to approval of certain legal matters by counsel and to certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify this offering and to reject any order in whole or in part. It is
expected that delivery of certificates representing the shares of Class A
Common Stock and Warrants will be made against payment therefor at the offices
of the Underwriter, 7 Hanover Square, New York, New York 10004, on or about
, 1998.
PARAGON CAPITAL CORPORATION LOGO
The date of this Prospectus is , 1998
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Unless otherwise indicated, all share and per share
data and information in this Prospectus (i) gives retroactive effect to a
recapitalization (the "Recapitalization") effected in December 1997, pursuant
to which all of the outstanding shares of common stock of the Company were
converted to 1,150,000 shares of Class A Common Stock and 1,000,000 shares of
Class B Common Stock and (ii) assumes no exercise of the Underwriter's
over-allotment option to purchase up to 232,500 additional shares of Class A
Common Stock from Mr. Uziel Frydman, the Company's Chairman, President and
Chief Executive Officer, and/or 116,250 additional Warrants from the Company.
See "Underwriting."
The Company
The Company manufactures, markets and distributes a diverse line of brand
name candies, cookies, chocolates and other food products. The Company's
principal products are COWS(TM) butter toffee candies, demitasse(R) biscuits,
RUGER(R) wafers and ELANA(R) Belgian chocolates. The Company also markets SOUP
DU JOUR(TM) soups, SOUR FRUIT BURST(TM) fruit-filled hard candies, as well as
holiday specialty products, such as PIRATE'S GOLD COINS(TM) milk chocolates for
Christmas and TOKENS OF LOVE(TM) milk chocolates for Valentine's Day. The
Company's marketing strategy, including its packaging of products designed to
maximize freshness, taste and visual appeal, emphasizes highly distinctive,
premium quality products that are sold at prices that compare favorably to
those of competitive products.
Sales of candy and cookie products in the United States have increased
significantly in recent years. According to the United States Department of
Commerce, manufacturers' domestic shipments of confectionery products
(excluding chewing gum) have grown steadily from approximately $9 billion in
1990 to $12.1 billion in 1996. The Chocolate Manufacturers Association/National
Confectioners Association has estimated that retail sales of confectionery
products in the United States in 1996 were more than $21 billion, and industry
trade reports project continued growth in these markets into the next century.
Despite such growth, the United States ranks only tenth in per capita candy
consumption among industrialized nations. The Company believes that these
expanding markets present attractive growth opportunities for its business, and
is focusing its strategy on introducing new products in these market categories
as well as achieving greater brand recognition and market penetration for all
of the Company's products.
The Company sells its products primarily to mass merchandisers and other
retail customers; vending companies; gourmet distributors; and grocery and drug
store chains, convenience stores, specialty shops and wholesalers. Sales to
mass merchandisers have accounted for a significant portion of the Company's
revenues. These customers include K-Mart, Dollar General and 99 Cents Only
stores. The Company believes that the visibility of its products in vending
channels enhances market acceptance and consumer appeal of the Company's
products in other distribution channels. The Company engages independent food
brokers in various regions throughout the United States and Canada for
marketing to retail and wholesale customers.
The Company currently purchases most of its finished products from
third-party manufacturers located in Europe and South America. In April 1996,
the Company acquired a 70,000 square foot manufacturing facility in Chase City,
Virginia in order to reduce its dependence on foreign manufacturers. The
Company modernized and equipped the facility and commenced production of its
demitasse biscuit products in February 1997. The Company also recently
completed the installation of equipment designed to manufacture candy products,
is currently formulating a candy product and anticipates that it will begin to
manufacture this candy product in May 1998.
During the twelve months following the consummation of the offering, the
Company intends to continue to shift its operations from importing finished
products to manufacturing products at its Chase City
3
<PAGE>
facility. The Company intends to use a significant portion of the proceeds of
this offering to purchase and install equipment necessary to manufacture
additional products. The Company has improved its operating margins for
demitasse biscuits, and believes that it is positioned to improve operating
margins by manufacturing additional products at its Chase City facility. There
can be no assurance that the Company will be successful in manufacturing
additional products at its Chase City facility or improving its operating
margins.
Despite its relatively limited capital resources, the Company has achieved
increased levels of revenues. The Company intends to use a significant portion
of the proceeds of this offering to expand its marketing and sales efforts,
primarily by aggressively advertising its brand name products. The Company's
strategy is to (i) capitalize on the popularity of its existing products by
developing new products and brand extensions, (ii) expand its manufacturing
operations by adding products and by developing private label and contract
manufacturing capabilities, and (iii) pursue opportunities by making selective
acquisitions of products or businesses which management believes will enhance
the Company's growth prospects.
The Company was incorporated under the laws of the State of North Carolina
in December 1982 under the name Sherwood Foods, Inc. and changed its name to
Sherwood Brands, Inc. in December 1997. The Company's principal executive
offices are located at 6110 Executive Blvd., Suite 1080, Rockville, Maryland
20852, and its telephone number is (301) 881-9340. Unless the context otherwise
requires, references in this Prospectus to the "Company" include its
wholly-owned subsidiaries, Sherwood Brands, LLC ("Sherwood LLC") and Sherwood
Brands Overseas, Inc. ("Sherwood Overseas"). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Offering
Securities offered........ 1,550,000 shares of Class A Common Stock and
Warrants to purchase 775,000 shares of Class A
Common Stock. See "Description of Securities."
Common Stock to be
outstanding after this
offering(1):
Class A
Common Stock(2) 2,700,000
shares
Class B Common Stock..... 1,000,000 shares
Warrants to be outstanding
after this offering(3)... 775,000 Warrants
Exercise terms........... Exercisable at any time commencing , 1999,
each to purchase one share of Class A Common Stock
at a price of $7.50, subject to adjustment in
certain circumstances. See "Description of
Securities -- Redeemable Warrants."
Expiration date.......... , 2003
Redemption............... Redeemable by the Company, at any time commencing
, 1999 upon notice of not less than 30 days, at
a price of $.10 per Warrant, provided that the
closing bid quotation of the Class A Common Stock on
all 20 trading days ending on the third day prior to
the day on which the Company gives notice (the "Call
Date") has been at least 134% (currently $10.05,
subject to adjustment) of the then effective
exercise price of the Warrants and the Company
obtains the written consent of the Underwriter to
such redemption prior to the Call Date. See
"Description of Securities -- Redeemable Warrants."
4
<PAGE>
Use of Proceeds.......... The Company intends to use the net proceeds of
this offering for the purchase of capital equipment;
potential acquisitions; repayment of indebtedness;
sales, marketing and promotion; and for working
capital and general corporate purposes. See "Use of
Proceeds."
Risk Factors............. The securities offered hereby are speculative and
involve a high degree of risk and immediate
substantial dilution and should not be purchased by
investors who cannot afford the loss of their entire
investment. See "Risk Factors" and "Dilution."
Proposed American Stock
Exchange symbols........ Class A Common Stock -- "SHD"
Warrants -- "SHDW"
- -------------
(1) The rights of holders of the two classes of Common Stock are identical,
except that (i) the Class A Common Stock is entitled to one vote per share
and the Class B Common Stock is entitled to seven votes per share on all
matters, including the election of directors, and (ii) the Class B Common
Stock automatically converts into Class A Common Stock on a share for
share basis upon transfer to an unaffiliated party. Uziel Frydman,
Chairman, President and Chief Executive Officer of the Company holds all
of the outstanding shares of Class B Common Stock. See "Principal
Stockholders" and "Description of Securities."
(2) Does not include: (i) 775,000 shares of Class A Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 232,500
shares of Class A Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the warrants included therein; (iii) 140,000
shares of Class A Common Stock reserved for issuance upon exercise of
outstanding options granted under the Company's 1998 Stock Option Plan
(the "Option Plan"); and (iv) 210,000 shares of Class A Common Stock
reserved for issuance upon exercise of options available for future grant
under the Option Plan. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Management -- 1998 Stock
Option Plan," "Description of Securities" and "Underwriting."
(3) Does not include any of the warrants referred to in footnote 2 above.
5
<PAGE>
Summary Financial Information
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements, including the
notes thereto, appearing elsewhere in this Prospectus.
Statement Of Operations Data:
<TABLE>
<CAPTION>
Years ended July 31, Six Months ended January 31,
--------------------------- ----------------------------
1996 1997 1997 1998
------------ ------------ ------------ ------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Net sales ............................. $ 14,638 $ 17,424 $ 9,574 $ 9,721
Cost of sales ......................... 10,864 12,570 7,136 6,515
Gross profit .......................... 3,773 4,853 2,437 3,205
Selling, general and administrative
expenses ............................ 2,342 2,680 1,173 1,417
Pre-production costs(1) ............... 212 769 616 54
Salaries and related expenses ......... 937 1,180 461 521
Income from operations ................ 281 223 187 1,213
Net income(2) ......................... 270 303 286 820
Basic and diluted income per share .13 .14 .13 .38
Supplemental net income per
share(3) ............................ .12 .34
Number of shares outstanding .......... 2,150,000 2,150,000 2,150,000 2,150,000
</TABLE>
Balance Sheet Data:
January 31, 1998
--------------------------------
Actual As Adjusted(4)
-------------- ---------------
Working capital .............. $ 2,726,037 $ 9,467,835
Total assets ................. 9,685,944 15,577,742
Total liabilities ............ 7,173,071 5,480,869
Shareholders' equity ......... 2,512,873 10,096,873
- -------------
(1) Represents costs associated with commencing manufacturing operations at the
Chase City facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) Includes non-recurring income, net of legal expenses, recorded in
connection with an insurance litigation settlement (the "Insurance
Settlement") of $223,605, $364,028 and $102,223 in the fiscal years ended
July 31, 1996 and 1997 and the six months January 31, 1998, respectively.
See Note 4 to Notes to Consolidated Financial Statements.
(3) Supplemental net income per share for the year ended July 31, 1997 and the
six months ended January 31, 1998 is based upon the weighted number of
shares of Common Stock used in the calculation of net income per share
increased by the sale of 284,404 shares, the proceeds of which would be
necessary to reduce borrowings by $1,692,202. See Consolidated Financial
Statements -- Summary of Accounting Principles.
(4) Gives effect to the sale of the shares of Class A Common Stock and Warrants
offered hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk. Prospective investors should carefully consider the following risk
factors before making an investment decision.
Limited Historical Profitability; Future Operating Results. Although the
Company has achieved increased levels of revenues, the Company has historically
achieved limited profitability. The Company's operating expenses have increased
and can be expected to continue to increase in connection with any expansion
activities undertaken by the Company, including those relating to advertising
and product manufacturing. Accordingly, the Company's profitability will depend
on the Company's ability to improve its operating margins and increase revenues
from operations. Unanticipated expenses, unfavorable currency exchange rates,
increased price competition and adverse changes in economic conditions could
have a material adverse effect on the Company's operating results. There can be
no assurance that the Company will achieve significantly increased levels of
revenues or that its future operations will be profitable. See "Business" and
Consolidated Financial Statements.
Dependence on Limited Product Line; Uncertainty of Market Acceptance. To
date, a substantial portion of the Company's revenues have been derived from a
limited number of products, a decline in the sale of which would have a
material adverse effect on the Company. For the year ended July 31, 1997,
domestic sales of seven products accounted for approximately 84.5% of the
Company's revenues, with COWS butter toffee candies, RUGER wafers, demitasse
biscuits and chocolate products (four products in the aggregate) accounting for
approximately 30.8%, 20.9%, 17.7%, and 15.1%, respectively, of the Company's
revenues. Sales of chocolate and cookie products declined approximately $14,000
or 1% and $173,000 or 5%, respectively, during the six months ended January 31,
1998. The Company recently introduced additional products and product line
extensions and intends to add other products to extend its line. Achieving
market acceptance for new products requires substantial marketing and sales
efforts and the expenditure of significant funds to create customer and
consumer awareness of and demand for new products. There can be no assurance
that recent or future additions to the Company's product line will achieve
market acceptance or result in significantly increased levels of revenues, or
that market acceptance of or revenues from the Company's existing products will
increase significantly or remain at present levels. See "Business -- Products."
Shift in Operations; Limited Manufacturing Experience; Uncertainty of
Business Plans. During the twelve months following the consummation of this
offering, the Company intends to continue to shift its operations from
importing finished products to manufacturing products at its Chase City
facility. The Company commenced production of demitasse biscuits in February
1997, plans to commence production of a candy product in May 1998 and intends
to use a significant portion of the proceeds of this offering to purchase
capital equipment necessary to manufacture additional products. The Company has
limited manufacturing experience and currently has limited financial,
operational and management resources to undertake extensive manufacturing
operations. Expansion of the Company's manufacturing operations will require
substantial resources and will be dependent upon the Company's ability to
successfully equip its facility, achieve manufacturing efficiencies, expand
capacity on a timely and cost effective basis and successfully monitor
operations (including controlling costs and maintaining effective inventory and
quality controls). The Company's efforts are subject to all of the risks
inherent in the establishment of new manufacturing operations and the
manufacture of new products, including unanticipated delays, expenses,
technical problems and difficulties, as well as the possible insufficiency of
funds to fully implement the Company's strategy, which could result in
abandonment or material change in product commercialization. The Company's
success also will be largely dependent upon its products satisfying targeted
cost, price and quality specifications. There can be no assurance that the
Company's business plans will be successfully implemented, that the Company's
products will satisfy anticipated price or quality objectives, that
unanticipated technical or other problems will not occur which would result in
increased costs or material delays or that new manufacturing operations will
not result in increased competition and a decline in revenues from existing
operations. The Company's manufacturing operations will also be dependent on
the Company's ability to protect its equipment from fire, flood, vandalism and
similar events. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Manufacturing."
Dependence on Third-Party Manufacturers and Suppliers. The Company has
limited manufacturing capabilities and is currently dependent on third parties
for the manufacture of all of its products except demitasse biscuits. For the
fiscal year ended July 31, 1997, five manufacturers accounted for approximately
66.8% of
7
<PAGE>
product purchases sold domestically, with the producers of COWS butter toffee
candies, RUGER wafers and chocolate products (four products in the aggregate)
accounting for approximately 30.8%, 20.9% and 15.1%, respectively, of product
purchases. The Company relies on a sole manufacturer for each of its products.
The Company does not maintain agreements with the manufacturers of COWS butter
toffee candies, RUGER wafers and certain other manufacturers and, accordingly,
such manufacturers could terminate their relationships at any time and compete
directly against the Company. Failure by any such manufacturer to continue to
supply finished products to the Company on commercially reasonable terms, or at
all, in the absence of readily available alternative sources, would have a
material adverse effect on the Company. The Company is dependent on the ability
of its manufacturers to adhere to the Company's product, price and quality
specifications and scheduling requirements. The Company's operations require it
to have production orders in place in advance of shipment to the Company's
warehouses (product deliveries typically take 60 days). Any delay by
manufacturers in supplying finished products to the Company would adversely
affect the Company's ability to deliver products on a timely and competitive
basis. In addition, raw materials necessary for the manufacture of the
Company's products at its Chase City facility, including flour, sugar,
shortening, butter and flavorings, are purchased from third-party suppliers.
The Company does not maintain agreements with any such suppliers and is subject
to risks of periodic price fluctuations, shortages and delays. The Company
anticipates that it will become increasingly dependent on third parties for
necessary raw materials used in the manufacture of its products, and a material
interruption in the availability or significant price increases for raw
materials would have a material adverse effect on the Company's operating
margins. See "Business -- Suppliers."
Risks Relating to Foreign Manufacturing. The Company has been and will
continue to be subject to risks associated with the manufacture of products in
foreign countries, primarily in Austria, Belgium and Argentina. Such risks
include material shipping delays, fluctuations in foreign currency exchange
rates, customs duties, tariffs and import quotas and international political,
regulatory and economic developments. The Company assumes the risk of loss,
damage or destruction of products when shipped by a manufacturer, although the
Company maintains cargo insurance on such shipments. Because the Company pays
for certain of its products manufactured outside the United States in foreign
currencies, any weakening of the United States dollar in relation to relevant
foreign currencies, as occurred in 1995, could result in significantly
increased costs to the Company. The Company incurred a net loss of $22,984 for
the year ended July 31, 1995 primarily as a result of unfavorable currency
exchange rates. In addition, certain products manufactured overseas are subject
to import duties. The Company currently pays a 7% import duty on its chocolate
products. Deliveries of products from the Company's foreign manufacturers could
also be delayed or restricted by the future imposition of quotas, and there can
be no assurance that the Company would be able to obtain quality products at
favorable prices from domestic or other suppliers whose quotas have not been
exceeded by the supply of products to existing customers. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Suppliers" and Note 2 to Notes to Consolidated Financial
Statements.
Dependence on Significant Customers. The Company is dependent on a limited
number of customers for a significant portion of its revenues. For the year
ended July 31, 1997 and the six months ended January 31, 1998, five customers
accounted for approximately 20.5% and 23%, respectively, of the Company's
revenues, with the Company's three largest customers, Dollar General, Dollar
Tree and K-Mart, accounting for approximately 6.5%, 4.9% and 4.1%,
respectively, of the Company's revenues for the year ended July 31, 1997. The
Company does not maintain agreements with its customers and sells products
pursuant to purchase orders placed from time to time in the ordinary course of
business. The loss of a significant customer could have an adverse effect on
the Company. See "Business -- Customers."
Competition. The Company faces significant competition in the marketing
and sale of its products. The Company's products compete for consumer
recognition and shelf space with candies, cakes, cookies, chocolates and other
food products which have achieved international, national, regional and local
brand recognition and consumer loyalty. These products are marketed by
companies (which may include the Company's suppliers) with significantly
greater financial, manufacturing, marketing, distribution, personnel and other
resources than the Company. Certain of such competitors, such as Hershey Food
Corporation, M&M Mars, Inc., Nestle, S.A., Nabisco, Inc., Keebler Company and
Sunshine Biscuits, Inc., dominate the markets for candy and cookie products,
and have substantial promotional budgets which enable them to implement
extensive advertising campaigns. The food industry is characterized by frequent
introductions of new products, accompanied by
8
<PAGE>
substantial promotional campaigns. While the Company believes that its existing
products compete favorably and that increased marketing and sales efforts will
result in increased product recognition and market penetration, there can be no
assurance that the Company will be able to continue to compete successfully.
See "Business -- Competition."
Consumer Preferences and Industry Factors. The markets for candy and
cookie products are affected by changes in consumer tastes and preferences and
nutritional and health-related concerns. The Company could be subject to
increased competition from companies whose products or marketing strategies
address these concerns. In addition, the markets for the Company's products may
be subject to national, regional and local economic conditions which affect
discretionary spending, demographic trends and product life cycles, whereby
product sales increase from their introductory stage through their maturity and
then reach a stage of decline over time. See "Business."
Dependence on Trademarks. The Company holds United States trademark
registrations for the "ELANA," "RUGER" and "demitasse" names, has filed for
trademark registrations for certain other names, including "COWS," and uses
other names for which it has not applied for registration. The Company believes
that its rights in these names is a significant part of the Company's business
and that its ability to create demand for its products is dependent to a large
extent on its ability to exploit these trademarks. There can be no assurance as
to the breadth or degree of protection which trademarks may afford the Company
or that any trademark applications will result in registered trademarks or that
trademarks will not be invalidated if challenged. The Company is not aware of
any infringement claims or other challenges to the Company's rights to use
these marks. Other than Canadian registrations for the "ELANA" and "RUGER"
names, the Company does not hold any international trademarks. See "Business --
Trademarks."
Risks Associated with Expansion and Acquisitions. The Company's expansion
plans could place a significant strain on its management, administrative,
operational, financial and other resources. The Company plans to increase its
manufacturing capacity, add new products to its line, expand its advertising,
marketing and promotional activities, expand its work force and expand its
presence in new and existing geographic markets. To successfully manage growth,
the Company will be required to implement and improve its operating, inventory,
management and accounts receivable systems and train and manage its employees.
The Company has limited experience in effectuating rapid expansion and in
managing new operations, and there can be no assurance that the Company will be
able to successfully expand its operations or manage growth. For the year ended
July 31, 1997 and the six months ended January 31, 1998, sales of the Company's
products in foreign markets accounted for 10.8% and 11.9%, respectively, of the
Company's revenues. Expansion of the Company's sales activities in foreign
markets could subject the Company to shipping delays, increased credit risks,
currency fluctuations and other international factors, including increased
competition from its suppliers. The Company may seek to pursue opportunities by
making selective acquisitions of products or businesses which the Company
believes will enhance its growth prospects. As of the date of this Prospectus,
the Company has no plans, agreements, commitments, understandings or
arrangements with respect to any such acquisition. There can be no assurance
that the Company will ultimately effect any acquisition or that it will be able
to successfully integrate into its operations any product or business which it
may acquire. Any inability to do so, particularly in instances where the
Company has made significant capital investments, could have a material adverse
effect on the Company.
The Company may determine, depending upon the opportunities available to
it, to seek additional debt or equity financing to fund the cost of continuing
expansion. To the extent that the Company finances an acquisition with equity
securities, any such issuance of equity securities would result in dilution to
the interests of the Company's stockholders. Additionally, to the extent that
the Company incurs indebtedness or issues debt securities in connection with
any acquisition or facility expansion, the Company will be subject to risks
associated with incurring substantial indebtedness, including the risks that
interest rates may fluctuate and cash flow may be insufficient to pay principal
and interest on any such indebtedness. See "Use of Proceeds."
Possible Fluctuations in Operating Results; Seasonality. The Company's
operating results may be subject to fluctuations as a result of new product
introductions, the timing of significant operating expenses and customer
orders, pricing and seasonality. The Company's sales typically increase toward
the middle of the Company's fiscal year, principally due to the holiday season.
Unanticipated events, including delays in product shipments
9
<PAGE>
past the time of peak sales or significant decreases in sales during the middle
of the Company's fiscal year, could have an adverse effect on the Company's
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Allocation of Proceeds to Repay Indebtedness; Loan Covenants and Security
Interests; Personal Guarantee. In order to finance the Company's operations,
the Company has incurred significant indebtedness. Of the Company's total
indebtedness of $4,316,275 outstanding at January 31, 1998, $1,419,589 was
outstanding under a working capital line of credit with First Union National
Bank of Maryland (the "Bank"); an aggregate of $2,054,484 was outstanding under
two industrial revenue bonds ("IRBs") and two county development authority
subordinated notes ("Subordinated Notes"); and $842,202 was outstanding under a
note payable to Ilana Frydman (the "Related Party Note"), the wife of Uziel
Frydman, Chairman, President and Chief Executive Officer of the Company. The
Company intends to use a portion of the proceeds of this offering to repay
$850,000 to the Bank (and to use the increased borrowing availability for
future expansion) and the entire amount outstanding on the Related Party Note
to Ms. Frydman, which proceeds will not be available for other corporate
purposes. The Company's line of credit with the Bank is secured by
substantially all of the assets of Sherwood LLC and Sherwood Overseas. The
principal amount of the IRBs are backed by irrevocable letters of credit issued
by Central Fidelity Bank of Virginia ("Fidelity") and are collateralized by a
first deed of trust and security interest in the Company's real and personal
property at the Chase City facility. In addition to certain financial
covenants, the Company's financing arrangements prohibit the Company, without
the consent of the lender, from incurring additional indebtedness, which could
limit the Company's ability to implement its proposed expansion. In the event
of a violation by the Company of its loan covenants or other default by the
Company on its obligations, the Company's lenders could elect to declare the
Company's indebtedness to be immediately due and payable and foreclose on the
Company's assets. As of the date of this Prospectus, the Company is in
compliance with all of the terms of its financing agreements and has obtained
all necessary consents from its lenders, including in connection with this
offering and the repayment of the entire amount outstanding on the Related
Party Note. There can be no assurance that the Company will be able to comply
with the terms of its financing agreements in the future.
Uziel Frydman, Chairman, President and Chief Executive Officer of the
Company, has personally guaranteed the repayment of indebtedness owing to the
Bank and to Fidelity. Neither Mr. Frydman nor any other person has any
obligations to make personal guarantees available to the Company in the future.
There can be no assurance that personal guarantees will be available to the
Company or that the absence of personal guarantees will not adversely affect
the Company's ability to borrow in the future. See "Use of Proceeds" and
"Certain Transactions."
Government Regulation. The Company is subject to extensive regulation by
the United States Food and Drug Administration, the United States Department of
Agriculture and by other state and local authorities in jurisdictions in which
the Company's products are manufactured or sold. Among other things, such
regulation governs the importation, manufacturing, packaging, storage,
distribution and labeling of the Company's products, as well as sanitary
conditions and public health and safety. Applicable statutes and regulations
governing the Company's products include "standards of identity" for the
content of specific types of products, nutritional labeling and serving size
requirements and general "Good Manufacturing Practices" with respect to
manufacturing processes. The Company's Chase City facility and products are
subject to periodic inspection by federal, state and local authorities. The
Company believes that it is in compliance with all governmental laws and
regulations and maintains all permits and licenses required for its operations.
Nevertheless, there can be no assurance that the Company will continue to be in
compliance with current laws and regulations or that the Company will be able
to comply with any future laws and regulations and licensing requirements.
Failure by the Company to comply with applicable laws and regulations could
subject the Company to civil remedies, including fines, injunctions, recalls or
seizures, as well as potential criminal sanctions. See "Business -- Government
Regulation."
Product Liability and Insurance. As a manufacturer and marketer of food
products, the Company is subject to product liability claims from consumers.
The Company maintains product liability insurance with limits of $2,000,000 in
the aggregate and $1,000,000 per occurrence (with excess coverage of
$3,000,000), which it believes is adequate for the types of products currently
offered by the Company. There can be no assurance,
10
<PAGE>
however, that such insurance will be sufficient to cover potential claims or
that adequate levels of coverage will be available in the future at a
reasonable cost. In the event of a partially or completely uninsured successful
claim against the Company, the Company's financial condition and reputation
would be materially affected. See "Business -- Insurance."
Significant Capital Requirements; Possible Need for Additional
Financing. The food manufacturing and distribution business is capital
intensive. The Company is dependent on the proceeds of this offering to
implement its expansion plans. Based on currently proposed plans and
assumptions relating to its operations, the Company believes that the proceeds
of this offering, together with projected cash flow from operations and
available cash resources, including its line of credit, will be sufficient to
satisfy its contemplated cash requirements for at least twelve months following
the consummation of this offering. In the event that the Company's plans
change, its assumptions change or prove to be inaccurate or if the proceeds of
this offering or cash flow prove to be insufficient to implement the Company's
proposed expansion, the Company may be required to obtain additional financing
sooner than anticipated. There can be no assurance that additional financing
will be available to the Company on commercially reasonable terms, or at all,
or that the proceeds of this offering will be adequate for all of the Company's
requirements, particularly the capital requirements associated with the
Company's anticipated increased product manufacturing activities. See "Use of
Proceeds."
Dependence on Key Personnel; Limited Management Personnel. The success of
the Company is dependent on the personal efforts of Uziel Frydman, its
Chairman, President and Chief Executive Officer, Amir Frydman, its Vice
President of Marketing, and Anat Schwartz, its Vice President -- Finance and
Secretary. Although the Company intends to enter into employment agreements
with each of these officers prior to the consummation of this offering, the
loss or interruption of the services of such individuals could have a material
adverse effect on the Company's business and prospects. The Company maintains
"key-man" insurance in the amount of $1 million on the life of Mr. Uziel
Frydman. The success of the Company will also be dependent upon its ability to
hire and retain additional qualified management, marketing and other personnel,
including a qualified Chief Financial Officer. The Company intends to hire a
Chief Financial Officer following the consummation of this offering. The
Company currently has limited management and other personnel. None of such
personnel has experience in managing the affairs of a publicly-held company.
Competition for qualified personnel in the food industry is intense, and there
can be no assurance that the Company will be able to hire or retain additional
qualified personnel. Failure to hire and retain additional qualified personnel
could adversely affect the Company's ability to expand its operations. See
"Management."
Benefits to Related Parties. The Company intends to use $842,202
(approximately 11% of the estimated net proceeds of this offering) to repay the
Related Party Note issued to Ilana Frydman, the wife of Uziel Frydman,
President and Chief Executive Officer of the Company. The Company also intends
to use $850,000 of the proceeds of this offering to reduce amounts outstanding
under its line of credit with the Bank, which will reduce Mr. Frydman's
potential liability under his personal guarantee. The Company also will seek to
release Mr. Frydman from this personal guarantee following this offering. See
"Use of Proceeds" and "Certain Transactions."
Concentration of Ownership. Upon the consummation of this offering, Mr.
Uziel Frydman, President and Chief Executive Officer of the Company, will own
1,000,000 shares of Class A Common Stock (767,500 shares if the Underwriter's
over-allotment option is exercised in full) and 1,000,000 shares of Class B
Common Stock, representing, in the aggregate, approximately 54% of the
outstanding Common Stock of the Company and 82% of the voting control of the
Company (48% and 80%, respectively, if the Underwriter's overallotment option
is exercised in full and assuming no exercise of the Warrants). Accordingly,
Mr. Frydman will be able to direct the election of all of the Company's
directors, increase the authorized capital, dissolve, merge or sell the assets
of the Company, and generally direct the affairs of the Company. See
"Management" and "Principal Shareholders."
Anti-Takeover Effects of Preferred Stock. The Company's Articles of
Incorporation authorize the Company's Board of Directors to issue up to
5,000,000 shares of "blank check" preferred stock (the "Preferred Stock")
without shareholder approval, in one or more series and to fix the dividend
rights, terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, and any other rights, preferences, privileges, and
restrictions applicable to each new series of Preferred Stock. The issuance of
shares of Preferred Stock in the future could, among other things, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, could make it difficult for a third party to gain control of the
Company, prevent or substantially delay a change in control, discourage bids
for the Common Stock at a premium, or otherwise adversely
11
<PAGE>
affect the market price of the Common Stock. Although the Company has no
current plans to issue any shares of Preferred Stock or designate any series of
Preferred Stock, there can be no assurance that the Board will not decide to do
so in the future. See "Description of Securities -- Capital Stock -- Preferred
Stock."
No Dividends. The Company has never paid any cash dividends on its Common
Stock and does not anticipate paying cash dividends in the foreseeable future.
The payment of cash dividends is prohibited by the terms of the Company's
financing agreements with the Bank and Fidelity. See "Dividend Policy."
Dilution. This offering involves an immediate and substantial dilution of
$3.22 per share (or 54.1%) between the net tangible book value per share of
Common Stock after this offering and the initial public offering price per
share in this offering. See "Dilution."
Shares Eligible for Future Sale. Upon consummation of this offering, the
Company will have 3,700,000 shares of Common Stock outstanding (assuming no
exercise of the Warrants), of which the 1,550,000 shares of Class A Common
Stock offered hereby will be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). All of the remaining 2,150,000 shares of Common Stock outstanding are
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act and will become eligible for sale, pursuant to Rule
144, commencing on various dates commencing 90 days following the date of this
Prospectus, subject to contractual restrictions described below. The holders of
all of such shares have agreed not to sell such shares for a period of 18
months from the date of this Prospectus without the Underwriter's prior written
consent. No prediction can be made as to the effect, if any, that sales of
shares of Class A Common Stock or even the availability of such shares for sale
will have on the market prices prevailing from time to time. The possibility
that substantial amounts of Class A Common Stock may be sold in the public
market may adversely affect the prevailing market price for the Class A Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."
No Assurance of Public Market; Possible Volatility of Market Price of
Class A Common Stock and Warrants; Underwriter's Potential Influence on the
Market. Prior to this offering, there has been no public trading market for the
Common Stock or Warrants. There can be no assurance that a regular trading
market for the Class A Common Stock or Warrants will develop after this
offering or that, if developed, it will be sustained. Moreover, the initial
public offering prices of the Class A Common Stock and the Warrants and the
exercise price of the Warrants have been determined by negotiations between the
Company and the Underwriter. The market prices of the Company's securities
following this offering may be highly volatile as has been the case with the
securities of other emerging companies. Factors such as the Company's operating
results, announcements by the Company or its competitors and various factors
affecting the food industry generally may have a significant impact on the
market price of the Company's securities. In addition, in recent years, the
stock market has experienced a high level of price and volume volatility and
market prices for the stock of many companies have experienced wide price
fluctuations which have not necessarily been related to the operating
performance of such companies. Although it has no obligation to do so, the
Underwriter intends to make a market in the Class A Common Stock and Warrants
and may otherwise effect transactions in the Class A Common Stock and Warrants.
If the Underwriter makes a market in the Class A Common Stock or Warrants, such
activities may exert a dominating influence on the market and such activity may
be discontinued at any time. The prices and liquidity of the Class A Common
Stock and Warrants may be significantly affected to the extent, if any, that
the Underwriter participates in such market. See "Underwriting."
Possible Delisting of Securities from AMEX; Risks Relating to Low-Priced
Stocks. It is currently anticipated that the Class A Common Stock and Warrants
will be eligible for listing on AMEX. In order to continue to be listed on
AMEX, the Company must maintain a public float of $1,000,000, at least 200,000
shares of common stock publicly held and at least 300 public shareholders.
Failure to meet these maintenance criteria may result in the suspension or
delisting of the Company's securities from AMEX, and trading in the Company's
securities would thereafter be conducted in the over-the-counter market. As a
result of such suspension or delisting, an investor could find it more
difficult to dispose of the Company's securities. In addition, if the Class A
Common Stock were to become delisted from trading on AMEX and the trading price
of the Class A Common Stock were to fall below $5.00 per share on the date the
Company's securities were delisted, trading in such securities would also be
subject to the requirements of certain rules promulgated under the Securities
Exchange
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<PAGE>
Act of 1934, as amended (the "Exchange Act"), which require additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any unlisted equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). Such
rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith, and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage broker-dealers from effecting transactions in the Company's
securities, which could severely limit the market price and liquidity of such
securities and the ability of purchasers in this offering to sell their
securities of the Company in the secondary market.
Potential Adverse Effect of Warrant Redemption. The Warrants are subject
to redemption by the Company at any time commencing , 1999 upon notice of
not less than 30 days, at a price of $.10 per Warrant, provided that the
closing bid quotation of the Class A Common Stock on all 20 trading days ending
on the third day prior to the day on which the Company gives notice has been at
least 134% (currently $10.05, subject to adjustment) of the then effective
exercise price of the Warrants and the Company obtains the written consent of
the Underwriter to such redemption prior to the Call Date. 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 the holders to do so, to
sell the Warrants at the then current market price when they might otherwise
wish to hold the Warrants, or to accept the redemption price, which is likely
to be substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities -- Redeemable Warrants."
Possible Inability to Exercise Warrants. A current prospectus covering the
Class A Common Stock issuable upon exercise of the Warrants must be in effect
before the Company may accept Warrant exercises. There can be no assurance the
Company will be able to have a current prospectus in effect when this
Prospectus is no longer current, notwithstanding the Company's commitment to
use its best efforts to do so. See "Description of Securities -- Redeemable
Warrants."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,550,000 shares of
Class A Common Stock and 775,000 Warrants offered hereby (after deducting
underwriting discounts and commissions and other expenses of the offering) are
estimated to be $7,584,000 ($7,594,230 if the Underwriter's over-allotment
option with respect to the Warrants is exercised in full). The Company expects
to use the net proceeds over the next 12 months approximately as follows:
<TABLE>
<CAPTION>
Approximate Approximate Percentage
Application of Proceeds Dollar Amount of Net Proceeds
- ----------------------- ------------- -----------------------
<S> <C> <C>
Purchase of capital equipment(1) .......... $2,000,000 26.4%
Acquisitions(2) ........................... 2,000,000 26.4
Repayment of indebtedness(3) .............. 1,700,000 22.4
Sales, marketing and promotion(4) ......... 800,000 10.5
Working capital ........................... 1,084,000 14.3
---------- -----
Total ..................................... $7,584,000 100.0%
========== =====
</TABLE>
- ------------
(1) Represents anticipated costs associated with the purchase and installation
of capital equipment required for the manufacture of additional products
at the Chase City facility and the salaries for up to ten additional
personnel. The Company may seek to finance a portion of the cost of such
equipment. There can be no assurance that the Company will be able to
obtain satisfactory equipment financing arrangements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Business -- Manufacturing."
(2) Represents anticipated costs to acquire products or businesses which the
Company believes will enhance its growth prospects. As of the date of this
Prospectus, the Company has no plans, agreements, commitments,
understandings or arrangements with respect to any acquisition. See
"Business."
(3) Consists of the repayment of (i) $850,000 to the Bank and (ii) up to
$850,000 to Ilana Frydman, the wife of Uziel Frydman, Chairman, President
and Chief Executive Officer of the Company. The Company intends to reduce
amounts outstanding under its line of credit with the Bank, permitting it
to utilize the full borrowing availability under the line of credit.
Borrowings under the line of credit vary daily based on the Company's
working capital requirements. At January 31, 1998 and February 28, 1998,
approximately $1,419,589 and $1,141,589, respectively, was outstanding
under the line of credit. Interest accrues on advances made under the line
of credit at the prime rate established by the Bank (8.5% at January 31,
1998). The line of credit expires on November 30, 1998. Advances under the
line of credit have been used to finance increased levels of inventories
and accounts receivable. The Company also intends to repay the remaining
outstanding principal and accrued interest at the rate of 9% per annum
under a promissory note payable to Ilana Frydman. Such indebtedness is due
on demand after March 1, 1999. See "Management's Discussion and Analysis
of Financial Conditions and Results of Operations" and "Certain
Transactions."
(4) Represents amounts to be used in connection with sales, marketing and
promotional activities, including advertising in trade journals,
preparation of sales literature and participation at trade shows. See
"Business -- Marketing, Sales and Advertising."
(5) Working capital may be used, among other things, to pay for inventories,
rent, trade payables, professional fees and other expenses.
If the Underwriter exercises its over-allotment option in full with
respect to the Warrants, the Company will realize additional net proceeds of
$10,230 which will be added to working capital. The Company will not realize
any additional net proceeds if the Underwriter exercises its over-allotment
option with respect to the Class A Common Stock.
Based on currently proposed plans and assumptions relating to its
operations, the Company believes that the proceeds of this offering, together
with projected cash flow from operations and available cash resources,
including its line of credit, will be sufficient to satisfy its contemplated
cash requirements for at least twelve months following the consummation of this
offering. In the event that the Company's plans change (due to changes in
market conditions, competitive factors or new or different business
opportunities that may become
14
<PAGE>
available in the future), its assumptions change or prove to be inaccurate or
if the proceeds of this offering or cash flow prove to be insufficient to
implement the Company's proposed expansion strategy (due to unanticipated
expenses, operating difficulties or otherwise), the Company may find it
necessary to reallocate a portion of the proceeds within the above-described
categories, use proceeds for other purposes, seek additional financing or
curtail its expansion activities. There can be no assurance that additional
financing, if required, will be available to the Company on commercially
reasonable terms, or at all.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest
bearing investments.
DILUTION
The difference between the initial public offering price per share and the
adjusted net tangible book value per share of Common Stock after this offering
constitutes the dilution to investors in this offering. Net tangible book value
per share of Common Stock on any given date is determined by dividing the net
tangible book value of the Company (total tangible assets less total
liabilities) on that date, by the number of shares of Common Stock (including
shares of Class A Common Stock issuable upon conversion of outstanding shares
of Class B Common Stock) outstanding on that date.
As of January 31, 1998, the net tangible book value of the Company was
$2,512,873 or $1.17 per share of Common Stock. After giving effect to the sale
of the 1,550,000 shares of Class A Common Stock and 775,000 Warrants being
offered hereby (after payment of underwriting discounts and commissions and
estimated expenses of this offering) the net tangible book value of the Company
as of January 31, 1998 would have been $10,096,873 or $2.73 per share,
representing an immediate increase in net tangible book value of $1.56 per
share of Common Stock to existing shareholders and an immediate dilution of
$3.22 per share (or 54.1%) to new investors. The following table illustrates
this dilution to new investors on a per share basis:
<TABLE>
<S> <C> <C>
Public offering price ................................... $ 5.95
Net tangible book value before this offering ......... $ 1.17
Increase attributable to this offering ............... 1.56
------
Net tangible book value after this offering ............. 2.73
------
Dilution to investors in this offering .................. $ 3.22
======
</TABLE>
The following table sets forth, with respect to existing shareholders and new
investors in this offering, a comparison of the number of shares of Class A
Common Stock issued by the Company (including shares issuable upon conversion
of the outstanding Class B Common Stock), the percentage of ownership of such
shares, the total cash consideration paid, the percentage of total cash
consideration paid and the average price per share.
<TABLE>
<CAPTION>
Total Cash
Shares Purchased Consideration Paid
----------------------- ------------------------- Average Price
Number Percent Amount Percent Per Share
----------- --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing shareholders ......... 2,150,000 58.1% $ 268,500 2.8% $ .13
New investors ................. 1,550,000 41.9 9,222,500 97.2 5.95
--------- ----- ---------- -----
Total ...................... 3,700,000 100.0% $9,491,000 100.0%
========= ===== ========== =====
</TABLE>
The above table assumes no exercise of the Underwriter's over-allotment
option. If such option is exercised in full, the new investors will have paid
$10,605,875 for 1,782,500 shares of Class A Common Stock, representing
approximately 97.53% of the total consideration for 48.2% of the total number
of shares of Common Stock outstanding.
In addition, the table assumes no exercise of other outstanding stock
options or warrants. The Company has issued, as of the date of this Prospectus,
options under the Option Plan to purchase an aggregate of 140,000 shares of
Common Stock at an exercise price of $5.95 per share. To the extent that these
options and warrants are exercised, there will be further ownership dilution to
new investors. See "Management -- 1998 Stock Option Plan," "Description of
Securities" and "Underwriting."
15
<PAGE>
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock, and the
Company's Board of Directors does not intend to declare or pay any dividends on
its Common Stock in the foreseeable future. The Board of Directors currently
intends to retain all available earnings (if any) generated by the Company's
operations for the development and growth of its business. The declaration in
the future of any cash or stock dividends on the Common Stock will be at the
discretion of the Board and will depend upon a variety of factors, including
the earnings, capital requirements and financial position of the Company and
general economic conditions at the time in question. The payment of cash
dividends on the Common Stock currently is limited or prohibited by the terms
of the Company's financing agreements with the Bank and Fidelity and under the
Subordinated Notes. See "Description of Securities -- Capital Stock."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
January 31, 1998, on an actual basis after giving effect to the
Recapitalization and as adjusted to give effect to the sale of the 1,550,000
shares of Class A Common Stock and 775,000 Warrants offered hereby and the
anticipated application of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
January 31, 1998
------------------------------
Actual As Adjusted
------------- --------------
<S> <C> <C>
Long term debt(excluding current portion) ......................... $ 2,670,809 $ 1,828,607
----------- -----------
Shareholders' equity(1):
Class A Common Stock, $.01 par value, 30,000,000 shares
authorized, 1,150,000 shares issued and outstanding and
2,700,000 shares issued and outstanding (as adjusted)(2) ......... 11,500 27,000
Class B Common Stock, $.01 par value, 5,000,000 shares
authorized, 1,000,000 shares issued and outstanding (actual
and as adjusted) ................................................. 10,000 10,000
Preferred Stock, $.01 par value, issuable in series: 5,000,000
shares authorized: no shares issued and outstanding, actual
and as adjusted .................................................. --
Additional paid-in capital ........................................ 247,000 7,815,500
Accumulated earnings .............................................. 2,244,373 2,244,373
----------- -----------
Total shareholders' equity ....................................... 2,512,873 10,096,873
----------- -----------
Total capitalization ........................................... $ 5,183,682 $11,925,480
=========== ===========
</TABLE>
- ------------
(1) Gives effect to the Recapitalization.
(2) Does not include (i) 775,000 shares of Class A Common Stock reserved for
issuance upon exercise of the Warrants; (ii) an aggregate of 232,500
shares of Class A Common Stock reserved for issuance upon exercise of the
Underwriter's Warrants and the warrants included therein; (iii) 140,000
shares of Class A Common Stock reserved for issuance upon exercise of
outstanding options granted under the Company's Option Plan; and (iv)
210,000 shares of Class A Common Stock reserved for issuance upon exercise
of options available for future grant under the Option Plan. See
"Management -- 1998 Stock Option Plan," "Descripion of Securities" and
"Underwriting."
16
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain selected historical financial data
of the Company as of and for the dates indicated. The selected financial data
as of July 31, 1996 and 1997 and for the years then ended have been derived
from the Company's financial statements on a consolidated basis set forth
elsewhere in this Prospectus that have been audited by BDO Seidman, LLP,
independent auditors. The selected financial data for the six months ended
January 31, 1997 and 1998 are derived from the Company's unaudited financial
statements for such periods set forth elsewhere in this Prospectus, which
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a proper statement of the results for such period. The results of
operations for the six months ended January 31, 1998 are not necessarily
indicative of results of operations to be expected for any future quarter or
the next fiscal year ended July 31, 1998. The financial data set forth below is
qualified by reference to and should be read in conjunction with the Company's
financial statements, related notes and other financial information contained
in this Prospectus, as well as "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Statement Of Operations Data:
<TABLE>
<CAPTION>
Years ended July 31, Six Months ended January 31,
--------------------------- ----------------------------
(in thousands, except share data)
1996 1997 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales .................................... $ 14,638 $ 17,424 $ 9,574 $ 9,721
Cost of sales ................................ 10,864 12,570 7,136 6,515
Gross profit ................................. 3,773 4,853 2,437 3,205
Selling, general and administrative
expenses .................................... 2,342 2,680 1,173 1,417
Pre-production costs(1) ...................... 212 769 616 54
Salaries and related expenses ................ 937 1,180 461 521
Income from operations ....................... 281 223 187 1,213
Net income (2) ............................... 270 303 286 820
Basic and diluted income per share ........... .13 .14 .13 .38
Supplemental net income per share(3) ......... .12 .34
Number of shares outstanding ................. 2,150,000 2,150,000 2,150,000 2,150,000
</TABLE>
Balance Sheet Data:
January 31, 1998
-------------------------------
Actual As Adjusted(4)
------------- ---------------
Working capital .............. $2,726,037 $ 9,467,835
Total assets ................. 9,685,944 15,577,742
Total liabilities ............ 7,173,071 5,480,869
Shareholders' equity ......... 2,512,873 10,096,873
- ------------
(1) Represents costs associated with commencing manufacturing operations at the
Chase City facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) Includes non-recurring income, net of legal expenses, recorded in
connection with an insurance litigation settlement (the "Insurance
Settlement") of $223,605, $364,028 and $102,223 in the fiscal years ended
July 31, 1996 and 1997 and the six months ended January 31, 1998,
respectively. See Note 4 to Notes to Consolidated Financial Statements.
(3) Supplemental net income per share for the year ended July 31, 1997 and the
six months ended January 31, 1998 is based upon the weighted number of
shares of Common Stock used in the calculation of net income per share
increased by the sale of 284,404 shares, the proceeds of which would be
necessary to reduce borrowings by $1,692,202. See "Consolidated Financial
Statements -- Summary of Accounting Principles."
(4) Gives effect to the sale of the shares of Class A Common Stock and Warrants
offered hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company's Consolidated Financial Statements include the operations of
the Company as the surviving corporation of a merger and subsequent
restructuring of the Company's affiliated entities in July 1997. The
transaction was treated like a pooling of interests for accounting purposes
and, accordingly, the Company's Consolidated Financial Statements include the
results of operations and financial position of the affiliated entities for all
periods presented. The Company's manufacturing operations are segregated from
its domestic and overseas marketing and distribution operations, which are
conducted through its direct and indirect wholly-owned subsidiaries, Sherwood
LLC and Sherwood Overseas, respectively. See Note 1 to Notes to Consolidated
Financial Statements.
The Company currently purchases most of its finished products from
third-party manufacturers located in Europe and South America. In April 1996,
the Company acquired a 70,000 square foot manufacturing facility in Chase City,
Virginia in order to reduce its dependence on foreign manufacturers. The
Company modernized and equipped the facility and commenced production of its
demitasse biscuit products in February 1997. The Company also recently
completed the installation of equipment designed to manufacture candy products,
is currently formulating a candy product and anticipates that it will begin to
manufacture this candy product in May 1998.
During the twelve months following the consummation of the offering, the
Company intends to continue its shift in operations from importing finished
products to manufacturing products at its Chase City facility. The Company
intends to use up to $2,000,000 of the proceeds of this offering to purchase
and install equipment necessary to manufacture additional products. The Company
expects to capitalize equipment purchases. The Company anticipates increases in
salary expense beyond its current level of expenditures as new products are
manufactured and additional personnel are required. The Company also intends to
use up to $2,000,000 of the proceeds of this offering to acquire products or
businesses which the Company believes will enhance its growth prospects. In
connection with any possible acquisition, the Company may acquire complementary
products, facilities or equipment which may be used to manufacture newly
acquired products. There can be no assurance that the Company will be
successful in manufacturing additional products at its Chase City facility,
improving its operating margins or consummating acquisitions of products or
businesses.
For the fiscal years ended July 31, 1996 and 1997 and the six months ended
January 31, 1997 and January 31, 1998, the Company incurred pre-production
costs of $212,089, $769,585, $616,015 and $54,125, respectively, representing
expenses associated with commencing manufacturing operations at the Chase City
facility, including the cost of parts and labor. See Note 16 to Notes to
Consolidated Financial Statements.
The Company recorded non-recurring income from the Insurance Settlement of
$223,605, $364,028 and $102,223 in the fiscal years ended July 31, 1996 and
1997, and the six months ended January 31, 1998, respectively. See Note 4 to
Notes to Consolidated Financial Statements.
At January 31, 1998, the Company had available net operating loss
carryforwards of approximately $950,000 which are available through 2012. These
net operating loss carryforwards are available to offset consolidated taxable
income generated in future periods. The Company has a net deferred tax asset of
approximately $62,000 at July 31, 1997, due to the net operating loss
carryforwards. See Note 10 to Notes to Consolidated Financial Statements.
18
<PAGE>
Results of Operations
The following table below sets forth, for the periods indicated, certain
of the Company's income and expense items as approximate percentages of net
sales:
<TABLE>
<CAPTION>
Six Months ended January
Years ended July 31, 31,
------------------------- -------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales ......................... 74.2 72.1 74.5 67.0
Gross profit .......................... 25.8 27.8 25.5 33.0
Selling, general and administrative
expenses ............................. 16.0 15.4 12.3 14.6
Pre-production costs .................. 1.4 4.4 6.4 0.1
Salaries and related expenses ......... 6.4 6.8 4.8 5.4
Income from operations ................ 1.9 1.3 2.0 12.5
Net income ............................ 1.8 1.7 3.0 8.4
</TABLE>
Six Months Ended January 31, 1998 Compared to Six Months Ended January 31, 1997
Sales: Net sales for the six months ended January 31, 1998 and 1997 were
$9,720,784 and $9,573,540, respectively. Sales of candy products in the United
States increased approximately $612,602, or 22%, for the period, reflecting an
increase in sales of candy products (particularly COWS) as well as seasonal
products with the introduction of seasonal candy items. Sales of cookie
products in the United States decreased approximately $172,569, or 5%,
reflecting an 8% decrease in sales of RUGER wafers, partially offset by a 5%
increase in sales of demitasse biscuits. The decrease in RUGER sales was
primarily due to timing differences in order deliveries. Sales of chocolate
products in the United States decreased approximately $14,065, or 1%, due to a
two-month delay in connection with the development of new product sizes and
graphic design and other packaging improvements. For the six months ended
January 31, 1998, domestic and foreign sales were approximately $8,565,321 and
$1,155,463, or 88.1% and 11.9%, respectively, of the Company's sales.
Gross Profit: Gross profit increased to $3,205,322 from $2,437,385 and, as
a percentage of net sales, from 25% to 33%. The increases were primarily
attributable to lower costs associated with manufacturing demitasse biscuits at
the Chase City facility and also to favorable currency exchange rates.
Operating Expenses: Operating expenses consist of selling, general and
administrative expenses, pre-production costs and salaries and related
expenses. Selling, general and administrative expenses for the six months ended
January 31, 1998 were $1,416,816, compared to $1,173,426 for the prior
comparable period. This increase was primarily due to increased commissions
paid to food and candy brokers and to higher storage and freight costs
associated with increased sales in Canada. Pre-production costs decreased to
$54,125 for the six months ended January 31, 1998 from $616,015 for the prior
comparable period. This decline was a result of the Company having incurred
most of the costs associated with the start-up of manufacturing operations at
the Chase City facility during the prior period. Salaries and related expenses
increased to $521,041 for the six months ended January 31, 1998 from $460,629
for the prior comparable period. This increase was primarily due to an increase
in personnel at the Chase City facility.
Income from Operations: Income from operations for the six months ended
January 31, 1998 was $1,213,340, compared to $187,315 for the same period one
year earlier. The increase was due primarily to an increase in gross profit of
approximately $767,937 and a decrease in pre-production costs of approximately
$561,890, partially offset by an increase in salaries and selling, general and
administrative expenses of $303,802.
Other Income (expense): Other income (expense) decreased from $232,906 for
the six months ended January 31, 1997 to $(6,673) for the six months ended
January 31, 1998. The change was primarily due to income of $324,223, net of
legal expenses, recorded as part of the Insurance Settlement in the prior
period.
Income Taxes: The Company's provision for taxes on income for the six
months ended January 31, 1998 and 1997 was $386,267 and $134,471, respectively.
The Company's effective tax rate is lower than the statutory
19
<PAGE>
rate due primarily to the untaxed income of Sherwood Overseas, which is not
subject to U.S. income tax. Sherwood Overseas makes annual royalty payments to
the Company of 7% of net sales for the use of its brand names. See Note 10 to
Notes to Consolidated Financial Statements.
Net Income: Net income was $820,400 for the six months ended January 31,
1998 compared to $285,750 for the prior comparable period. This improvement was
due primarily to the increase in gross margins as described above and a
reduction in pre-production costs.
Fiscal Year Ended July 31, 1997 Compared to Fiscal Year Ended July 31, 1996
Sales: Net sales for fiscal 1997 increased $2,785,747, or 19.0%, to
$17,424,243, as compared to $14,638,496 for fiscal 1996. The increase in sales
was due to significant growth in sales volume in all product categories,
particularly increases in domestic sales of cookie products, which increased
approximately $1,699,000, or 29%, and candy products, which increased
approximately $904,000 or 19%. For the year ended July 31, 1997, domestic and
foreign sales were approximately $15,549,000 and $1,875,000 or 89.2% and 10.8%,
respectively, of the Company's sales.
Gross Profit: Gross profit for fiscal 1997 increased to $4,853,637 from
$3,773,714 and, as a percentage of net sales, from 25.8% to 27.8%. The increase
was primarily attributable to lower costs associated with manufacturing
demitasse biscuits at the Chase City facility and favorable currency exchange
rates.
Operating Expenses: Selling, general and administrative expenses for
fiscal 1997 increased 14.4%, from $2,342,330 to $2,680,897, but decreased as a
percentage of sales from 16.0% to 15.4%. The decrease in selling, general and
administrative expenses as a percentage of sales was primarily due to focused
advertising programs that reduced expenditures and higher volumes of direct
sales for which no commissions were paid. Pre-production costs of $769,585 and
$212,089 in fiscal 1997 and 1996, respectively, represent expenses associated
with the start-up of manufacturing operations at the Company's Chase City
facility. Salaries and related expenses increased from $937,893 in fiscal 1996
to $1,180,522 in fiscal 1997. The increase was due to the staged hiring over
the course of the year of a new plant manager and 40 new employees at the Chase
City facility.
Income from Operations: Income from operations decreased from $281,402 in
fiscal 1996 to $222,633 in fiscal 1997, due primarily to the additional
pre-production costs associated with the manufacturing facility, which were
incurred in fiscal 1997.
Other Income (expense): Other income increased approximately $43,000, from
$61,003 in fiscal 1996 to $103,747 in fiscal 1997. This increase was due
primarily to a $140,000 increase in income recorded from the Insurance
Settlement, which was offset by an increase in interest expense of
approximately $84,000 associated with two IRBs.
Income Taxes: The Company's provision for taxes on income was less than
the statutory income tax rates in each of fiscal 1997 and 1996, due primarily
to the untaxed income from Sherwood Overseas. The provision for taxes on income
for the fiscal years ended July 31, 1997 and 1996 was $23,100 and $71,700,
respectively.
Net Income: Net income for the year increased to $303,280 compared to
$270,705 for the prior fiscal year, a 12.0% increase from the prior fiscal
year. This increase was due largely to the increase in gross profit and the
Insurance Settlement as described above.
Liquidity and Capital Resources
The Company's primary cash requirements have been to fund the purchase,
manufacture and commercialization of its products. The Company has historically
financed its operations and expansion with a combination of cash flow from
operations and borrowings, primarily from banks and a related-party loan. The
Company's working capital at July 31, 1997 and January 31, 1998 was $2,219,735
and $2,726,037, respectively.
Net cash used in operating activities was $658,172 for the year ended July
31, 1997, compared to net cash provided by operating activities of $135,370 for
the year ended July 31, 1996. The decrease in cash provided by operating
activities was due primarily to an increase in inventory in anticipation of an
increase in volume of fall
20
<PAGE>
and holiday orders. Net cash provided by operations was $545,056 for the six
months ended January 31, 1998, compared to net cash used in operations of
$239,823 for the prior comparable period. The increase in cash provided by
operating activities was primarily attributable to an increase in net income
and receipt of cash from the Insurance Settlement.
Net cash used in investing activities for the years ended July 31, 1996
and 1997 and the six months ended January 31, 1998 were $1,649,386, $816,196
and $201,066, respectively. Capital expenditures were made in connection with
commencing manufacturing operations at the Chase City facility.
Net cash provided by financing activities was $1,218,553 for the year
ended July 31, 1997, compared to $1,763,278 for the year ended July 31, 1996.
Net cash provided by financing activities for fiscal 1997 and 1996 reflects
borrowings under the line of credit with the Bank and the Related Party Note to
use as working capital and additional long-term debt borrowings to fund the
purchase and modernization of the Chase City facility. Net cash used in
financing activities was $332,736 for the six months ended January 31, 1998,
compared to net cash provided by financing activities of $788,694 for the
comparable period in 1997. This change reflects the payments of principal and
interest due under the Bank line of credit and the Related Party Note. At
January 31, 1998, the Company had cash and cash equivalents of $625,363.
In November 1996, the Company entered into a loan agreement with the Bank
which provides for borrowings under a line of credit of up to $4,000,000.
Advances under the line of credit are based on a borrowing formula equal to the
lesser of (i) $2,000,000 or (ii) 80% of domestic accounts receivable plus 70%
of domestically-owned inventory (subject to certain limitations) less the
aggregate amount of outstanding letters of credit. Interest accrues on such
advances at the Bank's prime lending rate (8.5% at January 31, 1998) and is
payable monthly. The loan agreement expires in November 1998. At January 31,
1998 and February 28, 1998, approximately $1,419,589 and $1,141,589,
respectively, was outstanding under the line of credit. Up to $2,000,000 of the
line of credit is available for letters of credit for use in connection with
the Company's product purchases. Amounts drawn on the letters of credit are
included in the Company's accounts payable.
The Company intends to use $850,000 of the proceeds of this offering to
reduce amounts outstanding under the line of credit. The Company expects to use
the increased borrowing availability to fund working capital needs. The line of
credit is secured by Sherwood LLC's and Sherwood Overseas' cash and cash
equivalents, receivables and inventory, and is also personally guaranteed by
Uziel Frydman, the Company's Chairman, President and Chief Executive Officer.
In addition to financial covenants requiring, among other things, a minimum
tangible net worth (as defined in the loan agreement) of $2,000,000, the
Company's loan agreement with the Bank limits or prohibits the Company, without
the Bank's consent, from incurring additional indebtedness, which could, under
certain circumstances, limit the Company's ability to expand its operations.
In June 1996 and May 1997, the Company borrowed $935,000 and $580,000,
respectively, from Industrial Development Authority of Mecklenburg County
("IDAMC") for the acquisition and improvement of the Chase City facility and
the purchase and installation of new production equipment, financed through the
issuance of two series of IRBs (Series 1996 and Series 1997). The IRBs are
backed by irrevocable letters of credit issued by Fidelity. Advances on the
letters of credit (which expire June 2006 and 2002, respectively) are, in turn,
secured by the Company's Chase City facility and all other real and personal
property of the Company and personally guaranteed by Uziel Frydman, the
Company's Chairman, President and Chief Executive Officer, pursuant to a
reimbursement agreement ("Reimbursement Agreement") between Fidelity and the
Company.
Under the Reimbursement Agreement, the Company makes monthly interest and
sinking fund payments to Fidelity. Interest is calculated at the rate of 10%
per annum. The sinking fund payments for the Series 1996 IRBs are based upon a
15 year straight line amortization of $640,000 advanced for the purchase of the
Chase City facility and a 7 year straight line amortization for approximately
$295,000 advanced for manufacturing equipment. Annual payments to the sinking
fund for the Series 1997 IRBs are due June 1 each year in the following
amounts: $85,000 in 1998, $105,000 in 1999 and $130,000 in each of 2000, 2001
and 2002. The total monthly payments vary from month to month and are subject
to variable market tax exempt interest rates (3.95% at July 31, 1997). The
terms of the Reimbursement Agreement require, among other things, that the
Company maintain certain financial ratios and adhere to certain covenants,
including, without Fidelity's permission, borrowing additional funds, merging
or consolidating, amending its Articles of Incorporation and repaying
subordinated debt.
21
<PAGE>
As part of the financing for the acquisition of the Chase City facility,
in May and June 1996, the Company borrowed $400,000 to finance equipment from
IDAMC and $250,000 for working capital from the Lake Country Development
Corporation ("LCDC"), respectively, evidenced by the Subordinated Notes. The
IDAMC Subordinated Note has a five year term, amortized over a ten year period
at an interest rate of 7% per annum, payable in monthly installments of $4,644
in principal and interest with a balloon payment of $239,193 due June 2001. The
LCDC Subordinated Note is pari passu with the IDAMC Subordinated Note in terms
of security, and has a five year term bearing interest at 5.25% per annum,
payable in monthly installments of interest only for the first nine payments
and thereafter payable in equal monthly payments of $5,480 in principal and
interest until June 2001. The IDAMC Subordinated Note is secured by the
Company's equipment and the LCDC Subordinated Note is secured by the real
property, fixtures and equipment located at the Chase City facility. The
Subordinated Notes limit the Company's capital expenditures, prohibit a change
in ownership greater than 50% and require the Company to create 50 full-time
jobs at the Chase City facility within two years of the date of the
Subordinated Notes. Both loans are personally guaranteed by Uziel Frydman, the
Company's Chairman, President and Chief Executive Officer.
In 1991, the Company issued the Related Party Note to Ilana Frydman, an
employee of the Company and the wife of Uziel Frydman, the Chairman, President,
and Chief Executive Officer of the Company, in the principal amount of
$1,500,000. The Related Party Note accrues interest at 9% and is due upon
demand after March 1, 1999. As of January 31, 1998, the outstanding principal
and interest on the Related Party Note was $842,202. The Related Party Note is
secured by cash and cash equivalents and is subordinated to the Company's other
indebtedness. The Company has obtained consent to repay the Related Party Note
and intends to use a portion of the net proceeds of this offering to pay all of
the remaining principal and interest on the Related Party Note. See "Certain
Transactions."
The Company's inventory consists of raw materials for production of
demitasse biscuits at its Chase City facility and finished products imported
from third-party manufacturers. The Company maintains inventory in its Chase
City facility as well as bonded public warehouses and takes a physical
inventory on a quarterly basis. The Company averaged over 90 days of inventory
in fiscal 1997. The average time from order to delivery of imported inventory
was approximately 60 days in fiscal 1997. Inventory turns were approximately
3.34 in fiscal 1996, as compared to approximately 3.98 in fiscal 1997, and 1.74
(or 3.48 on an annualized basis) for the six months ended January 31, 1998.
The Company's accounts receivable, less allowance for doubtful accounts,
at January 31, 1998 were $2,127,186, as compared to $2,101,950 at July 31,
1997. As of January 31, 1998, accounts 90 or more days past due were
approximately 6% of aggregate accounts receivable. Trade accounts receivable
averaged approximately 40 days in fiscal 1997, as compared to approximately 53
days for fiscal 1996, and approximately 44 days for the six months ended
January 31, 1998. Bad debt accounted for less than 1% of the Company's revenues
for fiscal 1996 and 1997.
As of the date of this Prospectus, the Company has no material commitments
for capital expenditures. The Company intends to use up to $2,000,000 of the
net proceeds of this offering for the purchase and installation of capital
equipment required to manufacture additional products at the Company's Chase
City facility and salaries for additional personnel. The Company may seek to
finance a portion of the cost of such equipment. The Company also intends to
use up to $2,000,000 of the net proceeds of this offering to pursue
opportunities for possible acquisitions of products or businesses which
management believes will enhance the Company's growth prospects. Based on
currently proposed plans and assumptions relating to its operations, the
Company believes that the proceeds of this offering, together with projected
cash flow from operations and available cash resources, including its line of
credit, will be sufficient to satisfy its contemplated cash requirements for at
least twelve months following the consummation of this offering.
Foreign Currency Fluctuations
The Company currently purchases most of its products from foreign
manufactures under terms that provide for the payment of goods in foreign
currency approximately 60 to 90 days from the invoice date. Purchases of COWS
butter toffee candies and other candies from manufacturers located in Argentina
are paid in U.S. dollars. Purchases of RUGER wafers and ELANA Belgian
chocolates products are purchased from manufacturers
22
<PAGE>
located in Austria and Belgium, respectively, and are paid for in local
currencies. These goods are recorded at cost in equivalent U.S. dollars at the
exchange rate in effect on the invoice date. The difference between the
recorded cost and the amount required for payment is reflected as a realized
foreign currency transaction gain or loss. Prior year fluctuations in gross
margin were attributable in large part to the decline in value of the U.S.
dollar. In prior years, the Company has hedged its exposure to foreign currency
rate changes by purchasing forward contracts based upon analysis of foreign
current markets. The Company may hedge against currency fluctuations in the
future. All sales of the Company's products in foreign markets are made in U.S.
dollars, except for a portion of Canadian sales which are in Canadian dollars.
See Note 2 to Notes to Consolidated Financial Statements.
Seasonality
The Company's sales typically increase toward the end of the calendar
year, principally due to the holiday season. Unanticipated events, including
delays in product shipments past the time of peak sales or significant
decreases in sales during such period, could have an adverse effect on the
Company's operating results.
Inflation
Inflation has not had a significant impact on the Company's results of
operations for the periods presented.
Year 2000 Computer Issue
The Company has assessed the issues associated with the programming code
in its existing computer systems with respect to a two digit year value as the
year 2000 approaches and believes that addressing such issues is not a material
event or uncertainty that would cause reported financial information not to be
indicative of future operating results or financial condition.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 will begin to affect the Company in 1998
with the establishment of the 1998 Stock Option Plan. The Company will adopt
only the disclosure provisions of SFAS 123 and account for stock-based
compensation using the intrinsic value method set forth in APB Opinion 25. See
"Management -- 1998 Stock Option Plan."
In March 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128
provides a different method of calculating earnings per share than is currently
used in APB Opinion 15. SFAS 128 provides for the calculation of basic and
diluted earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to existing fully diluted earnings per share.
The Company believes adopting SFAS 128 will not have a material effect on its
calculation of earnings per share. Effective January 31, 1998, the Company has
adopted the provisions for computing earnings per share set forth in SFAS 128.
23
<PAGE>
BUSINESS
General
The Company manufactures, markets and distributes a diverse line of brand
name candies, cookies, chocolates and other food products. The Company's
principal products are COWSTM butter toffee candies, demitasse(R) biscuits,
RUGER(R) wafers and ELANA(R) Belgian chocolates. The Company also markets SOUP
DU JOURTM soups, SOUR FRUIT BURSTTM fruit-filled hard candies, as well as
certain holiday specialty products, such as PIRATE'S GOLD COINSTM milk
chocolates for Christmas and TOKENS OF LOVETM milk chocolates for Valentine's
Day. The Company's marketing strategy, including its packaging of products
designed to maximize freshness, taste and visual appeal, emphasizes highly
distinctive, premium quality products that are sold at prices that compare
favorably to those of competitive products.
Market Overview
Sales of candy and cookie products in the United States have increased
significantly in recent years. According to the United States Department of
Commerce, manufacturers' domestic shipments of confectionery products
(excluding chewing gum) have grown steadily from approximately $9 billion in
1990 to $12.1 billion in 1996. The Chocolate Manufacturers Association/National
Confectioners Association has estimated that total retail sales of
confectionery products in the United States in 1996 were more than $21 billion,
and industry trade reports project continued growth in these markets into the
next century. Despite such growth, the United States ranks only tenth in per
capita candy consumption among the industrialized nations. The Company believes
that these expanding markets present attractive growth opportunities for its
business, and is focusing its strategy on introducing new products in these
market categories as well as achieving greater brand recognition and market
penetration for all of the Company's products.
The markets for candy and cookie products are dominated by a number of
large, well capitalized corporations. In the candy market, these companies
include Hershey Food Corporation, M&M Mars and Nestle S.A. The cookie and
biscuit market is dominated by Nabisco, Inc., Keebler Company and Sunshine
Biscuits, Inc. In addition to domestic manufacturers, foreign candy and cookie
companies, such as Lindt of Switzerland, Bahlsen KG, and Storck, have
established their products in this market. The Company believes that the
remainder of the market is otherwise highly fragmented, with numerous
manufacturers and hundreds of products and distribution channels, such as mass
merchandisers, vending companies and gourmet distributors. Management believes
that the Company's experience in these markets and distribution channels,
coupled with its expanded manufacturing capabilities, positions the Company to
capitalize on the growth opportunities in these markets.
Products
The table below sets forth, for the periods indicated, the approximate
revenues (in thousands) and percentages of revenues derived from United States
sales of the Company's products in the following categories:
<TABLE>
<CAPTION>
Year Ended July 31, Six months ended January 31,
----------------------------------------------- -----------------------------------------------
Product Category 1996 1997 1997 1998
- ------------------- ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Candy ............. $ 4,668 34.7% $ 5,572 35.0% $2,738 31.9% $3,351 38.0%
Cookies ........... 5,942 44.2 7,641 48.0 3,757 43.8 3,584 40.6
Chocolate ......... 2,115 15.7 2,308 14.5 1,631 19.1 1,617 18.3
Other ............. 728 5.4 398 2.5 448 5.2 273 3.1
------- ----- ------- ----- ------ ----- ------ -----
Total(1) .......... $13,453 100.0% $15,919 100.0% $8,574 100.0% $8,825 100.0%
======= ===== ======= ===== ====== ===== ====== =====
</TABLE>
- ------------
(1) Includes intercompany sales to Sherwood Overseas of approximately $352,000,
$370,000, $240,105 and $259,410 for the years ended July 31, 1996 and 1997
and the six months ended January 31, 1997 and 1998, respectively.
24
<PAGE>
The following is a brief description of the Company's products by
category:
Candy
COWSTM: COWS is a line of butter toffee candy offering both a soft and
chewy toffee and a dairy butter and cream hard candy. COWS butter toffee
candies are made with real dairy butter and cream and are sold in 7 oz. bags,
in tubs, and in bulk, and are packed in foil fresh packs to preserve freshness
and extend shelf life. COWS butter toffee candies are also packaged as gift
items in decorative tins and milk jars.
COWPOKESTM Lollipops: Cowpokes lollipops is a new product first introduced
in the fall of 1997. Cowpokes are an extension of the COWS line and are made
with a hard dairy butter and cream candy on the outside and a soft, chewy
butter toffee on the inside. Cowpokes are available in 7.3 oz. bags and are
also distributed in 60-count check-stand display cartons for single-item sales.
SOUR FRUIT BURSTTM Hard Candies: SOUR FRUIT BURST is a line of
fruit-filled hard candies in a variety of flavors sold in 3 oz. and 12 oz. bags
and distributed in a variety of packages.
Cookies
RUGER(R) Wafers: RUGER wafers is a line of wafer cookie available in three
flavors: chocolate, vanilla, and strawberry and in two sugar free varieties.
RUGER wafers are offered in a 7oz. grocery size as well as a 2 1/8 oz. size in
two different shapes in order to assure a proper fit in vending machine slots.
The RUGER wafer cookie formula designed by the Company utilizes an aeration
process which gives RUGER wafers its very light and delicate filling. RUGER
wafers are distributed in a mylar packaging material that resists sunlight and
humidity and is designed to preserve freshness and extend shelf life.
Demitasse(R) Biscuits: Demitasse is a line of tea biscuits offered in a
variety of flavors including the traditional tea biscuit, "Petit Beurre" (with
real butter), Cinnamon Honey, Coconut and Chocolate. The demitasse biscuit line
is certified kosher by the Orthodox Union.
Chocolate
ELANA(R) Belgian Chocolates: ELANA Belgian chocolate bars are sold in a
variety of flavors, including Mint, Caramel, Mocca, Truffle, White Truffle,
Honey Almond, Crispers, and Almonds, and are offered in two sizes (25 grams and
45 grams) for retail stores and vending, and also in a variety of package
combinations.
Countdown to ChristmasTM Chocolate Calendars: Countdown to Christmas
chocolate calendars are recently introduced advent calendars made with 24
milk-chocolate candies behind numbered doors. The calendar is marketed
domestically for the Christmas holiday season.
PIRATE'S GOLD COINSTM Foil-Wrapped Chocolate Coins: Pirate's Gold Coins is
a milk chocolate candy product designed in coin shapes and wrapped in embossed
gold foil. They are offered in two sizes of mesh bags, 2lb. 10oz. tubs and in
bulk, and marketed primarily for the Christmas holiday season.
TOKENS OF LOVETM Chocolate Candies: Tokens of Love is a line of milk
chocolate candy product in token shapes, wrapped in foil and containing
removable/resusable stickers with expressions of love and friendship. They are
offered in two sizes of mesh bags and in bulk, and marketed primarily for
Valentine's Day.
Other
SOUP DU JOURTM Soups: SOUP DU JOUR Soups is a line of instant powdered
soups offered in five different varieties, Chicken Noodle, Spring Vegetable,
French Onion, Minestrone and Mushroom, sold in single-serving packets, 3-packet
boxes and distributed in a variety of larger size packages.
Suppliers
The Company currently purchases most of its finished products from
third-party manufacturers located in Argentina, Austria and Belgium. For the
fiscal year ended July 31, 1997, five manufacturers accounted for approximately
66.8% of product purchases sold domestically, with the producers of COWS butter
toffee candies, RUGER wafers, and chocolate products accounting for
approximately 30.8%, 20.9% and 15.1%, respectively, of
25
<PAGE>
product purchases. The Company's products are manufactured to specific recipe
and design specifications developed by the Company. The Company's operations
require it to have production orders in place in advance of shipment to the
Company's warehouses (product deliveries typically take 60 days). Each of the
Company's foreign suppliers generally delivers finished products free on board
to a freight forwarder, cargo consolidator or directly to a seaport for
transport by steamship. The Company assumes the risk of loss, damage or
destruction of products, although the Company maintains cargo insurance. The
products are transported to United States seaports and then by rail and truck
to one of six regional warehouses used by the Company.
The Company has entered into agreements with the manufacturers of ELANA(R)
Belgian chocolates, PIRATE'S GOLD COINSTM milk chocolates and SOUP DU JOURTM
soups. Generally, under these agreements, the supplier may not export into the
United States, and in certain cases, other countries, any products similar to
those produced for the Company. The agreements require the Company to purchase
annual minimum volumes at specific prices (which minimums are subject to a
reduction and, ultimately, a suspension, in the event of certain price
increases by the supplier). The Company currently exceeds these purchase
requirements. The Company's supplier agreements require the supplier to
maintain product liability insurance with the Company as an additional named
insured and are generally terminable on short notice.
In addition, raw materials necessary for the manufacture of the Company's
products at its Chase City facility, including flour, sugar, shortening, butter
and flavorings, are purchased from numerous third-party suppliers. The Company
anticipates that it will become increasingly dependent on these suppliers for
necessary raw materials used in the manufacture of its products.
Customers
The Company sells its products primarily to mass merchandisers and other
retail customers; vending companies; gourmet distributors; and grocery and drug
store chains, convenience stores, specialty shops and wholesalers. Domestic
sales to mass merchandisers, vending companies and gourmet distributors
accounted for approximately 36.18%, 16.84% and 13.86%, respectively, of the
Company's revenues for the year ended July 31, 1997. The Company's mass
merchandiser customers include Dollar General, K-Mart, Dollar Tree and 99 Cents
Only Stores.
Vending companies are the Company's second largest customer category.
ELANA Belgian chocolates, RUGER wafers, COWS butter toffee candies and SOUR
FRUIT BURST are available in vending machines as well as through traditional
outlets. The Company believes that the visibility of its products in vending
channels enhances market acceptance and consumer appeal of the Company's
products in other distribution channels.
The Company sells its products to numerous gourmet distributors throughout
the United States. These distributors in turn sell products to a wide base of
gourmet stores. The Company believes that it has been able to penetrate this
market segment because of its ability to satisfy consumer demand for premium
quality products at prices that are attractive to these distributors. For the
same reason, the Company also believes that gift basket producers are a natural
extension of the gourmet market.
Distribution
The Company distributes its products throughout the United States and
internationally. The Company's principal market outside the United States is
Canada, which accounts for approximately 90% of the Company's international
sales. For the year ended July 31, 1997 and the six months ended January 31,
1998, sales of the Company's products in foreign markets accounted for
approximately 11% and 12%, respectively, of the Company's revenues. The Company
has recently introduced its products in certain countries in South America and
the Caribbean, and management intends to continue to expand its international
marketing efforts by selling products to distributors in these geographic
markets. In each country, the Company targets distributors that purchase large
quantities of products for mass distribution.
The Company engages independent food and candy brokers in various regions
throughout the United States for marketing to retail customers. These brokers
account for a majority of the Company's sales. Food and candy brokers are paid
on a commission basis (typically 5%) and are generally responsible in their
respective geographic markets for identifying customers, soliciting customer
orders and inspecting merchandise on store
26
<PAGE>
shelves. As of the date of this Prospectus, the Company had arrangements with
approximately 50 food and candy broker organizations. Such arrangements
prohibit the brokers from selling competing products. The Company believes the
use of food and candy brokers, which typically specialize in specific products
and have knowledge of and contracts in particular markets, enhances the quality
and scope of the Company's sales operations and permits the Company to limit
the significant costs associated with creating and maintaining a direct
distribution network. The Company's executive officers and three regional sales
managers work with brokers on an individual basis and are responsible for
managing the broker network, identifying opportunities and developing sales in
their respective territories.
The Company uses six regional bonded public warehouses that specialize in
food and confectionery storage. These warehouses are selected based on
proximity to the Company's customers, the ability to provide prompt customer
service and efficient and economic delivery. The Company generally sells its
products pursuant to customer purchase orders and fills these orders from
inventory generally within one to two days of receipt. Because orders are
filled shortly after receipt, backlog is not material to the Company's
business. Substantially all of the Company's products are delivered by common
carrier.
Manufacturing
The Company produces demitasse biscuits at its Chase City facility. The
facility consists of a brick building with over 70,000 square feet (including a
1,750 square foot office) situated on approximately ten acres in Chase City,
Virginia. The facility is accessible to a major seaport and rail lines. The
facility is equipped with state-of-the-art equipment for the manufacture and
packaging of cookie and candy products. The facility, which currently operates
one daily shift, operates at approximately 25% of its productive capacity for
the demitasse product. The facility is certified kosher by the Orthodox Union.
The Company's Vice President - Manufacturing Operations is responsible for
the operations at the Chase City facility. The Company currently employs
technical and production personnel who have working knowledge of the technical
and operational aspects of the Company's production equipment. The Company also
employs personnel responsible for conducting quality control testing at the
facility via on-site laboratory analysis and quality assurance inspections. The
inspectors evaluate the Company's products on the basis of subjective factors
such as taste and appearance. The Company monitors the efficiency of the
production equipment continuously and the facility is climate controlled.
The Company intends to use up to $2,000,000 of the proceeds of this
offering for the purchase and installation of capital equipment required for
the manufacture of additional products at the Chase City facility. The Company
also recently completed the installation of equipment designed to manufacture
candy products, is currently formulating a candy product and currently
anticipates that it will begin to manufacture this candy product in May 1998.
The Company expects to hire up to ten additional personnel during the twelve
months following this offering to operate this equipment. The Company will seek
to expand its manufacturing operations by adding products and by developing
private label and contract manufacturing capabilities. The Company will be
required to hire additional personnel as it expands its operations.
Marketing, Sales and Advertising
The Company believes that product recognition by retail and wholesale
customers, consumers and food brokers is an important factor in the marketing
of the Company's products. Accordingly, the Company promotes its products and
brand names through the use of attractive promotional materials, including
full-color product brochures and newspaper inserts, advertising in trade
magazines targeted to the mass merchandisers, vending industry, gourmet trade
and gift basket markets, and participation in trade shows. For the year ended
July 31, 1997 and the six months ended January 31, 1998, the Company spent
$450,446 and $175,367, respectively, on advertising. The Company intends to use
up to $800,000 of the proceeds of this offering to expand its marketing and
sales efforts primarily by aggressively advertising its brand name products.
The Company also promotes its products through sales discounts and
advertising allowances. The level of promotional programs is generally highest
during the initial introduction of a product. As distribution of the new
27
<PAGE>
product increases, the Company gradually shifts from promotion to direct
advertising to reinforce trade and consumer repeat purchasing. Management
believes that these promotional programs have shortened the time periods
necessary to achieve market penetration of its products. The Company intends to
continue to develop and implement marketing and advertising programs to
increase brand recognition of its products and to emphasize favorable pricing
compared to competing products. The Company also promotes its products through
payments of slotting allowances. Slotting allowances enable the Company to
obtain shelf space for its products. Payment of slotting allowances does not
assure that a product will continue to be carried beyond an initial period.
Competition
The Company faces significant competition in the marketing and sale of its
products. The Company's products compete for consumer recognition and shelf
space with candies, cakes, cookies, chocolates and other food products which
have achieved international, national, regional and local brand recognition and
consumer loyalty. These products are marketed by companies (which may include
the Company's suppliers) with significantly greater financial, manufacturing,
marketing, distribution, personnel and other resources than the Company.
Certain of such competitors, such as Hershey Food Corporation, M&M Mars, Inc.,
Nestle, S.A., Nabisco, Inc., Keebler Company and Sunshine Biscuits, Inc.,
dominate the markets for candy and cookie products, and have substantial
promotional budgets which enable them to implement extensive advertising
campaigns. The food industry is characterized by frequent introductions of new
products, accompanied by substantial promotional campaigns. Competitive factors
in these markets include brand identity, product quality, taste and price.
Trademarks
The Company holds United States trademark registrations for the "ELANA,"
"RUGER" and "demitasse" names, has filed for trademark registrations for
certain other names, including "COWS," and uses other names for which it has
not applied for registration. The Company believes that its rights in these
names is a significant part of the Company's business and that its ability to
create demand for its products is dependent to a large extent on its ability to
exploit these trademarks. There can be no assurance as to the breadth or degree
of protection which trademarks may afford the Company or that any trademark
applications will result in registered trademarks or that trademarks will not
be invalidated if challenged. The Company is not aware of any infringement
claims or other challenges to the Company's rights to use these marks. Other
than Canadian registrations for the "ELANA" and "RUGER" names, the Company does
not hold any international trademarks.
Government Regulation
The Company is subject to extensive regulation by the United States Food
and Drug Administration, the United States Department of Agriculture and by
other state and local authorities in jurisdictions in which the Company's
products are manufactured or sold. Among other things, such regulation governs
the importation, manufacturing, packaging, storage, distribution and labeling
of the Company's products, as well as sanitary conditions and public health and
safety. Applicable statutes and regulations governing the Company's products
include "standards of identity" for the content of specific types of products,
nutritional labeling and serving size requirements and general "Good
Manufacturing Practices" with respect to manufacturing processes. The Company's
Chase City facility and products are subject to periodic inspection by federal,
state and local authorities. The Company believes that it is in compliance with
all governmental laws and regulations and maintains all permits and licenses
required for its operations. Nevertheless, there can be no assurance that the
Company will continue to be in compliance with current laws and regulations or
that the Company will be able to comply with any future laws and regulations
and licensing requirements. Failure by the Company to comply with applicable
laws and regulations could subject the Company to civil remedies, including
fines, injunctions, recalls or seizures, as well as potential criminal
sanctions.
Insurance
The Company maintains product liability insurance with limits of
$2,000,000 in the aggregate and $1,000,000 per occurrence (with excess coverage
of $3,000,000), which it believes is adequate for the types of products
currently offered by the Company. There can be no assurance, however, that such
insurance will be
28
<PAGE>
sufficient to cover potential claims or that adequate levels of coverage will
be available in the future at a reasonable cost. In the event of a partially or
completely uninsured successful claim against the Company, the Company's
financial condition and reputation would be materially affected.
Properties
The Company's corporate headquarters are located in 3,620 square feet of
leased office space located at 6110 Executive Boulevard, Rockville, Maryland.
This lease commenced on October 14, 1988 and expires November 30, 1998. The
current annual rental is approximately $45,000.
The Company's 70,000 square foot manufacturing facility is located on
approximately 10 acres at 807 South Main Street, Chase City Virginia. The
Company acquired the real estate and building in April 1996. The Company
granted senior and junior security interests in such facility in connection
with its issuance of the IRBs. See "Risk Factors."
Employees
As of March 1, 1998, the Company employed a total of 80 full-time
employees, with 18 full-time employees employed at the principal offices in
Rockville, Maryland and 62 full-time employees employed at the Chase City
facility. The Company's employees are not represented by any labor union. The
Company believes that its relations with its employees are good.
Legal Proceedings
The Company is from time to time involved in litigation incidental to the
conduct of its business. Although the Company is not currently a party to any
legal proceedings, there can be no assurance that the Company will not be a
party to litigation in the ordinary course of business.
29
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following are the directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ----------------------------- ----- ----------------------------------------------------
<S> <C> <C>
Uziel Frydman ............... 61 Chairman, President and Chief Executive Officer
Anat Schwartz ............... 37 Vice President -- Finance and Secretary
Amir Frydman ................ 35 Director, Treasurer and Vice President -- Marketing
and Product Development
Zigmund Sadauskas ........... 61 Vice President -- Manufacturing Operations
Douglas A. Cummins .......... 55 Director
Jean E. Clary ............... 54 Director Nominee
</TABLE>
Uziel Frydman has been the President and Chief Executive Officer of the
Company and each of its subsidiaries since inception. Mr. Frydman has served as
the Chairman of the Board of Directors of the Company since December 1997. Mr.
Frydman served as Director of Marketing and Planning Sciences at R.J. Reynolds
Tobacco Company from 1977 to 1980, and prior to that, as Manager, Planning and
Operations Improvement at Lever Brothers Company from 1971 to 1977. He also
served as Projects Manager at Sperry & Hutchinson Company and as an independent
consultant to local governments in Turkey, Burma and Sierra Leone from 1962 to
1965. Mr. Frydman was an adjunct professor at the Graduate School of Business
at Rutgers University from 1970 to 1975. Mr. Frydman earned a Masters of
Business Administration, Management Science degree from Case Western Reserve
University in 1968 and a Bachelor of Science degree in Civil Engineering from
Technion Institute of Technology, Haifa, Israel in 1960. Mr. Frydman is the
father of Anat Schwartz and Amir Frydman.
Anat Schwartz has been Vice President -- Finance and Secretary of the
Company since January 1996 and Sherwood Brands, LLC (and its predecessors)
since 1988, and has been a director of Sherwood Brands Overseas, Inc. since
1993. Prior to joining the Company, Ms. Schwartz served as Manager - Loan
Syndications and Asset Sales for the Bank of Montreal in 1988 and as Team
Leader - Communications/Media Group and Account Officer for such bank's
Southeastern United States region from 1983 to 1988. Ms. Schwartz earned a
Masters of Business Administration, Finance/Health Care degree from Bernard
Baruch College in 1983 and a Bachelor of Arts degree from Wake Forest
University in 1981. Ms. Schwartz is the daughter of Uziel Frydman and the
sister of Amir Frydman.
Amir Frydman has been a director of the Company and has served as
Treasurer and Vice President - Marketing and Product Development since 1985.
Prior to joining the Company, Mr. Frydman was Commercial Branch Manager at NCNB
National Bank of Florida, from 1984 to 1985. Mr. Frydman earned a Bachelor of
Arts degree from the University of North Carolina in 1983. Mr. Frydman is the
son of Uziel Frydman and the brother of Anat Schwartz.
Zigmund Sadauskas has been Vice President -- Manufacturing Operations
since March 1998. Prior to joining the Company, from 1995 to February 1998, Mr.
Sadauskas was self employed as an engineer consultant. From 1984 to 1995, Mr.
Sadauskas served as Chief Engineer to Stauffer-Meiji/Stauffer Biscuit Company.
From 1979 to 1985, Mr. Sadauskas served as Plant Manager for Peter Paul Cadbury
Candy Co. Prior to such service and since 1950, Mr. Sadauskas served in
capacities ranging from Foreman to Senior Project Engineer for various food and
beverage companies.
Douglas A. Cummins has been a director of the Company since December 1997.
In 1996, Mr. Cummins served as President and Chief Executive Officer of the
Liggett Group, a manufacturer and distributor of cigarettes. From 1993 to 1996,
Mr. Cummins served as President and Chief Executive Officer of North Atlantic
Trading Co, a cigarette paper manufacturer and distributor. From 1990 to 1993,
Mr. Cummins served as the President and Chief Executive Officer of Decision
Marketing, an advertising and consulting firm. From 1984 to 1990, Mr. Cummins
served as the President and Chief Operating Officer of Salem Carpet Mills, a
carpet manufacturer, and from 1981 to 1984, served as President of Stellar
Group, a consulting firm. From 1973 to 1981,
30
<PAGE>
Mr. Cummins was Director of Marketing -- International and Vice President _
Foods Marketing at R.J. Reynolds Industries. Mr. Cummins currently sits on the
Boards of Gold Leaf Tobacco Corp., Q.E.P. Company, Inc., Smokey Mountain
Products, Inc. and the Fort Ticonderoga Association. Mr. Cummins earned a
Masters of Business Administration degree from Columbia University in 1966 and
a Bachelor of Arts degree from Harvard University in 1964.
Jean E. Clary has agreed to become a director of the Company upon the
consummation of this offering. Ms. Clary has been the Chief Executive Officer
and President of Century 21 - Clary and Associates, Inc. since January 1973.
Ms. Clary is currently on the Board of Directors of Virginia Power, a wholly
owned subsidiary of Dominion Resources, Inc., a public company traded on the
New York Stock Exchange.
The Company's directors hold office until the next annual meeting of the
Company's shareholders and directors, respectively. The Company's officers are
elected annually by the Company's Board of Directors and serve at the Board's
discretion.
The Company intends to hire a Chief Financial Officer following the
consummation of this offering.
The Company intends to appoint one additional independent member to its
Board of Directors following the consummation of this offering. The Company
also intends to establish a Compensation Committee and an Audit Committee of
the Board of Directors prior to consummation of the offering.
The Company has also agreed, for a period of three years from the date of
this Prospectus, if so requested by the Underwriter, to nominate and use its
best efforts to elect a designee of the Underwriter as a director of the
Company, or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. The Company's officers, directors and
shareholders have agreed to vote their shares of Common Stock in favor of such
designee. The Underwriter has not yet exercised its right to designate such a
person.
Executive Compensation
The following table sets forth compensation paid by the Company during the
fiscal years ended July 31, 1997, 1996 and 1995 to its Chief Executive Officer
and its other officer who received compensation in excess of $100,000 for such
fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------
Other Annual
Name and Principal Position Fiscal Year Salary Bonus Compensation
- ---------------------------------------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Uziel Frydman, Chairman, President and 1997 $108,170 (1) (1)
Chief Executive Officer 1996 102,794
1995 101,642
Amir Frydman, Treasurer and Vice 1997 118,646 (1) (1)
President Marketing and Product 1996 106,059
Development 1995 97,971
</TABLE>
- ------------
(1) No bonuses or other compensation were received by the individuals named
above.
The Company did not grant any options to its executive officers during the
year ended July 31, 1997. See "Management -- 1998 Stock Option Plan."
Key Man Life Insurance
The Company maintains a $1 million key man life insurance policy on Uziel
Frydman, the Company's Chairman, President and Chief Executive Officer.
Employment Agreements
The Company has entered into employment agreements with Uziel Frydman,
Chairman of the Board, President and Chief Executive Officer, Anat Schwartz,
Vice President -- Finance and Secretary, and Amir Frydman, Vice President --
Marketing and Product Development and Treasurer. Such agreements become
effective
31
<PAGE>
upon the consummation of this offering, are for a term of three years and
provide annual base salaries of $175,000, $105,000 and $150,000 for Uziel
Frydman, Anat Schwartz and Amir Frydman, respectively. In addition, such
employment agreements entitle the executives to a portion of a bonus pool as
determined by the Board of Directors equal to the sum of (i) the first $150,000
in excess of $1 million of Company pre tax net income (this item (i) is
applicable solely for fiscal 1998) and (ii) 15% of Company pre tax net income
in excess of certain incremental earnings targets. If either Uziel Frydman,
Amir Frydman or Anat Schwartz is terminated without cause or upon a change in
control of the Company, each is entitled to continue to receive his or her
annual base salary for a period of three years, any accrued incentive
compensation through the date of termination and certain other benefits. Each
of the above listed executives is prohibited from competing with the Company
for the duration of his or her respective employment agreement, and if
terminated or upon voluntary resignation, for one year thereafter.
1998 Stock Option Plan
In January 1998, the Company's shareholders approved a stock option plan
(the "Option Plan") pursuant to which 350,000 shares of Class A Common Stock
have been reserved for issuance upon the exercise of options designated as
either (i) options intended to constitute incentive stock options ("ISOs")
under the Internal Revenue Code of 1986, as amended (the "Code") or (ii)
nonqualified options. ISOs may be granted under the Option Plan to officers and
employees of the Company. Non-qualified options may be granted to consultants,
directors (whether or not they are employees), employees or officers of the
Company.
The purpose of the Option Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and other persons instrumental
to the success of the Company. The Option Plan is intended to qualify under
Rule 16b-3 under the Exchange Act and is administered by the Board of
Directors. The Board, within the limitations of the Option Plan, determines the
persons to whom options will be granted, the number of shares to be covered by
each option, whether the options granted are intended to be ISOs, the duration
and rate of exercise of each option, the option purchase price per share and
the manner of exercise, and the time, manner and form of payment upon exercise
of an option.
ISOs granted under the Option Plan may not be granted at a price less than
the fair market value of the Class A Common Stock on the date of grant (or 110%
of fair market value in the case of persons holding 10% or more of the voting
stock of the Company). The aggregate fair market value of shares for which ISOs
granted to any employee are exercisable for the first time by such employee
during any calendar year (under all stock option plans of the Company and any
related corporation) may not exceed $100,000. Non-qualified options granted
under the Option Plan may not be granted at a price less than the fair market
value of the Class A Common Stock on the date of grant. Options granted under
the Option Plan will expire not more than ten years from the date of grant
(five years in the case of ISOs granted to persons holding 10% or more of the
voting stock of the Company). All options granted under the Option Plan are not
transferable during an optionee's lifetime but are transferable at death by
will or by the laws of descent and distribution. In general, upon termination
of employment of an optionee, all options granted to such person which are not
exercisable on the date of such termination immediately terminate, and any
options that are exercisable terminate 90 days following termination of
employment.
The Company has issued, as of the date of this Prospectus, options to
purchase 140,000 shares of Class A Common Stock under the Option Plan at an
exercise price of $5.95 per share of which options to purchase 35,000 shares
will be granted to each of Uziel Frydman, Amir Frydman, Anat Schwartz and Ilana
Frydman. These options are exercisable as to one-third of the shares covered
thereby on the first, second and third anniversaries of the date of such grant.
Employee Benefit Plan
Effective August 1, 1997, the Company established a 401(k) and profit
sharing plan (the "Plan"). The Plan provides that the Company may elect in its
sole discretion to make contributions and/or distributions of up to 15% of
employee compensation. As of the date of this Prospectus, the Company has not
made any contributions or distributions under the Plan.
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<PAGE>
Exculpatory Provisions and Indemnification
As authorized by the North Carolina Business Corporations Act (the
"NCBCA"), the Company's Amended and Restated Articles of Incorporation provide
that no director or officer of the Company shall be personally liable to the
Company or its shareholders for damages for breach of any duty owed to the
Company or its shareholders, except for liability for any breach of duty based
upon an act or omission that the director or officer at the time of the breach
knew or believed to be clearly in conflict with the best interests of the
corporation. In addition, the Company intends to enter into agreements to
indemnify its directors and executive officers prior to the consummation of
this offering. The Company also intends to obtain directors and officers
liability insurance naming the Underwriter as an additional insured prior to
the consummation of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted for directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
33
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, immediately prior to
the consummation of this offering and as adjusted to reflect the sale by the
Company of the 1,550,000 shares offered hereby (based on information obtained
from the persons named below), relating to the beneficial ownership of shares
of Class A Common Stock by: (i) each person or entity who is known by the
Company to own beneficially five percent or more of the outstanding Class A
Common Stock, (ii) each of the Company's directors and (iii) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
---------------------------
Amount and Nature of Before After
Name and Address(1) Beneficial Ownership(2) Offering Offering
- ------------------------------------------------------------- ------------------------- ---------- ---------------
<S> <C> <C> <C>
Uziel Frydman ............................................... 2,000,000(3) 93.0% 54.1%(3)
Anat Schwartz ............................................... 75,000 3.5 2.0
Amir Frydman ................................................ 75,000 3.5 2.0
Douglas A. Cummins .......................................... 0 0 0
Jean E. Clary ............................................... 0 0 0
All directors and executive officers as a group (6 persons) . 2,150,000 100.0% 58.1%
</TABLE>
- ------------
(1) The address for each of the executive officers and directors is in care of
Sherwood Brands, Inc., 6110 Executive Blvd., Suite 1080, Rockville,
Maryland 20852.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from the date of this Prospectus upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that options, warrants or convertible
securities that are held by such person (but not those held by any other
person) and which are exercisable within 60 days of the date of this
Prospectus have been exercised and converted.
(3) Includes 1,000,000 shares of Class A Common Stock and 1,000,000 shares of
Class B Common Stock. Since each share of Class B Common Stock entitles
the holder to seven votes per share on all matters submitted to a vote of
shareholders, Mr. Frydman will retain 82% of the voting control of the
Company. If the over-allotment option is exercised in full, Mr. Frydman will
own 1,767,500 shares of Common Stock, or 48% of the outstanding shares of
Common Stock and will retain 80% of the voting control of the Company.
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<PAGE>
CERTAIN TRANSACTIONS
Uziel Frydman, President and Chief Executive Officer of the Company, has
personally guaranteed the repayment of all of the Company's indebtedness. The
Company will seek to release Mr. Frydman from his personal guarantee to the
Bank following this offering.
In 1991, the Company issued the Related Party Note to Ilana Frydman, an
employee of the Company and the wife of Uziel Frydman, the Chairman, President,
and Chief Executive Officer of the Company, in the principal amount of
$1,500,000. The Related Party Note accrues interest at 9% and is due upon
demand after March 1, 1999. As of January 31, 1998, the outstanding principal
and interest on the Related Party Note was $842,202. The Company intends to use
a portion of the net proceeds of this offering to pay all of the remaining
principal and interest on the Related Party Note.
Any future transactions will be on terms no less favorable to the Company
than could be obtained from unaffiliated parties and will be approved by a
majority of the independent and disinterested members of the Board of
Directors, outside the presence of any interested directors and, to the extent
deemed appropriate by the Board of Directors, the Company will obtain
shareholder approval or fairness opinions in connection with any such
transaction.
DESCRIPTION OF SECURITIES
Capital Stock
General
The Company is authorized to issue 30,000,000 shares of Class A Common
Stock, par value $.01 per share, 5,000,000 shares of Class B Common Stock, par
value $.01 per share, and 5,000,000 shares of Preferred Stock, par value $.01
per share. As of the date of this Prospectus, there are 1,150,000 shares of
Class A Common Stock and 1,000,000 shares of Class B Common Stock outstanding.
Class A Common Stock
The holders of Class A Common Stock are entitled to one vote per share on
all matters submitted to a vote of the shareholders, including the election of
directors, and, subject to preferences that may be applicable to any Preferred
Stock outstanding at the time, are entitled to receive ratably such dividends,
if any, as may be declared from time to time by the Board of Directors out of
funds legally available therefor. In the event of liquidation or dissolution of
the Company, the holders of Class A Common Stock are entitled to receive all
assets available for distribution to the shareholders, subject to any
preferential rights of any Preferred Stock then outstanding. The holders of
Class A Common Stock have no preemptive or other subscription rights, and there
are no conversion rights or redemption or sinking fund provisions with respect
to the Class A Common Stock. All outstanding shares of Class A Common Stock
are, and the shares of Class A Common Stock offered hereby upon issuance and
sale will be, fully paid and non-assessable. The rights, preferences and
privileges of the holders of Class A Common Stock are subject to, and may be
adversely affected by, the right of the holders of any shares of Preferred
Stock which the Company may designate in the future.
Class B Common Stock
The shares of Class A Common Stock and Class B Common Stock are identical
in all respects, except that each share of the Class B Common Stock entitles
the holder to seven votes on each matter submitted to a vote of the
shareholders. Except as required by applicable law, holders of the Class A
Common Stock and Class B Common Stock will vote together as a single class on
all matters submitted to a vote of the shareholders. Neither the Class A Common
Stock nor the Class B Common Stock has cumulative voting rights.
Class B Common Stock will be convertible into Class A Common Stock, in
whole or in part, at any time and from time to time at the option of the holder
commencing 180 days after the consummation of this offering, on the basis of
one share of Class A Common Stock for each share of Class B Common Stock
converted. Each share of Class B Common Stock will also automatically convert
into one share of Class A Common Stock upon transfer to a non-affiliate of the
holder or the Company. Each share of Class B Common Stock will also
35
<PAGE>
automatically convert into one share of Class A Common Stock if, on the record
date for any meeting of the shareholders, the number of shares of Class B
Common Stock then outstanding is less than 10% of the aggregate number of
shares of Class A Common Stock and Class B Common Stock then outstanding.
Preferred Stock
The authorized but undesignated shares of Preferred Stock may be issued
from time to time in one or more series upon authorization by the Company's
Board of Directors. The Board of Directors, without further approval of the
shareholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
and other rights, preferences, privileges and restrictions applicable to each
series of Preferred Stock. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more
difficult for a third party to gain control of the Company, prevent or
substantially delay a change of control, discourage bids for the Company's
Common Stock at a premium or otherwise adversely affect the market price of the
Common Stock. The Company has no current plans to issue any Preferred Stock.
Redeemable Warrants
Each Warrant offered hereby entitles the registered holder thereof (the
"Warrant Holders") to purchase one share of Class A Common Stock at a price of
$7.50, subject to adjustment in certain circumstances, at any time from the
date that is thirteen months after the date hereof and until 5:00 p.m., Eastern
Time on , 2002. The Warrants will be separately transferable immediately
upon issuance.
The Warrants are redeemable by the Company at any time commencing ,
1999, upon notice of not less than 30 days, at a price of $.10 per Warrant,
provided that the closing bid quotation of the Class A Common Stock on all 20
trading days ending on the third day prior to the day on which the Company
gives notice (the "Call Date") has been at least 134% (currently $10.05,
subject to adjustment) of the then effective exercise price of the Warrants and
the Company obtains the written consent of the Underwriter to such redemption
prior to the Call Date. The Warrant Holders shall have the right to exercise
their Warrants until the close of business on the date fixed for redemption.
The Warrants will be issued in registered form under a warrant agreement by and
among the Company, Continental Stock Transfer & Trust Company, as warrant
agent, and the Underwriter (the "Warrant Agreement"). The exercise price and
number of shares of Class A Common Stock or other securities issuable on
exercise of the Warrants are subject to adjustment in certain circumstances,
including in the event of a stock dividend, recapitalization, reorganization,
merger or consolidation of the Company. However, the Warrants are not subject
to adjustment for issuances of Class A Common Stock at prices below the
exercise price of the Warrants. Reference is made to the Warrant Agreement
(which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part) for a complete description of the terms and conditions
therein (the description herein contained being qualified in its entirety by
reference thereto).
The Warrants may be exercised upon surrender of the Warrant certificate
during the exercise period at the offices of the warrant agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check or bank draft payable to the Company) to the warrant agent for
the number of Warrants being exercised. The Warrant Holders do not have the
rights or privileges of holders of Common Stock.
No Warrant will be exercisable unless at the time of exercise the Company
has declared effective a current registration statement with the Commission
covering the shares of Class A Common Stock issuable upon exercise of such
Warrant and such shares have been registered or qualified or deemed to be
exempt from registration or qualification under the securities laws of the
state of residence of the holder of such Warrant. The Company will use its best
efforts to have all such shares so registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, subject to the terms of the Warrant Agreement.
While it is the Company's intention to do so, there can be no assurance that it
will be able to do so.
No fractional shares will be issued upon exercise of the Warrants.
However, if a Warrant Holder exercises all Warrants then owned of record by
him, the Company will pay to such Warrant Holder, in lieu of the issuance of
any fractional share which is otherwise issuable, an amount in cash based on
the market value of the Class A Common Stock on the last trading day prior to
the exercise date.
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<PAGE>
North Carolina Anti-Takeover Statutes
The Company's Certificate of Incorporation and Bylaws include provisions
which may have the effect of discouraging non-negotiated takeover attempts by
delaying or preventing changes in control of management of the Company. These
provisions include, in addition to the provision for Preferred Stock, no
cumulative voting and a denial of the ability of shareholders to call special
meetings of shareholders.
North Carolina has enacted legislation that may deter or frustrate
takeovers of corporations. The North Carolina Control Share Acquisition Act
applies to public companies incorporated in North Carolina that meet certain
additional requirements, including (i) over 40% of the corporation's assets
located in North Carolina, (ii) over 10% of its shareholders residing in North
Carolina or over 10% of its shares held by residents of North Carolina, and
(iii) over 40% of its employees are North Carolina residents. This Act
generally provides that shares acquired in excess of certain specified
thresholds will not possess any voting rights unless such voting rights are
approved by a majority vote of a corporation's disinterested shareholders. The
Company currently does not satisfy the above-listed requirements for the
application of such act. The North Carolina Shareholder Protection Act applies
to North Carolina corporations and generally requires 95% approval by
disinterested directors or shareholders of certain specified "multi-staged"
takeover transactions between a corporation and holders of more than 20% of the
outstanding voting shares of the corporation (or their affiliates).
Transfer Agent and Warrant Agent
The transfer agent for the Class A Common Stock and the warrant agent for
the Warrants is Continental Stock Transfer & Trust Company, 2 Broadway, New
York, New York 10004.
Reports to Shareholders
The Company intends to file a registration statement with the Securities
and Exchange Commission to register its Class A Common Stock and Warrants under
the provisions of Section 12(g) of the Exchange Act prior to the date of this
Prospectus and has agreed with the Underwriter that it will use its best
efforts to continue to maintain such registration. Such registration will
require the Company to comply with periodic reporting, proxy solicitation and
certain other requirements of the Exchange Act.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 2,700,000
shares of Class A Common Stock outstanding (assuming no exercise of the
Warrants) and 1,000,000 shares of Class B Common Stock outstanding. All
1,550,000 of the shares of Class A Common Stock being offered hereby will be
immediately tradable without restriction or further registration under the
Securities Act. The remaining 1,150,000 shares of Class A Common Stock and
1,000,000 shares of Class B Common Stock outstanding are deemed to be
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act, in that such shares were acquired by the shareholders
of the Company in transactions not involving a public offering, and, as such,
may only be sold pursuant to a registration statement under the Securities Act,
in compliance with the exemption provisions of Rule 144, or pursuant to another
exemption under the Securities Act. The 2,150,000 restricted shares of Common
Stock (Class A and Class B inclusive) will become eligible for sale under Rule
144, subject to the volume limitations prescribed by the Rule, on various dates
commencing 90 days following the date of this Prospectus. The Company and its
current shareholders have agreed not to sell or otherwise dispose of any
securities of the Company beneficially owned by them for a period of 18 months
from the date of this Prospectus, without the prior written consent of the
Underwriter and, that for an additional period of 12 months thereafter, all
sales of Common Stock of the Company shall be made only in accordance with
limitations of Rule 144 applicable to affiliates' sales of restricted shares.
See "Underwriting."
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate), who has
owned restricted shares of Common Stock beneficially for at least one year is
entitled to sell, 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 the American Stock Exchange or
other national
37
<PAGE>
securities exchange or automated quotation system of a registered securities
association, the average weekly trading volume during the four calendar weeks
preceding the sale. A person who has not been an affiliate of the Company for a
least three months immediately preceding the sale and who has beneficially
owned shares of Common Stock for at least two years is entitled to sell such
shares under Rule 144 without regard to any of the limitations described above.
Prior to this offering, there has been no market for the Class A Common
Stock or Warrants and no prediction can be made as to the effect, if any, that
public sales of shares of Class A Common Stock or the availability of such
shares for sale will have on the market prices of the Class A Common Stock and
the Warrants prevailing from time to time. Nevertheless, the possibility that
substantial amounts of Class A Common Stock may be sold in the public market
may adversely affect prevailing market prices for the Class A Common Stock and
the Warrants and could impair the Company's ability in the future to raise
additional capital through the sale of its equity securities.
38
<PAGE>
UNDERWRITING
Paragon Capital Corporation (the "Underwriter") has agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase the
1,550,000 shares of Class A Common Stock and 775,000 Warrants offered hereby
from the Company. The Underwriter is committed to purchase and pay for all of
the shares of Class A Common Stock and Warrants offered hereby if any of such
securities are purchased. The shares of Class A Common Stock and Warrants are
being offered by the Underwriter, subject to prior sale, when, as and if
delivered to and accepted by the Underwriter and subject to approval of certain
legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the
shares of Class A Common Stock and Warrants to the public at the public
offering prices set forth on the cover page of this Prospectus. The Underwriter
may allow to certain dealers who are members of the National Association of
Securities Dealers, Inc. (the "NASD") concessions, not in excess of $ per
share of Class A Common Stock and $ per Warrant, of which not in excess of
$ per share of Class A Common Stock and $ per Warrant may be reallowed to
other dealers who are members of the NASD.
The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 116,250 additional
Warrants and Mr. Uziel Frydman has granted to the Underwriter an option,
exercisable for 45 days from the date of this Prospectus, to purchase up to
232,500 shares of Class A Common Stock at the public offering prices set forth
on the cover page of this Prospectus, less the underwriting discounts and
commissions. The Underwriter may exercise these options in whole or, from time
to time, in part, solely for the purpose of covering over-allotments, if any,
made in connection with the sale of the shares of Class A Common Stock and/or
Warrants offered hereby.
The Company has agreed to pay the Underwriter a nonaccountable expense
allowance of 3% of the gross proceeds of this offering, of which $50,000 has
been paid as of the date of this Prospectus. The Company has also agreed to pay
all expenses in connection with qualifying the shares of Class A Common Stock
and Warrants offered hereby for sale under the laws of such states as the
Underwriter may designate, including expenses of counsel retained for such
purpose by the Underwriter.
The Company has agreed to sell to the Underwriter and its designees for an
aggregate of $100, warrants (the "Underwriter's Warrants") to purchase up to
155,000 shares of Class A Common Stock at an exercise price of $9.22 per share
(155% of the public offering price per share) and up to 77,500 Warrants (each
exercisable to purchase one share of Class A Common Stock at a price of $7.50
per share) at an exercise price of $.155 per Warrant (155% of the public
offering price per Warrant). The Underwriter's Warrants may not be sold,
transferred, assigned or hypothecated for one year from the date of this
Prospectus, except to the officers and partners of the Underwriter and members
of the selling group and are exercisable at any time and from time to time, in
whole or in part, during the five-year period commencing on the date of this
Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise Term, the
holders of the Underwriter's Warrants are given, at nominal cost, the
opportunity to profit from a rise in the market price of the Class A Common
Stock. To the extent that the Underwriter's Warrants are exercised, dilution to
the interests of the Company's shareholders will occur. Further, the terms upon
which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of the Underwriter's Warrants can be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company
than those provided in the Underwriter's Warrants. Any profit realized by the
Underwriter on the sale of the Underwriter's Warrants, the underlying shares of
Class A Common Stock or the underlying warrants, or the shares of Class A
Common Stock issuable upon exercise of such underlying warrants may be deemed
additional underwriting compensation. The Company has agreed, at the request of
the holders of a majority of the Underwriter's Warrants, at the Company's
expense, to register the Underwriter's Warrants, the shares of Class A Common
Stock and warrants underlying the Underwriter's Warrants, and the shares of
Class A Common Stock issuable upon exercise of the underlying warrants under
the Securities Act on one occasion during the Warrant Exercise Term and to
include the Underwriter's Warrants and all such underlying securities in any
appropriate registration statement which is filed by the Company during the
seven years following the date of this Prospectus.
39
<PAGE>
The Company has also agreed, for a period of three years from the date of
this Prospectus, if so requested by the Underwriter, to nominate and use its
best efforts to elect a designee of the Underwriter as a director of the
Company, or, at the Underwriter's option, as a non-voting advisor to the
Company's Board of Directors. The Company's officers, directors and
shareholders have agreed to vote their shares of Class A Common Stock in favor
of such designee. The Underwriter has not yet exercised its right to designate
such a person.
In addition, the Company has agreed to enter into a consulting agreement
to retain the Underwriter as a financial consultant for a period of two years
from the consummation of this offering at an annual fee of $25,000 per year,
payable in advance upon consummation of this offering. The consulting agreement
will not require the consultant to devote a specific amount of time to the
performance of its duties thereunder. In the event that the Underwriter
originates a financing or a merger, acquisition, joint venture or other
transaction to which the Company is a party, the Underwriter will be entitled
to receive a finder's fee in consideration for origination of such transaction.
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation (commencing one year from the date of this
Prospectus), to pay to the Underwriter a fee of 5% of the exercise price for
each Warrant exercised; provided, however, that the Underwriter will not be
entitled to receive such compensation in Warrant exercise transactions in which
(i) the market price of Class A Common Stock at the time of exercise is lower
than the exercise price of the Warrants; (ii) the Warrants are held in any
discretionary account; (iii) disclosure of compensation arrangements is not
made, in addition to the disclosure provided in this Prospectus, in documents
provided to holders of Warrants at the time of exercise; (iv) the exercise of
the Warrants is unsolicited by the Underwriter; or (v) the solicitation of
exercise of the Warrants was in violation of Regulation M.
The Company and all of its current shareholders, officers and directors
have agreed not to sell or otherwise dispose of any securities of the Company
beneficially owned by them for a period of 18 months from the date of this
Prospectus, without the prior written consent of the Underwriter. In addition,
the current shareholders, officers and directors have agreed that for an
additional period of 12 months thereafter, all sales of Common Stock of the
Company shall be made only in accordance with limitations of Rule 144
applicable to affiliates' sales of restricted shares, unless waived by the
Underwriter.
The Underwriter has advised the Company that it does not expect sales made
to discretionary accounts to exceed 1% of the securities offered hereby.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act.
Prior to this offering, there has been no public trading market for the
Class A Common Stock or Warrants. Consequently, the initial public offering
price of the Class A Common Stock and Warrants and the exercise price of the
Warrants have been determined by negotiations between the Company and the
Underwriter. Among the factors considered in determining these prices were the
Company's financial condition and prospects, market prices of similar
securities of comparable publicly-traded companies and the general condition of
the securities market.
In order to facilitate the offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the prices of the
Class A Common Stock and Warrants. Specifically, the Underwriter may over-allot
in connection with the offering, creating a short position in the Class A
Common Stock and Warrants for its own account. In addition, to cover
over-allotments or to stabilize the price of the Class A Common Stock and
Warrants, the Underwriter may bid for, and purchase shares of Class A Common
Stock and Warrants in the open market. The Underwriter may also reclaim selling
concessions allowed to a dealer for distributing the Common Stock and Warrants
in the offering, if the Underwriter repurchases previously distributed Class A
Common Stock and Warrants in transactions to cover short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Class A Common Stock and Warrants above
independent market levels. The Underwriter is not required to engage in these
activities, and may end any of these activities at any time.
40
<PAGE>
LEGAL MATTERS
The legality of the securities offered by this Prospectus will be passed
upon for the Company by Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.,
Miami, Florida. Tenzer Greenblatt LLP, New York, New York, has acted as counsel
to the Underwriter in connection with this offering.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by BDO Seidman, LLP independent auditors as stated in their report
appearing herein and have been included herein in reliance upon the report of
said firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
SB-2 (the "Registration Statement") under the Securities Act with respect to
the securities offered by this Prospectus. This Prospectus, filed as a part of
such Registration Statement, does not contain all of the information set forth
in, or annexed as exhibits to, the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and this
offering, reference is made to the Registration Statement, including the
exhibits filed therewith, which may be inspected without charge at the Office
of the Commission, 450 Fifth Street, N.W., Washington D.C. 20549; and at the
following regional offices: Midwest Regional Office, Northwestern Atrium
Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661-2511, and the
Northeast Regional Office, 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of the Registration Statement may be obtained from the Commission
at its principal office upon payment of prescribed fees. Statements contained
in this Prospectus as to the contents of any contract or other document are not
necessarily complete and, where the contract or other document has been filed
as an exhibit to the Registration Statement, each statement is qualified in all
respects by reference to the applicable document filed with the Commission. The
Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of that site is
http://www.sec.gov.
Upon consummation of this offering, the Company will become subject to the
reporting requirements of the Exchange Act and, in accordance therewith, will
file reports, proxy statements and other information with the Securities and
Exchange Commission. The Company intends to furnish its shareholders with
annual reports containing audited financial statements and such other periodic
reports as the Company deems appropriate or as may be required by law.
41
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1997 AND 1996
AND THE SIX MONTHS ENDED JANUARY 31, 1998 AND 1997
Independent Auditors' Report ............................. F-2
Consolidated Financial Statements
Consolidated balance sheets ............................. F-3
Consolidated statements of operations ................... F-4
Consolidated statements of stockholder's equity ......... F-5
Consolidated statements of cash flows ................... F-6
Summary of accounting policies .......................... F-7 to F-8
Notes to consolidated financial statements .............. F-9 to F-15
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Shareholder
Sherwood Brands, Inc.
and Subsidiaries
Rockville, Maryland
We have audited the accompanying consolidated balance sheets of Sherwood
Brands, Inc. and Subsidiaries as of July 31, 1997 and 1996 and the related
consolidated statements of operations, stockholder's equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sherwood Brands,
Inc. and Subsidiaries at July 31, 1997 and 1996 and the results of its
operations and cash flows for the years then ended, in conformity with
generally accepted accounting principles.
BDO Seidman, LLP
Washington, D.C.
October 7, 1997,
Except for Note 18,
the date of which
is December 12, 1997
F-2
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, January 31,
------------------------------- --------------
1996 1997 1998
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents (Note 6) ....................... $ 869,924 $ 614,109 $ 625,363
Accounts receivable, less allowance of $21,900 and
$23,400 and $27,800 (Note 6) ........................... 2,109,995 2,101,950 2,127,186
Insurance settlement receivable (Note 4) ................. 262,574 262,574 29,383
Inventory (Notes 3 and 6) ................................ 2,892,510 3,412,962 4,080,698
Other current assets ..................................... 98 46,062 86,369
Deferred taxes on income (Note 10) ....................... -- 170,700 170,700
----------- ----------- -----------
Total current assets ................................... 6,135,101 6,608,357 7,119,699
----------- ----------- -----------
Net property and equipment (Notes 5, 7, 8 and 9) .......... 1,644,322 2,335,556 2,481,356
----------- ----------- -----------
Other Assets .............................................. 22,738 19,447 84,889
----------- ----------- -----------
TOTAL ASSETS .............................................. $ 7,802,161 $ 8,963,360 $ 9,685,944
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Line of credit (Note 6) .................................. $ 744,589 $ 1,644,589 $ 1,419,589
Current portion of long-term debt (Note 8) ............... 15,000 145,000 145,000
Current portion of subordinated debt (Note 9) ............ 46,447 85,757 80,877
Accounts payable (Note 2) ................................ 2,796,169 2,124,764 2,021,430
Accrued expenses ......................................... 100,233 198,012 340,499
Income taxes payable ..................................... 36,000 190,500 386,267
Deferred taxes on income (Note 10) ....................... 88,000 -- --
----------- ----------- -----------
Total current liabilities .............................. 3,826,438 4,388,622 4,393,662
----------- ----------- -----------
Long-term debt (Note 8) ................................... 920,000 1,355,000 1,355,000
Subordinated debt (Note 9) ................................ 601,242 515,485 473,607
Deferred taxes on income (Note 10) ........................ 1,000 108,600 108,600
Due to related parties (Note 11) .......................... 1,064,288 903,180 842,202
----------- ----------- -----------
TOTAL LIABILITIES ......................................... 6,412,968 7,270,887 7,173,071
----------- ----------- -----------
Commitments (Note 12)
Stockholder's equity (Notes 1 and 18)
Preferred Stock, $.01 par value, 5,000,000 shares autho-
rized; no shares issued or outstanding ................. -- -- --
Common Stock, Class A, $.01 par value, 30,000,000
shares authorized, 1,150,000 shares issued and out-
standing ............................................... 11,500 11,500 11,500
Common Stock, Class B, $.01 par value, 5,000,000
shares authorized, 1,000,000 shares issued and out-
standing ............................................... 10,000 10,000 10,000
Additional paid-in capital ............................... 247,000 247,000 247,000
Retained earnings ........................................ 1,120,693 1,423,973 2,244,373
----------- ----------- -----------
TOTAL STOCKHOLDER'S EQUITY ............................... 1,389,193 1,692,473 2,512,873
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY ................................................. $ 7,802,161 $ 8,963,360 $ 9,685,944
=========== =========== ===========
</TABLE>
See accompanying summary of accounting polices and notes to consolidated
financial statements.
F-3
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months
Years ended July 31, ended January 31,
------------------------------- -----------------------------
1996 1997 1997 1998
-------------- -------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Net sales ........................................ $14,638,496 $17,424,243 $9,573,540 $9,720,784
----------- ----------- ---------- ----------
Cost of sales .................................... 10,864,782 12,570,606 7,136,155 6,515,462
----------- ----------- ---------- ----------
Gross profit ..................................... 3,773,714 4,853,637 2,437,385 3,205,322
----------- ----------- ---------- ----------
Selling, general and administrative expenses ..... 2,342,330 2,680,897 1,173,426 1,416,816
Pre-production costs (Note 16) ................... 212,089 769,585 616,015 54,125
Salaries and related expenses .................... 937,893 1,180,522 460,629 521,041
----------- ----------- ---------- ----------
Total operating expenses ......................... 3,492,312 4,631,004 2,250,070 1,991,982
----------- ----------- ---------- ----------
Income from operations ........................... 281,402 222,633 187,315 1,213,340
----------- ----------- ---------- ----------
Other income (expense)
Interest income ............................... 26,023 26,073 21,375 8,802
Interest expense .............................. (189,961) (273,511) (126,555) (122,424)
Insurance claim, net (Note 4) ................. 223,605 364,028 324,223 102,223
Other (expense) income ........................ 1,336 (12,843) 13,863 4,726
----------- ----------- ---------- ----------
Total other income (expense) .................. 61,003 103,747 232,906 (6,673)
----------- ----------- ---------- ----------
Income before provision for taxes on
income ....................................... 342,405 326,380 420,221 1,206,667
Provision for taxes on income (Note 10) ....... 71,700 23,100 134,471 386,267
----------- ----------- ---------- ----------
Net income .................................... $ 270,705 $ 303,280 $ 285,750 $ 820,400
----------- ----------- ---------- ----------
Basic and diluted earnings per share .......... $ .13 $ .14 $ .13 $ .38
----------- ----------- ---------- ----------
Weighted average common shares out-
standing ..................................... 2,150,000 2,150,000 2,150,000 2,150,000
=========== =========== ========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------------------------------
Class A Class B
----------------------- -----------------------
Shares Amount Shares Amount
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, at August 1, 1996 ............ 1,150,000 $11,500 1,000,000 $10,000
--------- ------- --------- -------
Net income ............................ -- -- -- --
--------- ------- --------- -------
Balance, at July 31, 1996 ............. 1,150,000 11,500 1,000,000 10,000
--------- ------- --------- -------
Net income ............................ -- -- -- --
--------- ------- --------- -------
Balance, at July 31, 1997 ............. 1,150,000 11,500 1,000,000 10,000
--------- ------- --------- -------
Net income, six months ended
January 31, 1998 (unaudited) ......... -- -- -- --
--------- ------- --------- -------
Balance, at January 31, 1998
(unaudited) .......................... 1,150,000 $11,500 1,000,000 $10,000
========= ======= ========= =======
<CAPTION>
Additional
Paid-in Retained
Capital Earnings Total
----------- ------------ -------------
<S> <C> <C> <C>
Balance, at August 1, 1996 ............ $247,000 $ 849,988 $1,118,488
-------- ---------- ----------
Net income ............................ -- 270,705 270,705
-------- ---------- ----------
Balance, at July 31, 1996 ............. 247,000 1,120,693 1,389,193
-------- ---------- ----------
Net income ............................ -- 303,280 303,280
-------- ---------- ----------
Balance, at July 31, 1997 ............. 247,000 1,423,973 1,692,473
-------- ---------- ----------
Net income, six months ended
January 31, 1998 (unaudited) ......... -- 820,400 820,400
-------- ---------- ----------
Balance, at January 31, 1998
(unaudited) .......................... $247,000 $2,244,373 $2,512,873
======== ========== ==========
</TABLE>
F-5
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months
Years Ended July 31, Ended January 31,
--------------------------------- -------------------------------
1996 1997 1997 1998
--------------- --------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ................................ $ 270,705 $ 303,280 $ 285,750 $ 820,400
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities
Depreciation expense .......................... 55,338 121,557 62,660 55,266
Deferred income taxes ......................... 146,700 (151,100) -- --
Unrealized (gain) loss on foreign
currency exchange ........................... 22,077 (84,519) (84,850) (7,590)
Loss on disposal of fixed asset ............... -- 3,405 -- --
Provision for inventory allowance ............. -- (18,192) -- --
Provision for doubtful accounts ............... 33,933 72,606 (891) 4,400
Write-off of accounts receivable .............. (31,015) (71,084) -- --
(Increase) decrease in assets
Accounts receivable ........................... (203,071) 6,523 253,290 (29,636)
Inventory ..................................... 730,122 (502,260) (850,358) (667,736)
Insurance settlement receivable ............... (262,574) -- (364,026) 233,191
Other current assets .......................... 42,289 (45,964) (5,472) (40,307)
Other assets .................................. (14,178) 3,291 -- (65,442)
Increase (decrease) in liabilities
Accounts payable .............................. (749,677) (586,886) 121,761 (95,744)
Accrued expenses .............................. 25,419 97,779 243,842 142,487
Accrued interest to related parties ........... 33,302 38,892
Income taxes payable .......................... 36,000 154,500 98,471 195,767
------------ ------------ ---------- -----------
Net cash provided by (used in) operating
activities ....................................... 135,370 (658,172) (239,823) 545,056
------------ ------------ ---------- -----------
Cash flows from investing activities
Capital expenditures ............................. (1,649,386) (816,196) (932,533) (201,066)
------------ ------------ ---------- -----------
Net cash used in investing activities ............. (1,649,386) (816,196) (932,533) (201,066)
------------ ------------ ---------- -----------
Cash flows from financing activities
Borrowings on line of credit ..................... 4,083,986 2,300,000 1,000,000 --
Repayments on line of credit ..................... (4,103,397) (1,400,000) (800,000) (225,000)
Proceeds from issuance of long-term debt ......... 1,585,000 580,000 580,000 --
Payments on debt ................................. (2,311) (61,447) (14,152) (46,758)
Borrowings from related parties .................. 200,000 -- 22,846 --
Payments to related parties ...................... -- (200,000) -- (60,978)
------------ ------------ ---------- -----------
Net cash provided by (used in) financing
activities ..................................... $ 1,763,278 $ 1,218,553 $ 788,694 $ (332,736)
------------ ------------ ---------- -----------
Net increase (decrease) in cash and cash
equivalents .................................... 249,262 (255,815) (383,662) 11,254
Cash and cash equivalents, at beginning
of period ...................................... 620,662 869,924 869,924 614,109
------------ ------------ ---------- -----------
Cash and cash equivalents, at end of period . $ 869,924 $ 614,109 $ 486,262 $ 625,363
============ ============ ========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)
Basis of Presentation
The consolidated financial statements include the accounts of Sherwood
Brands, Inc. and its wholly-owned subsidiaries, Sherwood Brands, LLC and
Sherwood Brands Overseas, Inc. ("Overseas") (collectively, the "Company"). All
material inter-company transactions and balances have been eliminated in
consolidation. Subsequent to July 31, 1997, Sherwood Foods, Inc. changed its
name to Sherwood Brands, Inc. (See Note 1).
Organization and Description of Business
Sherwood Brands, Inc. (formerly Sherwood Foods, Inc.) was incorporated in
December 1982 in the state of North Carolina. Sherwood Brands, Inc.
manufactures its own line of confectionery products, Demitasse(R) biscuits and
is developing and installing a new product line of candies. Sherwood Brands,
Inc. was inactive from 1987 until April 1996, when it acquired the building and
equipment for its manufacturing plant.
Sherwood Brands, Inc. is the owner of Sherwood Brands, LLC, a Maryland
limited liability company. Sherwood Brands, LLC markets and distributes its own
lines of confectionery products in the United States.
Overseas (a wholly-owned subsidiary of Sherwood Brands, LLC) was
incorporated in July 1993 in the Bahamas to market and distribute the Sherwood
lines of confectionery products internationally. Sherwood Brands, LLC and
Overseas purchase confectionery products from Sherwood Brands, Inc. as well as
third party suppliers.
Interim Financial Information
The financial information as of January 31, 1998 and for the six months
ended January 31, 1997 and 1998 is unaudited. In the opinion of management,
such information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for such periods.
Results for interim periods are not necessarily indicative of results to be
expected for an entire year.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers highly
liquid investments with maturities at original date of acquisition of three
months or less to be cash equivalents.
Inventory
Inventory consists of raw materials and finished goods and is stated at
the lower of cost or market. Cost is determined by the FIFO (first-in,
first-out) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
accelerated and straight-line methods over the estimated useful lives of the
individual assets which range from five to twenty years for machinery and
equipment to thirty years for the building.
Revenue Recognition
Sales are recognized upon shipment of products.
F-7
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES -- (Continued)
(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)
Income Taxes
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Financial Instruments
Financial instruments of the Company include long-term debt. Based upon
current borrowing rates available to the Company, estimated fair values of
these financial instruments approximate their recorded amounts.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"). SFAS 123 will begin to affect the
Company in fiscal 1998 with the establishment of the 1998 Stock Option Plan.
The Company will adopt only the disclosure provisions of SFAS 123 for stock
issued to employees and will account for such stock-based compensation using
the intrinsic value method set forth in APB Opinion 25.
Effective January 31, 1998, the Company has adopted the provisions of
statement of financial accounting standards No. 128, Earnings per share.
Statement No. 128 replaces the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options and convertible securities. Diluted earnings per share is computed
similarly to fully diluted earnings per share. The companies calculation for
basic and fully diluted earnings per share is the same as there are no options
or convertible securities outstanding. All earnings per share amounts for all
periods presented have been restated to conform to the requirements of
Statement No. 128.
Basic and diluted earnings per share is computed based on the weighted
average number of common shares outstanding, after giving effect to the stock
split as described in Note 18.
Supplementary proforma earnings per share for the years ended July 31,
1996 and 1997 and the six months ended January 31, 1997 and 1998 of $.11, $.12,
$.12 and $.34, respectively, is based upon the weighted average number of
shares of common stock used in the calculation of earnings per share increased
by the sale of 284,404 shares assuming an initial offering price of $5.95, the
proceeds of which would be necessary to reduce borrowings of $1,692,202.
F-8
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)
1. Merger
Effective July 25, 1997, Sherwood Brands, Inc. merged into Sherwood Foods,
Inc. with Sherwood Foods, Inc. being the surviving corporation. Sherwood Foods,
Inc. subsequently changed its name to Sherwood Brands, Inc. Since both
corporations were owned 100% by the sole shareholder, the transaction is
treated like a pooling and all accounts have been combined retroactively for
all periods presented. Sherwood Brands, Inc., previously a December 31 year
end, changed its fiscal year end to July 31.
2. Foreign Currency Transactions
The Company purchases products from foreign manufacturers under terms that
provide for the payment of goods in foreign currency approximately 60 to 90
days from the invoice date. The goods are recorded at cost in equivalent United
States dollars at the exchange rate in effect on the invoice date. The
difference between the recorded cost and the amount required for payment is
reflected as a realized foreign currency transaction gain or loss. Based on
exchange rates in effect at July 31, 1996 and 1997 and January 31, 1997 and
1998, a provision for unrealized foreign currency transaction loss (gain) of
$22,077, ($84,519), $(84,850) and $(7,590), respectively, on the future payment
of open invoices is included in the financial statements as cost of goods sold.
3. Inventory
Inventory consists of the following:
<TABLE>
<CAPTION>
July 31, January 31,
------------------------------- --------------
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Raw materials ............ $ -- $ 184,921 $ 290,452
Work in progress ......... -- -- 12,350
Finished goods ........... 2,892,510 3,228,041 3,777,896
----------- ----------- -----------
$ 2,892,510 $ 3,412,962 $ 4,080,698
=========== =========== ===========
</TABLE>
4. Insurance Settlement Receivable
In 1991, the Company filed suit against its insurance company for
reimbursement of legal costs related to a vendor dispute. In 1996 the Company
recorded a receivable of $262,574 in anticipation of settlement. In February
1997, the Company was awarded a partial payment from the insurance company for
$464,026, net of approximately $100,000 in legal fees, per the terms of the
settlement agreement.
The Company was further involved in a dispute with the insurance company
relating to reimbursement of additional legal costs. During the six month
period ended January 31, 1998, the Company has received the majority of the
amount which was previously recorded from the insurance company.
5. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
July 31, January 31,
--------------------------------- ---------------
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Land ............................. $ 65,000 $ 65,000 $ 65,000
Building ......................... 635,000 635,000 635,000
Machinery and equipment .......... 1,013,340 1,826,131 2,027,197
Furniture and fixtures ........... 13,933 13,933 13,933
Vehicles ......................... 139,564 139,564 139,564
----------- ----------- -----------
Accumulated depreciation ......... (222,515) (344,072) (399,338)
----------- ----------- -----------
Total ............................ $ 1,644,322 $ 2,335,556 $ 2,481,356
=========== =========== ===========
</TABLE>
F-9
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)
Depreciation expense for the years ended July 31, 1996 and 1997 and the
six months ended January 31, 1997 and 1998 was $55,338, $121,557, $62,660 and
$55,266, respectively.
6. Line of Credit
Sherwood Brands, LLC has a $4,000,000 line of credit available for
issuance of letters of credit, of which up to $2,000,000 is available for cash
draws to finance inventory and accounts receivable. Interest is payable monthly
at the prime rate (8.5% at July 31, 1997 and January 31, 1998). During July 31,
1996 and 1997, and January 31, 1998, Sherwood Brands, LLC incurred and paid
approximately $88,000, $92,000 and $37,000 of interest expense, respectively.
The balance outstanding on the line of credit is secured by Sherwood Brands,
LLC's cash and cash equivalents, receivables and inventory, and is also
guaranteed by Sherwood Brands, LLC's sole stockholder. Outstanding letters of
credit approximated $1,397,000 and $1,251,000 at July 31, 1997 and January 31,
1998, respectively.
Average short-term borrowings and the related interest rates are as
follows:
<TABLE>
<CAPTION>
Six
months
Years ended ended
July 31, January 31,
--------------------------------- ----------------
1996 1997 1998
-------------- ---------------- ----------------
<S> <C> <C> <C>
Borrowings under revolving line of credit ........... $ 744,589 $ 1,644,589 $ 1,419,589
Weighted average interest rate ...................... 8.5% 8.5% 8.5%
Maximum month-end balance during the period ......... $ 1,390,413 $ 1,644,589 $ 1,419,589
Average balance during the period ................... $ 708,416 $ 1,091,849 $ 1,190,422
</TABLE>
7. Letters of Credit
Sherwood Brands, Inc. has available an irrevocable letter of credit of
$935,000 with a bank, to be used for payments of principal portions of Virginia
Revenue Bonds in the event of Sherwood Brands, Inc.'s default on payment. The
letter is collateralized by a first deed of trust and security interest in
Sherwood Brands, Inc.'s land, building and equipment. The letter expires in
2006. The letter of credit agreement has a debt to worth and a debt coverage
requirement as well as a limitation on dividends paid and on borrowings, as
well as a limitation on the requirement of subordinated debt. Sherwood Brands,
Inc. was in compliance with all covenants as of July 31, 1997.
Sherwood Brands, Inc. also has available another irrevocable letter of
credit of $580,000 with a bank, to be used for payment of principal portions of
Virginia Revenue Bonds in the event of Sherwood Brands, Inc.'s default on
payment. The letter is collateralized by a first deed of trust in Sherwood
Brands, Inc.'s commercial property as well as a lien on certain assets of
Sherwood Brands, Inc. The letter expires in 2002.
F-10
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)
8. Long-term Debt
Long term debt consists of the following:
<TABLE>
<CAPTION>
July 31, January 31,
----------------------------- --------------
1996 1997 1998
------------ -------------- --------------
<S> <C> <C> <C>
Mecklenberg County, Virginia Variable Rate Demand Rev-
enue Bonds issued on June 1, 1996; collateralized by an
irrevocable letter of credit (see Note 7); payable in vary-
ing annual amounts; to be redeemed in whole by June 1,
2006; interest at variable market tax exempt rates
(3.95% at July 31, 1997 and 3.625% at January 31,
1998) ..................................................... $ 935,000 $ 920,000 $ 920,000
Mecklenberg County, Virginia Revenue Bond issued on
May 15, 1997; collateralized by an irrevocable letter of
credit (See Note 7); payable in varying annual amounts;
to be redeemed in whole by May 15, 2002; interest at
variable market tax exempt rates (3.95% at July 31, 1997
and 3.625% at January 31, 1998). .......................... -- 580,000 580,000
--------- ----------- -----------
935,000 1,500,000 1,500,000
Less current maturities .................................... 15,000 145,000 145,000
--------- ----------- -----------
Long-term portion .......................................... $ 920,000 $ 1,355,000 $ 1,355,000
</TABLE>
Scheduled maturities of long-term debt are as follows:
July 31, 1997
- ------------------------- --------------
1998 .................. $ 145,000
1999 .................. 175,000
2000 .................. 205,000
2001 .................. 210,000
2002 .................. 215,000
Thereafter ............ 550,000
-----------
$ 1,500,000
===========
F-11
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)
9. Subordinated Debt
Subordinated debt consists of the following:
<TABLE>
<CAPTION>
July 31, January 31,
--------------------------- ------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Mecklenberg County, Virginia Industrial Development
Authority note; collaterallized by second deed of trust on
land, building and equipment; payable in monthly
installments of $4,644, including interest of 7%, with a
final payment of $239,193 due in June 2001. .............. $ 397,689 $ 368,882 $ 352,992
Lake Country Development Corporation Note; collateral-
ized by second deed of trust on land, building and equip-
ment; payable in monthly installments of $5,480, includ-
ing interest of 5.25% beginning on April 1, 1997 and
payable in full on June 1, 2001. ......................... 250,000 232,360 201,492
--------- --------- ---------
647,689 601,242 554,484
Less current maturities ................................... 46,447 85,757 80,877
--------- --------- ---------
Long-term portion ......................................... $ 601,242 $ 515,485 $ 473,607
========= ========= =========
</TABLE>
Scheduled maturities of subordinated debt are as follows:
July 31, 1997
- ------------------- -----------
1998 ............ $ 85,757
1999 ............ 90,941
2000 ............ 96,444
2001 ............ 328,100
$ 601,242
10. Income Taxes
The provision for income taxes in the statement of operations for the year
ended July 31, 1997 and 1996 is as follows:
July 31,
-----------------------------
1996 1997
-------------- ------------
Current tax provision
Federal ............................... $ (83,000) $ 162,600
State ................................. 8,000 11,600
---------- ----------
Total current ......................... (75,000) 174,200
---------- ----------
Deferred tax expense (credit) ......... 146,700 (151,100)
---------- ----------
Total taxes on income ................. $ 71,700 $ 23,100
========== ==========
F-12
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)
The following summary reconciles taxes at the federal statutory rate with
actual taxes:
<TABLE>
<CAPTION>
July 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Income taxes at the statutory rate ............................... $ 116,000 $ 114,000
Increase (decrease) in taxes resulting from:
Effect of untaxed income from a foreign subsidiary ............... (64,000) (80,500)
State and local taxes, net of federal income tax benefit ......... 3,000 4,000
Other ............................................................ 16,700 (14,400)
--------- ---------
Total taxes on income ............................................ $ 71,700 $ 23,100
========= =========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The principal items
giving rise to the Company's net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
July 31,
-------------------------------
1996 1997
------------- ---------------
<S> <C> <C>
Deferred tax assets
Net operating loss ......................................... $ 71,000 $ 363,400
Officer salary payable ..................................... 5,000 14,600
Allowance for doubtful accounts ............................ 7,000 8,300
Inventory obsolescence reserve ............................. -- 6,400
---------- -----------
Total deferred tax assets ................................ 83,000 392,700
---------- -----------
Deferred tax liabilities
Anticipated legal settlement ............................... (89,000) (89,000)
Accumulated depreciation ................................... (1,000) (108,600)
Accounts receivable service costs .......................... -- (110,300)
Unrealized gain/loss of foreign exchange contracts ......... 7,000 (22,700)
Supplier credit receivable ................................. (31,000) --
Argentina duty receivable .................................. (58,000) --
---------- -----------
Total deferred tax liabilities ........................... (172,000) (330,600)
---------- -----------
Net deferred tax asset (liability) .......................... $ (89,000) $ 62,100
========== ===========
Net current deferred tax asset (liability) .................. $ (88,000) $ 170,700
Net long-term deferred tax liability ........................ $ (1,000) $ (108,600)
========== ===========
</TABLE>
At July 31, 1997, the Company has approximately $950,000 of net operating
loss carryforwards that expire in years through 2012.
The Company's estimated effective tax rate for the six months ended
January 31, 1998 was approximately 32%. This rate is lower than the Federal and
State statutory rates due to the untaxed income of the Company's foreign
subsidiary (Overseas).
11. Related Party Transactions
The Company's stockholder is a guarantor of the Company's line of credit
note payable and long-term debt.
The Company has a note payable to a related party in the amount of
$1,064,288, $903,180 and $842,202 at July 31, 1996 and 1997, and January 31,
1998, respectively. The note accrues interest at 9% per year and is due upon
demand, but not prior to March 1, 1999.
F-13
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)
12. Commitments
The Company occupies office space under a noncancelable operating lease
expiring in November 1998. The lease is subject to annual increases based upon
both certain allocated operating costs and increases in the Consumer Price
Index. Future minimum rental commitments under operating leases as of July 31,
1997 are as follows:
1998 ........... $ 42,549
1999 ........... 14,183
--------
$ 56,732
========
13. Employee Benefit Plans
Effective January 1, 1987, the Company established a profit-sharing plan
and a money purchase pension plan covering all full-time employees meeting the
minimum age and service requirements. Under the terms of the Money Purchase
Pension Plan, the Company contributed 5.7% of total wages in July 31, 1996 and
1997. Contributions to the Profit-Sharing Plan are at the discretion of the
Company and were 3% and 5% in July 31, 1996 and 1997, respectively. Total
expenses for the Money Purchase Pension Plan and the Profit-Sharing Plan were
$52,355 and $56,296, respectively, for the years ended July 31, 1996 and 1997
and $22,500 and $-0- for the six months ended January 31, 1997 and 1998,
respectively.
Effective August 1, 1997, the Company amended the Money Purchase Pension
Plan to a 401(k) and Profit Sharing Plan ("401(k) Plan"). The Money Purchase
Pension Plan was terminated and the assets were merged with the 401(k) Plan.
All participants in the Money Purchase Pension Plan were fully vested in the
401(k) Plan as of August 1, 1997.
14. Supplemental Cash Flows Disclosure
Cash paid for interest amounted to $230,310, $224,055, $122,973, and
$140,491 for the years ended July 31, 1996 and 1997 and the six months ended
January 31, 1997 and 1998, respectively.
Cash paid for income taxes amounted to $13,082, $19,622, $-0- and $167,007
for the years ended July 31, 1996 and 1997 and the six months ended January 31,
1997 and 1998, respectively.
15. Concentration of Credit Risk and Export Sales
The Company purchases some of its products from three main vendors in
Europe and South America. The Company has a variety of customers, including
mass merchandisers, drug stores and grocery stores throughout the United States
and abroad. For the years ended July 31, 1996 and 1997, and the six monts ended
January 31, 1998, one customer comprised 5.0%, 6.5%, and 8.0% of the Company's
total sales, respectively.
Export sales for the years ended July 31, 1996 and 1997 and the six months
ended January 31, 1997 and 1998 were $1,536,578, $1,874,875, $ 1,240,044 and
$1,155,463 respectively. The majority of export sales are made to Canada.
F-14
<PAGE>
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of January 31, 1998 and for the six
months ended January 31, 1997 and 1998 is unaudited)
16. Pre-Production Costs
During the years ended July 31, 1996 and 1997, and the six months ended
January 31, 1997 and 1998, Sherwood Foods, Inc. incurred certain costs relating
to the development of its production facilities for its Demitasse(R) and candy
product lines. The following pre-production costs for the years ended July 31,
1997 and 1996 and the six months ended January 31, 1997 and 1998 were charged
to operations when incurred and are included in operating expenses. These costs
consist of the following:
<TABLE>
<CAPTION>
Six months
Years ended ended
July 31, January 31,
--------------------------- --------------------------
1996 1997 1997 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Parts and supplies ................. $ 1,517 $ 279,998 $ 264,130 $ 28,798
Assembly salaries .................. -- 166,386 72,488 20,474
Sub-contract labor ................. 54,748 140,119 58,028 --
Other .............................. 155,824 183,082 126,239 4,853
--------- --------- --------- --------
Total pre-production costs ......... $ 212,089 $ 769,585 $ 520,885 $ 54,125
========= ========= ========= ========
</TABLE>
17. Advertising Costs
Advertising costs, included in selling, general and administrative
expenses, are expensed as incurred and were $479,397, $450,446, $175,295 and
$175,367 for the years ended July 31, 1996 and 1997 and the six months ended
January 31, 1997 and 1998, respectively.
18. Subsequent Events
In October 1997, the shareholder authorized the filing of a registration
statement for an initial public offering of the Company's common stock as well
as changing the Company's name from Sherwood Foods, Inc. to Sherwood Brands,
Inc.
Effective December 30, 1997, the Company amended its articles of
incorporation to provide for a recapitalization of its common stock. As a
result of the recapitalization, two new classes of common stock were authorized
as follows: 30 million shares of Class A Common Stock, par value $.01, and 5
million shares of Class B Common Stock, par value $.01. The shares of Class A
Common Stock and Class B Common Stock are identical in all respects, except
that each share of Class B Common Stock entitles the holder to seven votes on
each matter submitted to a vote of the shareholders. In addition, the Company
is authorized to issue 5 million shares of Preferred stock.
As a result of the recapitalization, all 251 issued and outstanding shares
of common stock were recapitalized and converted into 1,150,000 validly issued,
fully paid and nonassessable shares of Class A Common Stock reflecting a
conversion ratio of 4581.67331:1 and 1,000,000 validly issued, fully paid and
nonassessable shares of Class B Common Stock, reflecting a conversion ratio of
3984.063745:1.
The change in the Company's common stock for the stock split and the
calculation of basic and diluted earnings per share have been retroactively
adjusted to give effect to the increases in authorized, issued and outstanding
shares of common stock for all periods presented.
In November 1997, the Company adopted the 1998 Stock Option Plan (the
"Plan"). Under the Plan, the Company may grant qualified and nonqualified stock
options to selected employees, consultants and directors. The Company has
reserved 350,000 shares of common stock for issuance under the Plan. As of
January 31, 1998, no options have been issued.
F-15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or the Underwriter. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any security other than the securities offered by this Prospectus, or
an offer to sell or a solicitation of an offer to buy any securities by anyone
in any jurisdiction in which such offer or solicitation is not authorized or is
unlawful. The delivery of this Prospectus shall not, under any circumstances,
create any implication that the information contained herein is correct as of
any time subsequent to the date hereof.
--------------------------------------------
TABLE OF CONTENTS
Page
-----------
Prospectus Summary ....................... 3
Risk Factors ............................. 7
Use of Proceeds .......................... 14
Dilution ................................. 15
Dividend Policy .......................... 16
Capitalization ........................... 16
Selected Financial Data .................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................ 18
Business ................................. 24
Management ............................... 30
Summary Compensation Table ............... 31
Principal Shareholders ................... 34
Certain Transactions ..................... 35
Description of Securities ................ 35
Shares Eligible for Future Sale .......... 37
Underwriting ............................. 39
Legal Matters ............................ 41
Experts .................................. 41
Additional Information ................... 41
Index to Financial Statements ............ F-1
Until , 1998, (25 days after the date of this Prospectus), all
dealers effecting transactions in the shares of Class A Common Stock or
Warrants offered hereby, whether or not participating in this distribution, may
be required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Sherwood Brands, Inc.
[LOGO]
1,550,000 SHARES OF CLASS A
COMMON STOCK
AND
REDEEMABLE WARRANTS TO
PURCHASE
775,000 SHARES OF CLASS A
COMMON STOCK
-----------------------------------------------------
PROSPECTUS
-----------------------------------------------------
[GRAPHIC OMITTED]
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 55-2-02 of the North Carolina Business Corporation Act (the
"NCBCA") enables a North Carolina corporation in its articles of incorporation
to eliminate or limit, with certain exceptions, the personal liability of a
director for monetary damages for breach of duty as a director. No such
provision is effective to eliminate or limit a director's liability for (i)
acts or omissions that the director at the time of the breach knew or believed
to be clearly in conflict with the best interests of the corporation, (ii)
improper distributions described in Section 55-8-33 of the NCBCA, (iii) any
transaction from which the director derived an improper personal benefit, or
(iv) acts or omissions occurring prior to the date the exculpatory provision
became effective. The Registrant's Restated and Amended Articles of
Incorporation limit the personal liability of its directors to the fullest
extent permitted by the NCBCA. This provision does not prevent the Registrant
or its shareholders from seeking equitable remedies, such as injunctive relief
or rescission. If equitable remedies are found not to be available to
shareholders in any particular case, however, shareholders may not have any
effective remedy against actions taken by directors that constitute negligence
or gross negligence.
Sections 55-8-50 through 55-8-58 of the NCBCA contain provisions entitling
the Registrant's directors and officers to indemnification from judgments,
settlements, penalties, fines, and reasonable expenses (including attorney's
fees) as the result of an action or proceeding in which they may be involved by
reason of having been a director or officer of the Registrant. The Restated and
Amended Articles of Incorporation also include provisions to the effect that
(subject to certain exceptions) the Registrant shall, to the maximum extent
permitted from time to time under the NCBCA, indemnify, and upon request shall
advance expenses to, any director or officer to the extent that such
indemnification and advancement of expenses is permitted under such law, as may
from time to time be in effect. In addition, the Registrant intends to enter
into indemnification agreements with its directors and officers prior to the
consummation of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any charter provision, by-law, contract, arrangement,
statute or otherwise, the Registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. See Item 28.
Additionally, Section 55-8-57 of the NCBCA authorizes a corporation to
purchase and maintain insurance on behalf of an individual who is or was a
director, officer, employee or agent of the corporation against certain
liabilities incurred by such persons, whether or not the corporation is
otherwise authorized by the NCBCA to indemnify such party. The Registrant's
directors and officers and the Underwriter, are currently covered under
directors' and officers' insurance policies maintained by the Registrant that
will indemnify such persons against certain liabilities arising from acts or
omissions in the discharge of their duties. Such insurance policies provide
$2.5 million coverage for liabilities, including liabilities for alleged
violation of securities laws.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions and the Underwriter's nonaccountable
expense allowance) are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee ............... $ 5,619.37
NASD filing fee ................................................... $ 5,000.00
American Stock Exchange listing fee ............................... $ 27,500.00
Underwriter's consulting fee ...................................... $ 96,000.00
Printing and engraving expenses ................................... $ 35,000.00
Legal fees and expenses ........................................... $180,000.00
Accounting fees and expenses ...................................... $ 68,000.00
Blue sky fees and expenses (including legal fees) ................. $ 13,000.00
Transfer agent, warrant agent and registrar fees and expenses ..... $ 2,500.00
Miscellaneous ..................................................... $ 380.63
-----------
Total ............................................................. $433,000.00
===========
</TABLE>
All amounts except the Securities and Exchange Commission registration
fee, the NASD filing fee and the American Stock Exchange listing fee are
estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
None.
II-2
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------- ---------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation, as amended, of the Registrant.
3.2 Bylaws, as amended, of the Registrant.
4.1* Form of Registrant's Class A Common Stock Certificate
4.2* Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate.
4.3* Form of Public Warrant Agreement among the Registrant, Paragon Capital Corporation, as Underwriter
and Continental Stock Transfer & Trust Company, as Warrant Agent.
4.4* Form of Registrant's Public Warrant Certificate
5.1* Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
10.1 Amended and Restated Reimbursement Agreement between Central Fidelity National Bank and the
Registrant, dated as of May 1, 1997.
10.2 Loan Agreement between Industrial Development Authority of Mecklenburg County, Virginia and the
Registrant, Dated as of May 1, 1997.
10.3 Irrevocable Letter of Credit dated May 15, 1997 issued on behalf of the Registrant to the Trustee for
the holders of Industrial Revenue Bonds (Series 1997) issued by the Industrial Development Authority
of Mecklenburg County, Virginia.
10.4 Amended and Restated Credit Line Deed of Trust and Security Agreement, among the Registrant and
Trustees, for the benefit of Central Fidelity National Bank dated May 1, 1997.
10.5 Pledge and Security Agreement between the Registrant and Central Fidelity National Bank, dated as of
May 1, 1997.
10.6 Guaranty between Uziel Frydman, the Registrant and Central Fidelity National Bank, dated as of May
1, 1997.
10.7 Loan Agreement between Industrial Development Authority of Mecklenburg County, Virginia and the
Registrant, Dated as of June 1, 1996.
10.8 Irrevocable Letter of Credit dated June 20, 1996 issued on behalf of the Registrant to the Trustee for
the holders of Industrial Revenue Bonds (Series 1996) issued by the Industrial Development Authority
of Mecklenburg County, Virginia.
10.9 Pledge and Security Agreement between the Registrant and Central Fidelity National Bank, dated as of
June 1, 1996.
10.10 Company Loan Agreement between the Industrial Development Authority of Mecklenburg County,
Virginia Loan Agreement through the Virginia Small Business Financing Administration and the
Registrant, dated as of June 20, 1996.
10.11 Revolving Loan Fund Agreement between the Registrant and Lake Country Development Corporation,
$250,000 Promissory Note to Lake Country Development Corporation, Guaranty of Note by the
Registrant and Uziel Frydman, and Deed of Trust between the Registrant and Trustee for Lake Country
Development Corporation, all dated May 15, 1996.
10.12 Loan Agreement, Promissory Note, and Security Agreement between the Registrant and First Union
National Bank, all dated November 29, 1996, and Guaranty between Uziel Frydman and First Union,
dated November 29, 1996.
10.13 Promissory Note issued to Ilana Frydman by the Registrant, dated August 28, 1991.
10.14 Lease, as amended, for the Registrant's Rockville offices, executed November 30, 1992.
10.15* 1998 Stock Option Plan.
10.16* Form of Employment Agreement between Registrant and Uziel Frydman, dated May 1, 1998.
10.17* Form of Employment Agreement between Registrant and Anat Schwartz, dated May 1, 1998.
10.18* Form of Employment Agreement between Registrant and Amir Frydman, dated May 1, 1998.
21.1 Subsidiaries of the Registrant.
23.1* Consent of BDO Seidman, LLP, Independent Certified Public Accountants.
23.2* Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. (included in its opinion filed as
Exhibit 5.1).
24.1 A power of attorney relating to the signing of amendments hereto is incorporated in the signature pages
of this Registration Statement.
27.1* Financial Data Schedule.
99.1** Consent of Jean E. Clary to be named in Registration Statement.
99.2** Consent of Zigmund Sadauskas to be named in Registration Statement.
</TABLE>
- ------------
* Filed herewith.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act.
(ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information set forth in
the Registration Statement;
(iii) include any additional or changed material information on the plan
of distribution;
(2) for determining liability under the Securities Act, treat each such
post-effective amendment as a new registration of the securities offered, and
the offering of such securities at that time to be initial bona fide offering;
and
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the standby under writing agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for the
purpose of determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Securities and Exchange Commission declares it effective; and (3) that for
the purpose of determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of Prospectus as a new
Registration Statement for the securities offered in the Registration Statement
therein, and treat the offering of the securities at that time as the initial
bona fide offering of those securities.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
city of Rockville, State of Maryland on May 4, 1998.
SHERWOOD BRANDS, INC.
By: /s/ Uziel Frydman
--------------------------
President and
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signatures Title(s) Date
- -------------------------- ----------------------------------------- ------------
<S> <C> <C>
/s/ Uziel Frydman President, Chief Executive Officer and May 4, 1998
-----------------------
Director (principal executive officer)
Uziel Frydman
/s/ Anat Schwartz Vice President -- Finance and Secretary May 4, 1998
-----------------------
(principal financial and accounting
Anat Schwartz
officer)
/s/ Amir Frydman Executive Vice President, Treasurer and May 4, 1998
-----------------------
Director
Amir Frydman
/s/ * Director May 4, 1998
-----------------------
Douglas A. Cummins
</TABLE>
*By: /s/ Anat Schwartz
- -----------------------------
Anat Schwartz
as Attorney-in-Fact
II-5
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Sherwood Brands, Inc. and Subsidiaries
The audits referred to in our report to Sherwood Brands, Inc. and
Subsidiaries, dated October 7, 1997, except for Note 18, the date of which is
December 12, 1997, which is contained in the Prospectus constituting part of
this Registration Statement, included the audit of the financial statement
schedule listed in the accompanying index for each of the two years in the
period ended July 31, 1997. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based upon our audits.
In our opinion, such schedule presents fairly, in all material respects,
the information set forth therein.
BDO Seidman, LLP
Washington, D.C.
October 7, 1997, except
for Note 18, the date
of which is December 12, 1997
<PAGE>
Schedule II
SHERWOOD BRANDS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged
Balance to Costs Balance at
Beginning and End
Description of Period Expenses Deduction of Period
- ---------------------------------------------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended July 31, 1996
Allowance for doubtful accounts ........... $19,000 $33,900 $ (31,000) $21,900
Reserve for slow moving inventory ......... $ -- $ -- $ -- $ --
Year ended July 31, 1997
Allowance for doubtful accounts ........... $21,900 $72,600 $ (71,100) $23,400
Reserve for slow moving inventory ......... $ -- $18,200 $ -- $18,200
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- ----------------------------------------------------------------------------------------------------
<S> <C>
4.1 Form of Registrant's Class A Common Stock Certificate
4.2 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate.
4.3 Form of Public Warrant Agreement among the Registrant, Paragon Capital Corporation, as Under-
writer and Continental Stock Transfer & Trust Company, as Warrant Agent.
4.4 Form of Registrant's Public Warrant Certificate
5.1 Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.
10.15 1998 Stock Option Plan.
10.16 Form of Employment Agreement between Registrant and Uziel Frydman, dated May 1, 1998.
10.17 Form of Employment Agreement between Registrant and Anat Schwartz, dated May 1, 1998.
10.18 Form of Employment Agreement between Registrant and Amir Frydman, dated May 1, 1998.
23.1 Consent of BDO Seidman, LLP, Independent Certified Public Accountants.
23.2 Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A. (included in its opinion filed as
Exhibit 5.1).
27.1 Financial Data Schedule.
</TABLE>
<PAGE>
[LOGO]
SHERWOOD BRANDS, INC.
SB
INCORPORATED UNDER THE LAWS
OF THE STATE OF NORTH CAROLINA
CUSIP
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE CLASS A
COMMON STOCK, $.01 PAR VALUE, OF
----------------------------------------
----- SHERWOOD BRANDS, INC. --------
----------------------------------------
transferable on the books of the Corporation by the owner hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate and the shares represented hereby are issued and
shall be held subject to all of the provisions of the Certificate of
Incorporation of the Corporation and the Bylaws of the Corporation and all
amendments thereto, to all of which the owner by the acceptance hereof
assents. This certificate is not valid unless countersigned and regist ered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers. Dated:
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(JERSEY CITY, N.J.)
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED OFFICER
(Facsimile Signature) (Facsimile Signature)
VICE PRESIDENT AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
SHERWOOD BRANDS, INC.
CORPORATE
SEAL
NORTH CAROLINA
1982
<PAGE>
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT ...................Custodian...................
(Cust) (Minor)
under Uniform Gifts to Minors
Act.........................
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
-------------------------
| |
| |
-------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within named Company with
full power of substitution in the premises.
Dated
-------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
The signature(s) should be guaranteed by an
eligible guarantor institution (Banks,
Stockbrokers, Savings and Loan Associations
and credit Unions with membership in an
approved signature guarantee Medallion
Program), pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
WARRANT AGREEMENT dated as of ________, 1998 between
Sherwood Brands, Inc., a North Carolina corporation with executive offices
located at 6110 Executive Boulevard, Suite 1080, Rockville, Maryland 20852
(the "Company"), and Paragon Capital Corporation, with executive offices
located at 7 Hanover Square, New York, New York 10004 (hereinafter referred to
as the "Underwriter").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Underwriter
warrants (the "Warrants") to purchase up to 155,000 shares (the "Shares") of
Class A common stock, par value $.01 per share (the "Class A Common Stock"),
of the Company and up to 77,500 Class A Common Stock purchase warrants (the
"Underlying Warrants"); and
WHEREAS, the Underwriter has agreed, pursuant to the
underwriting agreement (the "Underwriting Agreement") dated ____________, 1998
between the Underwriter and the Company, to act as the underwriter in
connection with the Company's proposed public offering (the "Public Offering")
of 1,550,000 shares of Class A Common Stock (the "Public Shares") at an
initial public offering price of $5.95 per Public Share and redeemable
warrants to purchase 775,000 shares of Class A Common Stock (the "Public
Warrants") at an initial public offering price of $.10 per Public Warrant; and
WHEREAS, the Warrants issued pursuant to this Agreement are
being issued by the Company to the Underwriter or to its designees who are
directors, officers and partners of the Underwriter or to members of the
selling group participating in the distribution of the Public Shares and
Public Warrants to the public
<PAGE>
in the Public Offering and/or their respective directors, officers or partners
(collectively, the "Designees"), in consideration for, and as part of the
Underwriter's compensation in connection with, the Underwriter acting as the
Underwriter pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the
payment by the Underwriter to the Company of ONE HUNDRED DOLLARS ($100.00),
the agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant.
The Underwriter, and/or the Designees are hereby
granted the right to purchase, at any time from __________, 1998 until 5:00
P.M., New York time, on _______, 2003 (the "Warrant Exercise Term"), up to
155,000 fully-paid and non-assessable Shares at an initial exercise price
(subject to adjustment as provided in Articles 6 and 8 hereof) of $9.22 per
Share and up to 77,500 Underlying Warrants at an initial exercise price
(subject to adjustment as provided in Articles 6 and 8 hereof) of $.155 per
Underlying Warrant. The Underlying Warrants are each exercisable to purchase
one fully-paid and non-assessable share of Class A Common Stock at a price of
$7.50 per share (the "Underlying Warrant Shares"). The Underlying Warrants are
exercisable until 5:00 P.M., New York City time on ____________, 2003. The
Holder may purchase, upon exercise of this Warrant, either the Shares of the
Underlying Warrants or both. Except as provided in this Section 1 hereof with
respect to the exercise price, the Shares and the Underlying
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Warrants are in all respects identical to the Public Shares and Public
Warrants being sold to the public pursuant to the terms and provisions of the
Underwriting Agreement.
2. Warrant Certificates.
The warrant certificates delivered and to be delivered
pursuant to this Agreement (the "Warrant Certificates") shall be in the forms
set forth in Exhibits A and B attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant.
3.1. Cash Exercise. The Warrants initially are
exercisable at a price of $9.22 per Share and $.155 per Underlying Warrant,
payable in cash or by check to the order of the Company, or any combination
thereof, subject to adjustment as provided in Article 8 hereof. Upon surrender
of the Warrant Certificate with the annexed Form of Election to Purchase duly
executed, together with payment of the Exercise Price (as hereinafter defined)
for the Shares and/or Underlying Warrants purchased, at the Company's
principal offices located at 6110 Executive Boulevard, Suite 1080, Rockville,
Maryland 20852, the registered holder of a Warrant Certificate ("Holder" or
"Holders") shall be entitled to receive a certificate or certificates for the
Shares and/or Underlying Warrants so purchased. The purchase rights
represented by each Warrant Certificate are exercisable at the option of the
Holder thereof, in whole or in part (but not as to fractional Shares or
Underlying Warrants). In the case of the purchase of less than all
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the Shares and/or Underlying Warrants purchasable under any Warrant
Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Shares and/or Underlying Warrants
purchasable thereunder.
3.2. Cashless Exercise. At any time during the Warrant
Exercise Term, the Holder may, at the Holder's option, exchange, in whole or
in part, the Warrants represented by such Holder's Warrant Certificate (a
"Warrant Exchange"), into the number of Shares and Underlying Warrants
determined in accordance with this Section 3.2, by surrendering such Warrant
Certificate at the principal office of the Company or at the office of its
transfer agent, accompanied by a notice stating such Holder's intent to effect
such exchange, the number of Shares and Underlying Warrants to be so exchanged
and the date on which the Holder requests that such Warrant Exchange occur
(the "Notice of Exchange"). The Warrant Exchange shall take place on the date
specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for
the Shares and Underlying Warrants issuable upon such Warrant Exchange and, if
applicable, a new Warrant Certificate of like tenor representing the Shares
and Underlying Warrants which were subject to the surrendered Warrant
Certificate and not included in the Warrant Exchange, shall be issued as of
the Exchange Date and delivered to the Holder within three (3) days following
the Exchange Date. In connection with any Warrant Exchange, the Holder shall
be entitled to subscribe for and
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acquire (i) the number of Shares (rounded to the next highest integer) which
would, but for the Warrant Exchange, then be issuable pursuant to the
provision of Section 3.1 above upon the exercise of the Warrants specified by
the Holder in its Notice of Exchange (the "Total Number") less (ii) the number
of Shares equal to the quotient obtained by dividing (a) the product of the
Total Number and the existing Exercise Price (as hereinafter defined) by (b)
the Market Price (as hereinafter defined) of a Public Share on the day
preceding the Warrant Exchange, and (iii) the number of Underlying Warrants
(rounded to the next highest integer) equal to (A) the number of Underlying
Warrants specified by the Holder in its Notice of Exchange (the "Total
Underlying Warrant Number") less (B) the number of Underlying Warrants equal
to the quotient obtained by dividing (i) the product of the Total Underlying
Warrant Number and the existing Exercise Price per Underlying Warrant by (ii)
the current Market Price of a Public Warrant. "Market Price" at any date shall
be deemed to be the last reported sale price, or, in case no such reported
sales takes place on such day, the average of the last reported sale prices
for the last three (3) trading days, in either case as officially reported by
the principal securities exchange on which the Class A Common Stock and/or
Public Warrants are listed or admitted to trading or as reported in the NASDAQ
National market System, or, if the Class A Common Stock and/or Public Warrants
are not listed or admitted to trading on any national securities exchange or
quoted on the NASDAQ National Market System, the closing bid price as
furnished by (i) the National Association of Securities Dealers, Inc. through
NASDAQ
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or (ii) a similar organization if NASDAQ is no longer reporting
such information.
4. Issuance of Certificates.
Upon the exercise of the Warrants, the issuance of
certificates for the Shares purchased and certificates for the Underlying
Warrants purchased, and upon the exercise of the Underlying Warrants, the
issuance of certificates for the Underlying Warrant Shares purchased shall be
made forthwith (and in any event within three (3) business days thereafter)
without charge to the Holder thereof including, without limitation, any tax
which may be payable in respect of the issuance thereof, and such certificates
shall (subject to the provisions of Article 5 hereof) be issued in the name
of, or in such names as may be directed by, the Holder thereof; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of
any such certificates in a name other than that of the Holder and the Company
shall not be required to issue or deliver such certificates unless or until
the person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing
the Shares and Underlying Warrants shall be executed on behalf of the Company
by the manual or facsimile signature of the present or any future Chairman or
Vice Chairman of the Board of Directors, Chief Executive Officer or President
or Vice President
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of the Company under its corporate seal reproduced thereon, attested to by the
manual or facsimile signature of the present or any future Secretary or
Assistant Secretary of the Company. Warrant Certificates shall be dated the
date of execution by the Company upon initial issuance, division, exchange,
substitution or transfer.
Upon exercise, in part or in whole, of the Warrants,
certificates representing the Shares and Underlying Warrants purchased, and
upon exercise, in whole or in part, of the Underlying Warrants, certificates
representing the Underlying Warrant Shares purchased (collectively, the
"Warrant Certificates"), shall bear a legend substantially similar to the
following:
"The securities represented by this certificate have not been
registered for purposes of public distribution under the Securities
Act of 1933, as amended (the "Act"), and may not be offered or sold
except (i) pursuant to an effective registration statement under the
Act, (ii) to the extent applicable, pursuant to Rule 144 under the
Act (or any similar rule under such Act relating to the disposition
of securities), or (iii) upon the delivery by the holder to the
Company of an opinion of counsel, reasonably satisfactory to counsel
to the Company, stating that an exemption from registration under
such Act is available."
5. Restriction on Transfer of Warrants.
The Holder of a Warrant Certificate, by the Holder's
acceptance thereof, covenants and agrees that the Warrants are being acquired
as an investment and not with a view to the distribution thereof, and that the
Warrants may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for a period of one (1) year from the date
hereof, except to the Designees.
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<PAGE>
6. Price.
6.1. Initial and Adjusted Exercise Price. The initial
exercise price of each Warrant shall be $9.22 per Share and $.155 per
Underlying Warrant. The adjusted exercise prices per Share and per Underlying
Warrant shall be the price which shall result from time to time from any and
all adjustments of the initial exercise price per Share and per Underlying
Warrant in accordance with the provisions of Article 8 hereof.
6.2. Exercise Price. The term "Exercise Price" herein
shall mean the initial exercise price or the adjusted exercise price,
depending upon the context.
7. Registration Rights.
7.1. Registration Under the Securities Act of 1933. None
of the Warrants, Shares or Underlying Warrants have been registered for
purposes of public distribution under the Securities Act of 1933, as amended
(the "Act"). 7.2. Registrable Securities. As used herein the term "Registrable
Security" means each of the Warrants, the Shares, the Underlying Warrants, the
Underlying Warrant Shares and any shares of Class A Common Stock issuable upon
any stock split or stock dividend in respect of such Shares or Underlying
Warrant Shares; provided, however, that with respect to any particular
Registrable Security, such security shall cease to be a Registrable Security
when, as of the date of determination, (i) it has been effectively registered
under the Act and disposed of pursuant thereto, (ii) registration under the
Act is no longer required for the subsequent public distribution of such
security or (iii) it has
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<PAGE>
ceased to be outstanding. The term "Registrable Securities" means any and/or
all of the securities falling within the foregoing definition of a
"Registrable Security." In the event of any merger, reorganization,
consolidation, recapitalization or other change in corporate structure
affecting the Class A Common Stock, such adjustment shall be made in the
definition of "Registrable Security" as is appropriate in order to prevent any
dilution or enlargement of the rights granted pursuant to this Article 7.
7.3. Piggyback Registration. If, at any time during the
seven years following the effective date of the Public Offering, the Company
proposes to prepare and file one or more post-effective amendments to the
registration statement filed in connection with the Public Offering or any new
registration statement or post-effective amendments thereto covering equity or
debt securities of the Company, or any such securities of the Company held by
its shareholders (in any such case, other than in connection with a merger,
acquisition or pursuant to Form S-8 or successor form), (for purposes of this
Article 7, collectively, the "Registration Statement"), it will give written
notice of its intention to do so by registered mail ("Notice"), at least
thirty (30) business days prior to the filing of each such Registration
Statement, to all holders of the Registrable Securities. Upon the written
request of such a holder (a "Requesting Holder"), made within twenty (20)
business days after receipt of the Notice, that the Company include any of the
Requesting Holder's Registrable Securities in the proposed Registration
Statement, the Company shall, as to each such Requesting Holder, use its best
efforts to
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<PAGE>
effect the registration under the Act of the Registrable Securities which it
has been so requested to register ("Piggyback Registration"), at the Company's
sole cost and expense and at no cost or expense to the Requesting Holders.
7.4. Demand Registration.
(a) At any time during the Warrant Exercise Term, any
"Majority Holder" (as such term is defined in Section 7.4(d) below) of the
Registrable Securities shall have the right (which right is in addition to the
piggyback registration rights provided for under Section 7.3 hereof),
exercisable by written notice to the Company (the "Demand Registration
Request"), to have the Company prepare and file with the Securities and
Exchange Commission (the "Commission"), on one occasion, at the sole expense
of the Company (except as provided in Section 7.5(b) hereof), a Registration
Statement and such other documents, including a prospectus, as may be
necessary (in the opinion of both counsel for the Company and counsel for such
Majority Holder), in order to comply with the provisions of the Act, so as to
permit a public offering and sale of the Registrable Securities by the holders
thereof. The Company shall use its best efforts to cause the Registration
Statement to become effective under the Act, so as to permit a public offering
and sale of the Registrable Securities by the holders thereof. Once effective,
the Company will use its best efforts to maintain the effectiveness of the
Registration Statement until the earlier of (i) the date that all of the
Registrable Securities have been sold or (ii) the date that the holders of the
Registrable Securities receive an opinion of counsel to the Company
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<PAGE>
that all of the Registrable Securities may be freely traded (without
limitation or restriction as to quantity or timing and without registration
under the Act) under Rule 144(k) promulgated under the Act or otherwise.
(b) The Company covenants and agrees to give written
notice of any Demand Registration Request to all holders of the Registrable
Securities within ten (10) business days from the date of the Company's
receipt of any such Demand Registration Request. After receiving notice from
the Company as provided in this Section 7.4(b), holders of Registrable
Securities may request the Company to include their Registrable Securities in
the Registration Statement to be filed pursuant to Section 7.4(a) hereof by
notifying the Company of their decision to have such securities included
within ten (10) days of their receipt of the Company's notice.
(c) The term "Majority Holder" as used in Section 7.4
hereof shall mean any holder or any combination of holders of Registrable
Securities, if included in such holders' Registrable Securities are that
aggregate number of shares of Class A Common Stock (including Shares already
issued and Shares issuable pursuant to the exercise of outstanding Warrants,
Underlying Warrant Shares already issued and Underlying Warrant Shares
issuable pursuant to the exercise of outstanding Underlying Warrants) as would
constitute a majority of the aggregate number of shares of Class A Common
Stock (including Shares already issued, Shares issuable pursuant to the
exercise of outstanding Warrants, Underlying Warrant Shares already issued and
Underlying Warrant
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<PAGE>
Shares issuable pursuant to the exercise of outstanding Underlying Warrants)
included in all the Registrable Securities.
7.5. Covenants of the Company With Respect to
Registration. The Company covenants and agrees as follows:
(a) In connection with any registration under Section 7.4
hereof, the Company shall file the Registration Statement as expeditiously as
possible, but in any event no later than twenty (20) days following receipt of
any demand therefor, shall use its best efforts to have any such Registration
Statement declared effective at the earliest possible time, and shall furnish
each holder of Registrable Securities such number of prospectuses as shall
reasonably be requested.
(b) The Company shall pay all costs, fees and expenses
(other than underwriting fees, discounts and nonaccountable expense allowance
applicable to the Registrable Securities and the fees and expenses of counsel
retained by the holders of Registrable Securities) in connection with all
Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof
including, without limitation, the Company's legal and accounting fees,
printing expenses, and blue sky fees and expenses.
(c) The Company will take all necessary action which may
be required in qualifying or registering the Registrable Securities included
in the Registration Statement for offering and sale under the securities or
blue sky laws of such states as are reasonably requested by the holders of
such securities.
(d) The Company shall indemnify any holder of the
Registrable Securities to be sold pursuant to any Registration
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Statement and any underwriter or person deemed to be an underwriter under the
Act and each person, if any, who controls such holder or underwriter or person
deemed to be an underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act,
the Exchange Act or otherwise, arising from such registration statement to the
same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify the Underwriter as set forth in Section 7 of
the Underwriting Agreement and to provide for just and equitable contribution
as set forth in Section 8 of the Underwriting Agreement.
(e) Any holder of Registrable Securities to be sold
pursuant to a registration statement, and such Holder's successors and
assigns, shall severally, and not jointly, indemnify, the Company, its
officers and directors and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against all loss, claim, damage or expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which they may become subject under the Act, the
Exchange Act or otherwise, arising from information furnished by or on behalf
of such holder, or such Holder's successors or assigns, for specific inclusion
in such
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<PAGE>
Registration Statement to the same extent and with the
same effect as the provisions pursuant to which the Underwriter has agreed to
indemnify the Company as set forth in Section 7 of the Underwriting Agreement
and to provide for just and equitable contribution as set forth in Section 8
of the Underwriting Agreement.
(f) Nothing contained in this Agreement shall be
construed as requiring any Holder to exercise his Warrants or the Underlying
Warrants held by such Holder prior to the initial filing of any registration
statement or the effectiveness thereof.
(g) If the Company shall fail to comply with the
provisions of this Article 7, the Company shall, in addition to any other
equitable or other relief available to the holders of Registrable Securities,
be liable for any or all incidental, special and consequential damages
sustained by the holders of Registrable Securities, requesting registration of
their Registrable Securities.
(h) The Company shall promptly deliver copies of all
correspondence between the Commission and the Company, its counsel or auditors
and all memoranda relating to discussions with the Commission or its staff
with respect to the Registration Statement to each holder of Registrable
Securities included for such registration in such Registration Statement
pursuant to Section 7.3 hereof or Section 7.4 hereof requesting such
correspondence and memoranda and to the managing underwriter, if any, of the
offering in connection with which such Holder's Registrable Securities are
being registered and shall permit each holder of Registrable Securities and
such underwriter to do such
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reasonable investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the Registration Statement as it
deems reasonably necessary to comply with applicable securities laws or rules
of the National Association of Securities Dealers, Inc. Such investigation
shall include access to books, records and properties and opportunities to
discuss the business of the Company with its officers and independent
auditors, all to such reasonable extent and at such reasonable times and as
often as any such holder of Registrable Securities or underwriter shall
reasonably request.
8. Adjustments of Exercise Price and Number of Securities.
The following adjustments apply to the Exercise Price of the Warrants with
respect to the Shares and the number of Shares purchasable upon exercise of
the Warrants. In the event the Exercise Price per Share and/or the number of
Shares so purchasable is adjusted, then the Exercise Price of the Warrants
relating to the Underlying Warrants and the number of Underlying Warrants
purchasable hereunder shall be adjusted in the same proportion.
8.1. Computation of Adjusted Price. In case the Company
shall at any time after the date hereof pay a dividend in shares of Class A
Common Stock or make a distribution in shares of Class A Common Stock, then
upon such dividend or distribution the Exercise Price in effect immediately
prior to such dividend or distribution shall forthwith be reduced to a price
determined by dividing:
(a) an amount equal to the total number of shares of
Class A Common Stock outstanding immediately prior to
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such dividend or distribution multiplied by the Exercise Price for the shares
of Class A Common Stock outstanding immediately prior to such dividend or
distribution, by
(b) the total number of shares of Class A Common Stock
outstanding immediately after such issuance or sale.
For the purposes of any computation to be made in
accordance with the provisions of this Section 8.1, the shares of Class A
Common Stock issuable by way of dividend or other distribution on any stock of
the Company shall be deemed to have been issued immediately after the opening
of business on the date following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution.
8.2. Subdivision and Combination. In case the Company
shall at any time subdivide or combine the outstanding shares of Class A
Common Stock, the Exercise Price shall forthwith be proportionately decreased
in the case of subdivision or increased in the case of combination.
8.3. Adjustment in Number of Securities. Upon each
adjustment of the Exercise Price pursuant to the provisions of this Article 8,
the number of Shares issuable upon the exercise of each Warrant shall be
adjusted to the nearest full number by multiplying a number equal to the
Exercise Price in effect immediately prior to such adjustment by the number of
Shares issuable upon exercise of the Warrants immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise
Price, provided, however, that if an event occurs that results in an
adjustment of the number and/or price of the shares of Class A Common Stock
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issuable upon exercise of the Public Warrants pursuant to Section 9 of the
Warrant Agreement by and among the Company, the Underwriter and Continental
Stock Transfer & Trust Company dated as of ___________, 1998 (the "Public
Warrant Agreement"), resulting in automatic adjustment in the number and/or
price of the Underlying Warrant Shares issuable upon exercise of the
Underlying Warrants pursuant to Section 8.5 hereof, then the adjustment
provided for in this Section 8.3 shall not, in such instance, result in any
further adjustment in the aggregate number of shares of Class A Common Stock
ultimately issuable upon exercise of the Underlying Warrants.
8.4. Reclassification, Consolidation, Merger, etc. In
case of any reclassification or change of the outstanding shares of Class A
Common Stock (other than a change in par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), or in the
case of any consolidation of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger in which the Company
is the surviving corporation and which does not result in any reclassification
or change of the outstanding shares of Class A Common Stock, except a change
as a result of a subdivision or combination of such shares or a change in par
value, as aforesaid), or in the case of a sale or conveyance to another
corporation of the property of the Company as an entirety, the Holders shall
thereafter have the right to purchase the kind and number of shares of stock
and other securities and property receivable upon such reclassification,
change, consolidation, merger, sale or conveyance as if the Holders were the
owners of both the Shares and the
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Underlying Warrant Shares immediately prior to any such events at a price
equal to the product of (x) the number of shares of Class A Common Stock
issuable upon exercise of the Holders' Warrants and the Underlying Warrants
and (y) the Exercise Price in effect immediately prior to the record date for
such reclassification, change, consolidation, merger, sale or conveyance as if
such Holders had exercised the Warrants and the Underlying Warrants.
8.5 Adjustment of Underlying Warrants' Exercise Price and
Securities Issuable Upon Exercise of Underlying Warrants. With respect to any
of the Underlying Warrants, whether or not the Warrants have been exercised
and whether or not the Warrants are issued and outstanding, the exercise price
for, and the number of, Underlying Warrant Shares issuable upon exercise of
the Underlying Warrants shall be automatically adjusted in accordance with
Section 9 of the Public Warrant Agreement, upon the occurrence of any of the
events described therein. Thereafter, until the next such adjustment or until
otherwise adjusted in accordance with this Section 8, the Underlying Warrants
shall be exercisable at such adjusted exercise price and for such adjusted
number of Underlying Warrant Shares.
8.6. Determination of Outstanding Shares of Class A
Common Stock. The number of shares of Class A Common Stock at any one time
outstanding shall include the aggregate number of shares of Class A Common
Stock issued and the aggregate number of shares of Class A Common Stock
issuable upon the exercise of options, rights, warrants and upon the
conversion or exchange of convertible or exchangeable securities.
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8.7. Dividends and Other Distributions with Respect to
Outstanding Securities. In the event that the Company shall at any time prior
to the exercise of all Warrants make any distribution of its assets to holders
of its Class A Common Stock as a liquidating or a partial liquidating
dividend, then the holder of Warrants who exercises his Warrants after the
record date for the determination of those holders of Class A Common Stock
entitled to such distribution of assets as a liquidating or partial
liquidating dividend shall be entitled to receive for the Warrant Price per
Warrant, in addition to each share of Class A Common Stock, the amount of such
distribution (or, at the option of the Company, a sum equal to the value of
any such assets at the time of such distribution as determined by the Board of
Directors of the Company in good faith) which would have been payable to such
holder had he been the holder of record of the Class A Common Stock receivable
upon exercise of his Warrant on the record date for the determination of those
entitled to such distribution. At the time of any such dividend or
distribution, the Company shall make appropriate reserves to ensure the timely
performance of the provisions of this Subsection 8.7.
8.8. Subscription Rights for Shares of Class A Common
Stock or Other Securities. In the case that the Company or an affiliate of the
Company shall at any time after the date hereof and prior to the exercise of
all the Warrants issue any rights, warrants or options to subscribe for shares
of Class A Common Stock or any other securities of the Company or of such
affiliate to all the shareholders of the Company, the Holders of unexercised
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Warrants on the record date set by the Company or such affiliate in connection
with such issuance of rights, warrants or options shall be entitled, in
addition to the shares of Class A Common Stock or other securities receivable
upon the exercise of the Warrants, to receive such rights, warrants or options
that such Holders would have been entitled to receive had they been, on such
record date, the holders of record of the number of whole shares of Class A
Common Stock then issuable upon exercise of their outstanding Warrants
(assuming for purposes of this Section 8.7), that the exercise of the Warrants
is permissible immediately upon issuance).
9. Exchange and Replacement of Warrant Certificates.
Each Warrant Certificate is exchangeable without expense,
upon the surrender thereof by the registered Holder at the principal executive
office of the Company, for a new Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of
securities in such denominations as shall be designated by the Holder thereof
at the time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any
Warrant Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to it, and reimbursement to the Company of
all reasonable expenses incidental thereto, and upon surrender and
cancellation of the Warrant Certificate, if mutilated, the Company will make
and deliver a new Warrant Certificate of like tenor, in lieu thereof.
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10. Elimination of Fractional Interests.
The Company shall not be required to issue certificates
representing fractions of Shares or fractions of Underlying Warrants upon the
exercise of the Warrants or fractions of shares of Class A Common Stock upon
exercise of the Underlying Warrants, nor shall it be required to issue scrip
or pay cash in lieu of fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of Shares, Underlying Warrants or
shares of Class A Common Stock issuable upon the exercise of the Underlying
Warrants.
11. Reservation and Listing of Securities.
The Company shall at all times reserve and keep available
out of its authorized shares of Class A Common Stock, solely for the purpose
of issuance upon the exercise of the Warrants and Underlying Warrants, such
number of shares of Class A Common Stock as shall be issuable upon the
exercise thereof. The Company covenants and agrees that, upon exercise of the
Warrants and payment of the Exercise Price therefor, all Shares issuable upon
such exercise, as the case may be, shall be duly and validly issued, fully
paid, non-assessable and not subject to the preemptive rights of any
shareholder. The Company further covenants and agrees that upon exercise of
the Underlying Warrants and payment of the respective Underlying Warrant
exercise price therefor, all Underlying Warrant Shares issuable upon such
exercise shall be duly and validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any shareholder. As long as the Warrants
shall be outstanding, the Company shall use its
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<PAGE>
best efforts to cause all shares of Class A Common Stock issuable upon the
exercise of the Warrants and the Underlying Warrants to be listed on or quoted
by NASDAQ or listed on such national securities exchanges as requested by the
Underwriter.
12. Notices to Warrant Holders.
Nothing contained in this Agreement shall be construed as
conferring upon the Holder or Holders the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of the Warrants and Underlying Warrants and their exercise, any
of the following events shall occur:
(a) the Company shall take a record of the
holders of its shares of Class A Common Stock for the
purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of
current or retained earnings, as indicated by the accounting
treatment of such dividend or distribution on the books of
the Company; or
(b) the Company shall offer to all the
holders of its Class A Common Stock any additional shares of
capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company,
or any option, right or warrant to subscribe therefor; or
-22-
<PAGE>
(c) a dissolution, liquidation or winding
up of the Company (other than in connection with a
consolidation or merger) or a sale of all or substantially
all of its property, assets and business as an entirety
shall be proposed; or
(d) reclassification or change of the
outstanding shares of Class A Common Stock (other than a
change in par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination),
consolidation of the Company with, or merger of the Company
into, another corporation (other than a consolidation or
merger in which the Company is the surviving corporation and
which does not result in any reclassification or change of
the outstanding shares of Class A Common Stock, except a
change as a result of a subdivision or combination of such
shares or a change in par value, as aforesaid), or a sale or
conveyance to another corporation of the property of the
Company as an entirety is proposed; or
(e) The Company or an affiliate of the
Company shall propose to issue any rights to subscribe for
shares of Class A Common Stock or any other securities of
the Company or of such affiliate to all the shareholders of
the Company;
then, in any one or more of said events, the Company shall give written notice
to the Holder or Holders of such event at least fifteen (15) days prior to the
date fixed as a record date or the
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<PAGE>
date of closing the transfer books for the determination of the shareholders
entitled to such dividend, distribution, convertible or exchangeable
securities or subscription rights, options or warrants, or entitled to vote on
such proposed dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of closing the transfer books, as the
case may be. Failure to give such notice or any defect therein shall not
affect the validity of any action taken in connection with the declaration or
payment of any such dividend or distribution, or the issuance of any
convertible or exchangeable securities or subscription rights, options or
warrants, or any proposed dissolution, liquidation, winding up or sale.
13. Underlying Warrants.
The underlying warrants shall be governed by the Public
Warrant Agreement, including Section 13 of the Public Warrant Agreement, and
the form of the certificates representing the Underlying Warrants (and the
form of election to purchase shares of Class A Common Stock upon the exercise
of the Underlying Warrants and the form of assignment printed on the reverse
thereof) shall be substantially as set forth in Exhibit "A" to the Public
Warrant Agreement, provided, however, (i) each Underlying Warrant issuable
upon exercise of the Warrants shall evidence the right to initially purchase
one fully paid and non-assessable share of Class A Common Stock in respect of
the Underlying Warrant at an initial purchase price of $7.50 per share until
_______, 2003 and (ii) the Target Redemption Price (as defined in the Public
Warrant Agreement) of the Underlying Warrants is 134% of the then effective
exercise
-24-
<PAGE>
price of the Underlying Warrants. As set forth in Section 8.5 of this
Agreement, the exercise price of the Underlying Warrants and the number of
shares of Class A Common Stock issuable upon the exercise of the Underlying
Warrants are subject to adjustment, whether or not the Warrants have been
exercised and the Underlying Warrants have been issued, in the manner and upon
the occurrence of the events set forth in Section 9 of the Public Warrant
Agreement, which is hereby incorporated by reference and made a part hereof as
if set forth in its entirety herein. Subject to the provisions of this
Agreement and upon issuance of the Underlying Warrants, each registered holder
of such Underlying Warrants shall have the right to purchase from the Company
(and the Company shall issue to such registered holders) up to the number of
fully paid and non-assessable Underlying Warrant Shares (subject to adjustment
as provided herein and in the Public Warrant Agreement), free and clear of all
preemptive rights of shareholders, provided that such registered holder
complies, in connection with the exercise of such holders' Underlying
Warrants, with the terms governing the exercise of the Public Warrants set
forth in the Public Warrant Agreement, and pays the applicable exercise price,
determined in accordance with the terms of the Public Warrant Agreement. Upon
exercise of the Underlying Warrants, the Company shall forthwith issue to the
registered holder of any such Underlying Warrants, in such holder's name or in
such name as may be directed by such holder, certificates for the number of
Underlying Warrant Shares so purchased. The Underlying Warrants shall be
governed in all respects by the terms of the Public Warrant Agreement. The
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<PAGE>
Underlying Warrants shall be transferable in the manner provided in the Public
Warrant Agreement, and upon any such transfer and the payment of taxes, if
any, thereon, a new Underlying Warrant shall be issued promptly to the
transferee. The Company covenants to, and agrees with, each Holder that
without the prior written consent of all of the Holders, the Public Warrant
Agreement will not be modified, amended, cancelled, altered or superseded, and
that the Company will send to each Holder, irrespective of whether or not the
Warrants have been exercised, any and all notices required by the Public
Warrant Agreement to be sent to holders of the Public Warrants.
14. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to a registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in
Section 3 of this Agreement or to such other address as the Company may
designate by notice to the Holders.
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<PAGE>
15. Supplements and Amendments.
The Company and the Underwriter may from time to time
supplement or amend this Agreement without the approval of any Holders of
Warrant Certificates in order to cure any ambiguity, to correct or supplement
any provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter deem not to
adversely affect the interests of the Holders of Warrant Certificates.
16. Successors.
All the covenants and provisions of this Agreement by or
for the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
17. Termination.
This Agreement shall terminate at the close of business
on __________, 2006. Notwithstanding the foregoing, this Agreement will
terminate on any earlier date when all Warrants have been exercised and all
the Shares and Underlying Warrants issuable upon exercise of the Warrants have
been resold to the public; provided, however, that the provisions of Section 7
shall survive any termination pursuant to this Section 16 until the close of
business on _________, 2009.
18. Governing Law.
This Agreement and each Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of
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<PAGE>
the State of New York and for all purposes shall be construed in accordance
with the laws of said State.
19. Benefits of This Agreement.
Nothing in this Agreement shall be construed to give to
any person or corporation other than the Company and the Underwriter and any
other registered holder or holders of the Warrant Certificates, Warrants,
Underlying Warrants or the Shares any legal or equitable right, remedy or
claim under this Agreement; and this Agreement shall be for the sole and
exclusive benefit of the Company and the Underwriter and any other holder or
holders of the Warrant Certificates, Warrants, Underlying Warrants or the
Shares.
20. Counterparts.
This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and
the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
[SEAL] SHERWOOD BRANDS, INC.
By:__________________________________
Name:
Title:
Attest:
- -----------------------
PARAGON CAPITAL CORPORATION
By:__________________________________
Name:
Title:
-29-
<PAGE>
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED FOR PURPOSES OF PUBLIC
DISTRIBUTION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY
NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144
UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION
OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY,
STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _________, 2003
No. W- 155,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that Paragon Capital
Corporation or registered assigns, is the registered holder of 155,000
Warrants to purchase, at any time from _______, 1998 until 5:00 P.M. New York
City time on ________, 2003 ("Expiration Date"), up to 155,000 fully-paid and
non-assessable shares ("Shares") of common stock, par value $.01 per share
(the "Class A Common Stock"), of Sherwood Brands, Inc., a North Carolina
corporation (the "Company"), at the initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), of $9.22 per Share upon
surrender of this Warrant Certificate and payment of the Exercise Price at an
office or agency of the Company, but subject to the conditions set forth
herein and in the warrant agreement dated as of ____________, 1998 between the
Company and Paragon Capital Corporation (the "Warrant Agreement"). Payment of
the Exercise Price may be made in cash, or by certified or official bank check
in New York Clearing House funds payable to the order of the Company, or any
combination thereof.
No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part
of a duly authorized issue of Warrants issued pursuant to the Warrant
Agreement, which Warrant Agreement is hereby incorporated by reference in and
made a part of this instrument and is hereby referred to in a description of
the rights, limitation of rights,
<PAGE>
obligations, duties and immunities thereunder of the Company and the holders
(the words "holders" or "holder" meaning the registered holders or registered
holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the
rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax, or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s)
hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding
any notation of ownership or other writing hereon made by anyone), for the
purpose of any exercise hereof, and of any distribution to the holder(s)
hereof, and for all other purposes, and the Company shall not be affected by
any notice to the contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the
Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: ___________, 1998 SHERWOOD BRANDS, INC.
[SEAL] By:__________________________
Name:
Title:
Attest:
______________________
-2-
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase ____________
shares of Common Stock and herewith tenders in payment for such securities
cash or a certified or official bank check payable in New York Clearing House
Funds to the order of Sherwood Brands, Inc. in the amount of $_______ , all in
accordance with the terms hereof. The undersigned requests that a certificate
for such securities be registered in the name of __________ , whose address is
__________________, and that such Certificate be delivered to
__________________, whose address is _____________.
Dated: Signature:________________
(Signature must conform
in all respects to name
of holder as specified on
the face of the Warrant
Certificate.)
--------------------------------
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if
such holder desires to transfer the Warrant
Certificate.)
FOR VALUE RECEIVED__________________________________________
hereby sells, assigns and transfers unto
______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________, Attorney,
to transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:___________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate)
- -------------------------------
- -------------------------------
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
EXHIBIT B
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED FOR PURPOSES OF PUBLIC
DISTRIBUTION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY
NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144
UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION
OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY,
STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _________, 2003
No. W- 77,500 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that Paragon Capital
Corporation or registered assigns, is the registered holder of 77,500 Warrants
to purchase, at any time from _______, 1998 until 5:00 P.M. New York City time
on ________, 2003 ("Expiration Date"), up to 77,500 warrants (each exercisable
to purchase one fully-paid and non-assessable share ("Share") of Class A
common stock, par value $.01 per share (the "Class A Common Stock"), of
Sherwood Brands, Inc., a North Carolina corporation (the "Company") at the
initial exercise price of $7.50 per Share), at the initial exercise price,
subject to adjustment in certain events (the "Exercise Price"), of $.155 per
Warrant upon surrender of this Warrant Certificate and payment of the Exercise
Price at an office or agency of the Company, but subject to the conditions set
forth herein and in the warrant agreement dated as of ____________, 1998
between the Company and Paragon Capital Corporation (the "Warrant Agreement").
Payment of the Exercise Price may be made in cash, or by certified or official
bank check in New York Clearing House funds payable to the order of the
Company, or any combination thereof.
No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part
of a duly authorized issue of Warrants issued pursuant to the Warrant
Agreement, which Warrant Agreement is hereby incorporated by reference in and
made a part of this instrument and is hereby referred to in a description of
the rights, limitation of rights,
<PAGE>
obligations, duties and immunities thereunder of the Company and the holders
(the words "holders" or "holder" meaning the registered holders or registered
holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the
rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax, or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s)
hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding
any notation of ownership or other writing hereon made by anyone), for the
purpose of any exercise hereof, and of any distribution to the holder(s)
hereof, and for all other purposes, and the Company shall not be affected by
any notice to the contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the
Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: ___________, 1998 SHERWOOD BRANDS, INC.
[SEAL] By:__________________________
Name:
Title:
Attest:
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<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase ____________
warrants (each exercisable to purchase one fully paid and non-assessable share
of Common Stock, par value $.01 per share, of Sherwood Brands, Inc., a North
Carolina Corporation, at an initial exercise price of $_____ per share) and
herewith tenders in payment for such securities cash or a certified or
official bank check payable in New York Clearing House Funds to the order of
Sherwood Brands, Inc. in the amount of $________, all in accordance with the
terms hereof. The undersigned requests that a certificate for such securities
be registered in the name of ________________________________________________,
whose address is __________________, and that such Certificate be delivered
to __________________, whose address is
_________________.
Dated: Signature:________________
(Signature must conform
in all respects to name
of holder as specified on
the face of the Warrant
Certificate.)
--------------------------------
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED________________________________________
hereby sells, assigns and transfers unto
______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________, Attorney,
to transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:_________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate)
- -------------------------------
- -------------------------------
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
SHERWOOD BRANDS, INC.
a North Carolina corporation
and
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
Warrant Agent
and
PARAGON CAPITAL CORPORATION
Underwriter
WARRANT AGREEMENT
<PAGE>
Table of Contents
-----------------
Section Page
- ------- ----
1. Appointment of Warrant Agent..........................................1
2. Form of Warrant.......................................................1
3. Countersignature and Registration.....................................2
4. Transfers and Exchanges...............................................3
5. Exercise of Warrants; Payment of Warrant
Solicitation Fee......................................................4
6. Payment of Taxes......................................................7
7. Mutilated or Missing Warrants.........................................8
8. Reservation of Class A Common Stock...................................8
9. Warrant Price; Adjustments.......................................... 10
10. Fractional Interest................................................. 17
11. Notices to Warrantholders........................................... 18
12. Disposition of Proceeds on Exercise of Warrants..................... 20
13. Redemption of Warrants.............................................. 20
14. Merger or Consolidation or Change of
Name of Warrant Agent............................................... 21
15. Duties of Warrant Agent............................................. 22
16. Change of Warrant Agent............................................. 25
17. Identity of Transfer Agent.......................................... 26
18. Notices............................................................. 27
19. Supplements and Amendments.......................................... 28
20. New York Contract................................................... 28
21. Benefits of this Agreement.......................................... 28
22. Successors.......................................................... 30
<PAGE>
WARRANT AGENT AGREEMENT dated as of __________ __, 1998, by and
among Sherwood Brands, Inc., a North Carolina corporation (the "Company"),
Paragon Capital Corporation (the "Underwriter") and Continental Stock Transfer &
Trust Company, as warrant agent (hereinafter called the "Warrant Agent").
WHEREAS, the Company proposes to issue and sell to the public
up to 1,782,500 shares of the Class A common stock of the Company, $.01 par
value (hereinafter, together with the stock of any other class to which such
shares may hereafter have been changed, called "Class A Common Stock"), and up
to 891,250 Class A Common Stock Purchase Warrants (the "Warrants");
WHEREAS, each Warrant will entitle the holder to purchase one
(1) share of Class A Common Stock;
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in
connection with the issuance, registration, transfer, exchange and exercise of
the Warrants;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereto agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act as Warrant Agent for the Company in
accordance with the instructions hereinafter set forth in this Agreement, and
the Warrant Agent hereby accepts such appointment.
Section 2. Form of Warrant. The text of the Warrants and
<PAGE>
of the form of election to purchase Class A Common Stock to be printed on the
reverse thereof shall be substantially as set forth in Exhibit A attached
hereto. Each Warrant shall entitle the registered holder thereof to purchase
one (1) share of Class A Common Stock at a purchase price of Seven Dollars and
Fifty Cents ($7.50), at any time from ___________ __, 1999 until 5:00 p.m.
Eastern time, on _____________ __, 2003 (the "Warrant Exercise Period").
The warrant price and the number of shares of Class A Common Stock issuable upon
exercise of the Warrants are subject to adjustment upon the occurrence of
certain events, all as hereinafter provided. The Warrants shall be executed on
behalf of the Company by the manual or facsimile signature of the present or any
future President or Vice President of the Company, attested to by the manual or
facsimile signature of the present or any future Secretary or Assistant
Secretary of the Company.
Warrants shall be dated as of the issuance by the Warrant
Agent either upon initial issuance or upon transfer or exchange.
In the event the aforesaid expiration dates of the Warrants
fall on a Saturday or Sunday, or on a legal holiday on which the New York
Stock Exchange is closed, then the Warrants shall expire at 5:00 p.m. Eastern
time on the next succeeding business day.
Section 3. Countersignature and Registration. The
Warrant Agent shall maintain books for the transfer and registra-
tion of Warrants. Upon the initial issuance of the Warrants, the
-2-
<PAGE>
Warrant Agent shall issue and register the Warrants in the names of the
respective holders thereof. The Warrants shall be countersigned manually or by
facsimile by the Warrant Agent (or by any successor to the Warrant Agent then
acting as warrant agent under this Agreement) and shall not be valid for any
purpose unless so countersigned. Warrants may, however, be so countersigned by
the Warrant Agent (or by its successor as Warrant Agent) and be delivered by
the Warrant Agent, notwithstanding that the persons whose manual or facsimile
signatures appear thereon as proper officers of the Company shall have ceased
to be such officers at the time of such countersignature or delivery.
Section 4. Transfers and Exchanges. The Warrant Agent shall
transfer, from time to time, any outstanding Warrants upon the books to be
maintained by the Warrant Agent for that purpose, upon surrender thereof for
transfer properly endorsed or accompanied by appropriate instructions for
transfer. Upon any such transfer, a new Warrant shall be issued to the
transferee and the surrendered Warrant shall be cancelled by the Warrant
Agent. Warrants so cancelled shall be delivered by the Warrant Agent to the
Company from time to time upon request. Warrants may be exchanged at the
option of the holder thereof, when surrendered at the office of the Warrant
Agent, for another Warrant, or other Warrants of different denominations of
like tenor and representing in the aggregate the right to purchase a like
number of shares of Class A Common Stock.
-3-
<PAGE>
Section 5. Exercise of Warrants; Payment of Warrant
Solicitation Fee.
(a) Subject to the provisions of this Agreement, each
registered holder of Warrants shall have the right, which may be exercised
commencing at the opening of business on the first day of the Warrant Exercise
Period, to purchase from the Company (and the Company shall issue and sell to
such registered holder of Warrants) the number of fully paid and
non-assessable shares of Class A Common Stock specified in such Warrants upon
surrender of such Warrants to the Company at the office of the Warrant Agent,
with the form of election to purchase on the reverse thereof duly filled in
and signed, and upon payment to the Company of the warrant price, determined
in accordance with the provisions of Sections 9 and 10 of this Agreement, for
the number of shares of Class A Common Stock in respect of which such Warrants
are then exercised. Payment of such warrant price shall be made in cash or by
certified check or bank draft to the order of the Company. Subject to Section
6, upon such surrender of Warrants and payment of the warrant price, the
Company shall issue and cause to be delivered with all reasonable dispatch to
or upon the written order of the registered holder of such Warrants and in
such name or names as such registered holder may designate, a certificate or
certificates for the number of full shares of Class A Common Stock so
purchased upon the exercise of such Warrants. Such certificate or certificates
shall be deemed to have been issued and any person
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so designated to be named therein shall be deemed to have become a holder of
record of such shares of Class A Common Stock as of the date the Company's
transfer agent issues the certificates representing such shares. The rights of
purchase represented by the Warrants shall be exercisable, at the election of
the registered holders thereof, either as an entirety or from time to time for
a portion of the shares specified therein and, in the event that any Warrant
is exercised in respect of less than all of the shares of Class A Common Stock
specified therein at any time prior to the date of expiration of the Warrants,
a new Warrant or Warrants will be issued to the registered holder for the
remaining number of shares of Class A Common Stock specified in the Warrant so
surrendered, and the Warrant Agent is hereby irrevocably authorized to
countersign and to deliver the required new Warrants pursuant to the
provisions of this Section and of Section 3 of this Agreement and the Company,
whenever requested by the Warrant Agent, will supply the Warrant Agent with
Warrants duly executed on behalf of the Company for such purpose. Anything in
the foregoing to the contrary notwithstanding, no Warrant will be exercisable
unless at the time of exercise the Company has filed with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933,
as amended (the "Act"), covering the shares of Class A Common Stock issuable
upon exercise of such Warrant and such shares have been so registered or
qualified or deemed to be exempt under the securities laws of the state of
residence of the holder
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of such Warrant. The Company shall use its best efforts to have all shares so
registered or qualified for sale under the Act on or before the date on which
the Warrants become exercisable.
(b) If at the time of exercise of any Warrant after
(i) ______ __, 1999, (ii) the market price of the Company's Class A Common
Stock is equal to or greater than the then purchase price of the Warrant,
(iii) the exercise of the Warrant is solicited by the Underwriter at such time
while the Underwriter is a member of the National Association of Securities
Dealers, Inc. ("NASD"), (iv) the Warrant is not held in a discretionary
account, (v) disclosure of the compensation arrangement is made in documents
provided to the holders of the Warrants; and (vi) the solicitation of the
exercise of the Warrant is not in violation of Regulation M (as such rule or
any successor rule may be in effect as of such time of exercise) promulgated
under the Securities Exchange Act of 1934, then the Underwriter shall be
entitled to receive from the Company upon exercise of each of the Warrant(s)
so exercised a fee of five percent (5%) of the aggregate price of the Warrants
so exercised (the "Exercise Fee"). The procedures for payment of the warrant
solicitation fee are set forth in Section 5(c) below.
(c) (1) Within five (5) days of the last day of each month
commencing with , 1999, the Warrant Agent will notify the Underwriter of each
Warrant Certificate which has been properly completed for exercise by holders of
Warrants during the last month. The Company and Warrant Agent shall determine,
in
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their sole and absolute discretion, whether a Warrant Certificate has been
properly completed. The Warrant Agent will provide the Underwriter with such
information, in connection with the exercise of each Warrant, as the
Underwriter shall reasonably request.
(2) The Company hereby authorizes
and instructs the Warrant Agent to deliver to the Underwriter the Exercise Fee
promptly after receipt by the Warrant Agent from the Company of a check
payable to the order of the Underwriter in the amount of the Exercise Fee. In
the event that an Exercise Fee is paid to the Underwriter with respect to a
Warrant which the Company or the Warrant Agent determines is not properly
completed for exercise or in respect of which the Underwriter is not entitled
to an Exercise Fee, the Underwriter will return such Exercise Fee to the
Warrant Agent which shall forthwith return such fee to the Company.
The Underwriter and the Company may at any time, after _________
__, 1999, and during business hours, examine the records of the Warrant Agent,
including its ledger of original Warrant certificates returned to the Warrant
Agent upon exercise of Warrants. Notwithstanding any provision to the contrary,
the provisions of paragraph 5(b) and 5(c) may not be modified, amended or
deleted without the prior written consent of the Underwriter.
Section 6. Payment of Taxes. The Company will pay any
documentary stamp taxes attributable to the initial issuance of
Class A Common Stock issuable upon the exercise of Warrants;
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provided, however, that the Company shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issue or delivery of
any certificates of shares of Class A Common Stock in a name other than that
of the registered holder of Warrants in respect of which such shares are
issued, and in such case neither the Company nor the Warrant Agent shall be
required to issue or deliver any certificate for shares of Class A Common
Stock or any Warrant until the person requesting the same has paid to the
Company the amount of such tax or has established to the Company's
satisfaction that such tax has been paid.
Section 7. Mutilated or Missing Warrants. In case any of the
Warrants shall be mutilated, lost, stolen or destroyed, the Company may, in
its discretion, issue and the Warrant Agent shall countersign and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant,
or in lieu of and in substitution for the Warrant lost, stolen or destroyed, a
new Warrant of like tenor and representing an equivalent right or interest,
but only upon receipt of evidence satisfactory to the Company and the Warrant
Agent of such loss, theft or destruction and, in case of a lost, stolen or
destroyed Warrant, indemnity, if requested, also satisfactory to them.
Applicants for such substitute Warrants shall also comply with such other
reasonable regulations and pay such reasonable charges as the Company or the
Warrant Agent may prescribe.
Section 8. Reservation of Class A Common Stock. There
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have been reserved, and the Company shall at all times keep reserved, out of
the authorized and unissued shares of Class A Common Stock, a number of shares
of Class A Common Stock sufficient to provide for the exercise of the rights
of purchase represented by the Warrants, and the transfer agent for the shares
of Class A Common Stock and every subsequent transfer agent for any shares of
the Company's Class A Common Stock issuable upon the exercise of any of the
rights of purchase aforesaid are irrevocably authorized and directed at all
times to reserve such number of authorized and unissued shares of Class A
Common Stock as shall be required for such purpose. The Company agrees that
all shares of Class A Common Stock issued upon exercise of the Warrants shall
be, at the time of delivery of the certificates of such shares, validly issued
and outstanding, fully paid and nonassessable and listed on any national
securities exchange upon which the other shares of Class A Common Stock are
then listed. So long as any unexpired Warrants remain outstanding, the Company
will file such post-effective amendments to the registration statement (Form
SB-2, Registration No. 333-44655) (the "Registration Statement")filed pursuant
to the Act with respect to the Warrants (or other appropriate registration
statements or post-effective amendment or supplements) as may be necessary to
permit it to deliver to each person exercising a Warrant, a prospectus meeting
the requirements of Section 10(a)(3) of the Act and otherwise complying
therewith, and will deliver such a prospectus to each such person. To the
extent that during any
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period it is not reasonably likely that the Warrants will be exercised, due to
market price or otherwise, the Company need not file such a post-effective
amendment during such period. The Company will keep a copy of this Agreement
on file with the transfer agent for the shares of Class A Common Stock and
with every subsequent transfer agent for any shares of the Company's Class A
Common Stock issuable upon the exercise of the rights of purchase represented
by the Warrants. The Warrant Agent is irrevocably authorized to requisition
from time to time from such transfer agent stock certificates required to
honor outstanding Warrants. The Company will supply such transfer agent with
duly executed stock certificates for that purpose. All Warrants surrendered in
the exercise of the rights thereby evidenced shall be cancelled by the Warrant
Agent and shall thereafter be delivered to the Company, and such cancelled
Warrants shall constitute sufficient evidence of the number of shares of Class
A Common Stock which have been issued upon the exercise of such Warrants.
Promptly after the date of expiration of the Warrants, the Warrant Agent shall
certify to the Company the total aggregate amount of Warrants then
outstanding, and thereafter no shares of Class A Common Stock shall be subject
to reservation in respect of such Warrants which shall have expired.
Section 9. Warrant Price; Adjustments.
(i) The warrant price at which Class A Common Stock
shall be purchasable upon the exercise of the Warrants shall be
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$7.50 per share or after adjustment, as provided in this Section, shall be
such price as so adjusted (the "Warrant Price").
(ii) The Warrant Price shall be subject to adjust-
ment from time to time as follows:
(I) In case the Company shall at any time
after the date hereof pay a dividend in shares of Class A Common Stock or make
a distribution in shares of Class A Common Stock, then upon such dividend or
distribution the Warrant Price in effect immediately prior to such dividend or
distribution shall forthwith be reduced to a price determined by dividing:
(A) an amount equal to the total
number of shares of Class A Common Stock outstanding immediately prior to such
dividend or distribution multiplied by the Warrant Price in effect immediately
prior to such dividend or distribution, by
(B) the total number of shares of
Class A Common Stock outstanding immediately after such issuance or sale.
For the purposes of any computation to be made in accordance
with the provisions of this clause (i), the following provisions shall be
applicable: Class A Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the date following the date fixed
for the determination of stockholders entitled to receive such dividend or
other distribution.
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(II) In case the Company shall at any time
subdivide or combine (including, without limitation, a reverse stock split)
the outstanding Class A Common Stock, the Warrant Price shall forthwith be
proportionately decreased in the case of subdivision or increased in the case
of combination to the nearest one cent. Any such adjustment shall become
effective at the time such subdivision or combination shall become effective.
(III) Within a reasonable time after the
close of each quarterly fiscal period of the Company during which the Warrant
Price has been adjusted as herein provided, the Company shall
(A) file with the Warrant Agent a
certificate signed by the President or Vice President of the Company and by the
Treasurer or Assistant Treasurer or the Secretary or an Assistant Secretary of
the Company, showing in detail the facts requiring all such adjustments
occurring during such period and the Warrant Price after each such adjustment;
and
(B) the Warrant Agent shall have
no duty with respect to any such certificate filed with it except to keep the
same on file and available for inspection by holders of Warrants during
reasonable business hours, and the Warrant Agent may conclusively rely upon the
latest certificate furnished to it hereunder. The Warrant Agent shall not at any
time be under any duty or responsibility to any holder of a Warrant to determine
whether any facts exist which may require any adjustment of the
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Warrant Price, or with respect to the nature or extent of any adjustment of
the Warrant Price when made, or with respect to the method employed in making
any such adjustment, or with respect to the nature or extent of the property
or securities deliverable hereunder. In the absence of a certificate having
been furnished, the Warrant Agent may conclusively rely upon the provisions of
the Warrants with respect to the Class A Common Stock deliverable upon the
exercise of the Warrants and the applicable Warrant Price thereof.
(C) Notwithstanding anything
contained herein to the contrary, no adjustment of the Warrant Price shall be
made if the amount of such adjustment shall be less than $.05, but in such case
any adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall
amount to not less than $.05.
(iii) In the event that the number of outstanding
shares of Class A Common Stock is increased by a stock dividend payable in
Class A Common Stock or by a subdivision of the outstanding Class A Common
Stock, then, from and after the time at which the adjusted Warrant Price
becomes effective pursuant to Subsection (ii) of this Section by reason of
such dividend or subdivision, the number of shares of Class A Common Stock
issuable upon the exercise of each Warrant shall be increased in proportion
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to such increase in outstanding shares. In the event that the number of shares
of Class A Common Stock outstanding is decreased by a combination (including,
without limitation, a reverse stock split) of the outstanding Class A Common
Stock, then, from and after the time at which the adjusted Warrant Price
becomes effective pursuant to Subsection (ii) of this Section by reason of
such combination, the number of shares of Class A Common Stock issuable upon
the exercise of each Warrant shall be decreased in proportion to such decrease
in the outstanding shares of Class A Common Stock.
(iv) In case of any reorganization or reclassifi-
cation of the outstanding Class A Common Stock (other than a change in par
value, or from par value to no par value, or as a result of a subdivision or
combination), or in case of any consolidation of the Company with, or merger
of the Company into, another corporation (other than a consolidation or merger
in which the Company is the continuing corporation and which does not result
in any reclassification of the outstanding Class A Common Stock), or in case
of any sale or conveyance to another corporation of the property of the
Company as an entirety or substantially as an entirety, the holder of each
Warrant then outstanding shall thereafter have the right to pur-chase the kind
and amount of shares of Class A Common Stock and other securities and property
receivable upon such reorganization, reclassification, consolidation, merger,
sale or conveyance by a holder of the number
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<PAGE>
of shares of Class A Common Stock which the holder of such Warrant shall then
be entitled to purchase until the date of the consummation of such
transaction; such adjustments shall apply with respect to all such changes
occurring between the date of this Warrant Agreement and the date of exercise
of such Warrant.
(v) Subject to the provisions of this Section 9, in
case the Company shall, at any time prior to the exercise of the Warrants,
make any distribution of its assets to holders of its Class A Common Stock as
a liquidating or a partial liquidating dividend, then the holder of Warrants
who exercises his Warrants after the record date for the determination of
those holders of Class A Common Stock entitled to such distribution of assets
as a liquidating or partial liquidating dividend shall be entitled to receive
for the Warrant Price per Warrant, in addition to each share of Class A Common
Stock, the amount of such distribution (or, at the option of the Company, a
sum equal to the value of any such assets at the time of such distribution as
determined by the Board of Directors of the Company in good faith), which
would have been payable to such holder had he been the holder of record of the
Class A Common Stock receivable upon exercise of his Warrant on the record
date for the determination of those entitled to such distribution.
(vi) In case of the dissolution, liquidation or
winding up of the Company, all rights under the Warrants shall terminate on a
date fixed by the Company, such date to be no
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earlier than ten (10) days prior to the effectiveness of such dissolution,
liquidation or winding up and not later than five (5) days prior to such
effectiveness. Notice of such termination of purchase rights shall be given to
the last registered holder of the Warrants, as the same shall appear on the
books of the Company maintained by the Warrant Agent, by registered mail at
least thirty (30) days prior to such termination date.
(vii) In case the Company shall, at any time prior
to the expiration of the Warrants and prior to the exercise thereof, offer to
the holders of its Class A Common Stock any rights to subscribe for additional
shares of any class of the Company, then the Company shall give written notice
thereof to the last registered holder thereof not less than thirty (30) days
prior to the date on which the books of the Company are closed or a record
date is fixed for the determination of the stockholders entitled to such
subscription rights. Such notice shall specify the date as to which the books
shall be closed or record date fixed with respect to such offer of
subscription and the right of the holder thereof to participate in such offer
of subscription shall terminate if the Warrant shall not be exercised on or
before the date of such closing of the books or such record date.
(viii) Any adjustment pursuant to the aforesaid
provisions shall be made on the basis of the number of shares of Class A
Common Stock which the holder thereof would have been entitled to acquire by
the exercise of the Warrant immediately
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prior to the event giving rise to such adjustment.
(ix) Irrespective of any adjustments in the Warrant
Price or the number or kind of shares purchasable upon exercise of the
Warrants, Warrants previously or thereafter issued may continue to express the
same price and number and kind of shares as are stated in the similar Warrants
initially issuable pursuant to this Warrant Agreement.
(x) The Company may retain a firm of independent
public accountants (who may be any such firm regularly employed by the
Company) to make any computation required under this Section, and any
certificate setting forth such computation signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section.
(xi) If at any time, as a result of an adjustment
made pursuant to paragraph (iv) above, the holders of a Warrant or Warrants
shall become entitled to purchase any securities other than shares of Class A
Common Stock, thereafter the number of such securities so purchasable upon
exercise of each Warrant and the Warrant Price for such shares shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Class A Common
Stock contained in paragraphs (ii) and (iii).
Section 10. Fractional Interest. The Warrants may only
be exercised to purchase full shares of Class A Common Stock and
the Company shall not be required to issue fractions of shares of
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Class A Common Stock on the exercise of Warrants. However, if a Warrant holder
exercises all Warrants then owned of record by him and such exercise would
result in the issuance of a fractional share, the Company, at its option, will
pay to such Warrant holder, in lieu of the issuance of any fractional share
otherwise issuable, either a whole share of Class A Common Stock or an amount
of cash based on the market value of the Class A Common Stock of the Company
on the last trading day prior to the exercise date.
Section 11. Notices to Warrantholders.
(i) Upon any adjustment of the Warrant Price and
the number of shares of Class A Common Stock issuable upon exercise of a
Warrant, then and in each such case the Company shall give written notice
thereof to the Warrant Agent, which notice shall state the Warrant Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of a Warrant,
setting forth in reasonable detail the method of calculation and the facts
upon which such calculation is based. The Company shall also mail such notice
to the holders of the Warrants at their addresses appearing in the Warrant
register. Failure to give or mail such notice, or any defect therein, shall
not affect the validity of the adjustments.
(ii) In case at any time:
(I) the Company shall pay dividends payable in
stock upon its Class A Common Stock or make any distribution (other
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than regular cash dividends) to the holders of its Class A Common
Stock; or
(II) the Company shall offer for
subscription pro rata to the holders of its Class A Common Stock any additional
shares of stock of any class or other rights; or
(III) there shall be any capital
reorganization or reclassification of the capital stock of the Company, or
consolidation or merger of the Company with, or sale or substantially all of its
assets to another corporation; or
(IV) there shall be a voluntary or
involuntary dissolution, liquidation or winding up of the Company; then in any
one or more of such cases, the Company shall give written notices in the manner
set forth in Section 11(i) of the date on which (A) a record shall be taken for
such dividend, distribution or subscription rights, or (B) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also
specify the date as of which the holders of Class A Common Stock of record
shall participate in such dividend, distribution or subscription rights, or
shall be entitled to exchange their Class A Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up as the
case may be. Such notice shall be given at least thirty (30) days prior to the
action in question and not less than thirty (30) days prior to the record
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date in respect thereof. Failure to give such notice, or any defect therein,
shall not affect the legality or validity of any of the matters set forth in
this Section 11(ii).
(iii) The Company shall cause copies of all finan-
cial statements and reports, proxy statements and other documents that are
sent to its stockholders to be sent by first-class mail, postage prepaid, on
the date of mailing to such stockholders, to each registered holder of
Warrants at his address appearing in the warrant register as of the record
date for the determination of the stockholders entitled to such documents.
Section 12. Disposition of Proceeds on Exercise of Warrants.
(i) The Warrant Agent shall promptly forward to the
Company all monies received by the Warrant Agent for the purchase of shares of
Class A Common Stock through the exercise of such Warrants.
(ii) The Warrant Agent shall keep copies of this
Agreement available for inspection by holders of Warrants during normal
business hours.
Section 13. Redemption of Warrants. The Warrants are
redeemable by the Company, in whole or in part, on not less than thirty (30)
days' prior written notice at a redemption price of $.10 per Warrant at any
time, provided that the closing sale price of the Class A Common Stock on all
twenty (20) trading days ending on the third day prior to the day on which the
Company gives notice
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of redemption has been at least 134% of the then effective exercise price of
the Warrants (the "Target Redemption Price"). The redemption notice shall be
mailed to the holders of the Warrants at their addresses appearing in the
Warrant register. Holders of the Warrants will have exercise rights until the
close of business on the date fixed for redemption.
Section 14. Merger or Consolidation or Change of Name of
Warrant Agent. Any corporation or company which may succeed to the corporate
trust business of the Warrant Agent by any merger or consolidation or
otherwise shall be the successor to the Warrant Agent hereunder without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that such corporation would be eligible to serve as a
successor Warrant Agent under the provisions of Section 16 of this Agreement.
In case at the time such successor to the Warrant Agent shall succeed to the
agency created by this Agreement, any of the Warrants shall have been
countersigned but not delivered, any such successor to the Warrant Agent may
adopt the countersignature of the original Warrant Agent and deliver such
Warrants so countersigned.
In case at any time the name of the Warrant Agent shall be
changed and at such time any of the Warrants shall have been countersigned but
not delivered, the Warrant Agent may adopt the countersignature under its
prior name and deliver Warrants so countersigned. In all such cases such
Warrants shall have the full force provided in the Warrants and in the
Agreement.
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Section 15. Duties of Warrant Agent. The Warrant Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Warrants, by their acceptance thereof, shall be bound:
(i) The statements of fact and recitals contained
herein and in the Warrants shall be taken as statements of the Company, and
the Warrant Agent assumes no responsibility for the correctness of any of the
same except such as describe the Warrant Agent or action taken or to be taken
by it. The Warrant Agent assumes no responsibility with respect to the
distribution of the Warrants except as herein expressly provided.
(ii) The Warrant Agent shall not be responsible for
any failure of the Company to comply with any of the covenants in this
Agreement or in the Warrants to be complied with by the Company.
(iii) The Warrant Agent may consult at any time
with counsel satisfactory to it (who may be counsel for the Company) and the
Warrant Agent shall incur no liability or responsibility to the Company or to
any holder of any Warrant in respect of any action taken, suffered or omitted
by it hereunder in good faith and in accordance with the opinion or the advice
of such counsel.
(iv) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant for
any action taken in reliance on any notice, resolution, waiver,
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consent, order, certificate or other instrument believed by it to be genuine
and to have been signed, sent or presented by the proper party or parties,
except as a result of the Warrant Agent's negligence, willful misconduct or
bad faith.
(v) The Company agrees to pay to the Warrant Agent
reasonable compensation for all services rendered by the Warrant Agent in the
execution of this Agreement, to reimburse the Warrant Agent for all expenses,
taxes and governmental charges and other charges incurred by the Warrant Agent
in the execution of this Agreement and to indemnify the Warrant Agent and save
it harmless against any and all liabilities, including judgments, costs and
reasonable counsel fees, for anything done or omitted by the Warrant Agent in
the execution of this Agreement, except as a result of the Warrant Agent's
negligence, willful misconduct or bad faith.
(vi) The Warrant Agent shall be under no obligation
to institute any action, suit or legal proceeding or to take any other action
likely to involve expenses unless the Company or one or more registered
holders of Warrants shall furnish the Warrant Agent with reasonable security
and indemnity for any costs and expenses which may be incurred, but this
provision shall not affect the power of the Warrant Agent to take such action
as the Warrant Agent may consider proper, whether with or without any such
security or indemnity. All rights of action under this Agreement or
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under any of the Warrants may be enforced by the Warrant Agent without the
possession of any of the Warrants or the production thereof at any trial or
other proceeding, and any such action, suit or proceeding instituted by the
Warrant Agent shall be brought in its name as Warrant Agent, and any recovery
of judgment shall be for the ratable benefit of the registered holders of the
Warrants, as their respective rights and interests may appear.
(vii) The Warrant Agent and any stockholder, direc-
tor, officer, partner or employee of the Warrant Agent may buy, sell or deal
in any of the Warrants or other securities of the Company or become
pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to or otherwise act as fully and
freely as though it were not the Warrant Agent under this Agreement. Nothing
herein shall preclude the Warrant Agent from acting in any other capacity for
the Company or for any other legal entity.
(viii) The Warrant Agent shall act hereunder solely
as agent and its duties shall be determined solely by the provisions hereof.
(ix) The Warrant Agent may execute and exercise any
of the rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys, agents or employees, and the
Warrant Agent shall not be answerable or accountable for any such attorneys,
agents or employees or for any loss to the Company resulting from such neglect
or misconduct, provided
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reasonable care had been exercised in the selection and continued
employment thereof.
(x) Any request, direction, election, order or
demand of the Company shall be sufficiently evidenced by an instrument signed
in the name of the Company by its President or a Vice President or its
Secretary or an Assistant Secretary or its Treasurer or an Assistant Treasurer
(unless other evidence in respect thereof be herein specifically prescribed);
and any resolution of the Board of Directors may be evidenced to the Warrant
Agent by a copy thereof certified by the Secretary or an Assistant Secretary
of the Company.
Section 16. Change of Warrant Agent. The Warrant Agent may
resign and be discharged from its duties under this Agreement by giving to the
Company notice in writing, and to the holders of the Warrants notice by
mailing such notice to the holders at their addresses appearing on the Warrant
register, of such resignation, specifying a date when such resignation shall
take effect. The Warrant Agent may be removed by like notice to the Warrant
Agent from the Company and the like mailing of notice to the holders of the
Warrants. If the Warrant Agent shall resign or be removed or shall otherwise
become incapable of acting, the Company shall appoint a successor to the
Warrant Agent. If the Company shall fail to make such appointment within a
period of thirty (30) days after such removal or after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated
Warrant
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Agent or after the Company has received such notice from a registered holder
of a Warrant (who shall, with such notice, submit his Warrant for inspection
by the Company), then the registered holder of any Warrant may apply to any
court of competent jurisdiction for the appointment of a successor to the
Warrant Agent. Any successor Warrant Agent, whether appointed by the Company
or by such a court, shall be a bank or trust company, in good standing,
incorporated under New York or federal law. After appointment, the successor
Warrant Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Warrant Agent without
further act or deed and the former Warrant Agent shall deliver and transfer to
the successor Warrant Agent all cancelled Warrants, records and property at
the time held by it hereunder, and execute and deliver any further assurance
or conveyance necessary for the purpose. Failure to file or mail any notice
provided for in this Section, however, or any defect therein, shall not affect
the validity of the resignation or removal of the Warrant Agent or the
appointment of the successor Warrant Agent, as the case may be.
Section 17. Identity of Transfer Agent. Forthwith upon the
appointment of any transfer agent for the shares of Class A Common Stock or of
any subsequent transfer agent for the shares of Class A Common Stock or other
shares of the Company's Class A Common Stock issuable upon the exercise of the
rights of purchase represented by the Warrants, the Company will file with the
Warrant
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Agent a statement setting forth the name and address of such transfer agent.
Section 18. Notices. Any notice pursuant to this Agreement to
be given by the Warrant Agent, or by the registered holder of any Warrant to
the Company, shall be sufficiently given if sent by first-class mail, postage
prepaid, addressed (until another is filed in writing by the Company with the
Warrant Agent) as follows:
Sherwood Brands, Inc.
6110 Executive Blvd.
Suite 1080
Rockville, Maryland 20852
Attention: Uziel Frydman, Chief Executive Officer
and a copy thereof to:
Greenberg Traurig Hoffman Lipoff
Rosen & Quentel, P.A.
1221 Brickell Avenue
Miami, Florida 33131
Attention: Gary Epstein, Esq.
Any notice pursuant to this Agreement to be given by the
Company or by the registered holder of any Warrant to the Warrant Agent shall
be sufficiently given if sent by first-class mail, postage prepaid, addressed
(until another address is filed in writing by the Warrant Agent with the
Company) as follows:
Continental Stock Transfer & Trust Company
Two Broadway
New York, New York 10004
Attention: Mr. William Seegraber
Any notice pursuant to this Agreement to be given by the
-27-
<PAGE>
Warrant Agent or by the Company to the Underwriter shall be sufficiently given
if sent by first-class mail, postage prepaid, addressed (until another address
if filed in writing with the Warrant agent) as follows:
Paragon Capital Corporation
7 Hanover Square
New York, New York 10004
Attention: George B. Levine
and a copy thereof to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attention: Robert J. Mittman, Esq.
Section 19. Supplements and Amendments. The Company and the
Warrant Agent may from time to time supplement or amend this Agreement in
order to cure any ambiguity or to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provision herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Warrant Agent may deem
necessary or desirable and which shall not be inconsistent with the provisions
of the Warrants and which shall not adversely affect the interest of the
holders of Warrants.
Section 20. New York Contract. This Agreement and each Warrant
issued hereunder shall be deemed to be a contract made under the laws of the
State of New York and shall be construed in accordance with the laws of New
York applicable to agreements to be performed wholly within New York.
Section 21. Benefits of this Agreement. Nothing in this
-28-
<PAGE>
Agreement shall be construed to give to any person or corporation other than
the Company, the Warrant Agent, the Underwriter and the registered holders of
the Warrants any legal or equitable right, remedy or claim under this
Agreement; but this Agreement shall be for the sole and exclusive benefit of
the Company, the Warrant Agent and the registered holders of the Warrants.
-29-
<PAGE>
Section 22. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company, the Warrant Agent or the
Underwriter shall bind and inure to the benefit of their respective successors
and assigns hereunder.
IN WITNESS WHEREOF, the parties have entered into this
Agreement on the date first above written.
SHERWOOD BRANDS, INC.
By:________________________________
Name
Title
CONTINENTAL STOCK TRANSFER & TRUST
COMPANY
By:________________________________
Name
Title
PARAGON CAPITAL CORPORATION
By:________________________________
Name
Title
-30-
<PAGE>
VOID AFTER MAY , 2003
REDEEMABLE WARRANT CERTIFICATE
TO PURCHASE CLASS A COMMON STOCK OF
No. WARRANTS
SHERWOOD BRANDS, INC.
THIS IS TO CERTIFY THAT
CUSIP
or registered assigns, is the owner of the number of warrants set forth above.
Each Warrant (subject to adjustments as hereinafter referred to) entitles the
owner hereof to purchase at any time commencing , 1999 (or such earlier date
as to which Paragon Capital Corporation shall consent) (the Exercise Date)
until 5:00 p.m. Eastern time on , 2003 one fully paid and non-assessable share
of Class A common stock (the Common Stock) of Sherwood Brands, Inc., a North
Carolina corporation (the Company) (such shares of Common Stock being
hereinafter referred to as the Shares or a Share), upon payment of the warrant
price (as hereinafter described), provided, however, that under certain
conditions set forth in the Warrant Agreement hereinafter mentioned, the
number of Shares purchasable upon the exercise of this Warrant may be
increased or reduced and the warrant price per Share (hereinafter called the
Warrant Price) shall be $7.50 per Share if exercised on or before 5:00 p.m.
Eastern time on , 2003. As provided in said Warrant Agreement, the Warrant
Price is payable upon the exercise of the Warrant, either in cash or by
certified check or bank draft to the order of the Company.
Under certain conditions set forth in the Warrant Agreement, this Warrant may
be called for redemption on or after the Exercise Date at a redemption price
of $.10 per Warrant upon 30 days written notice.
Upon the exercise of this Warrant, the form of election to purchase on the
reverse hereof must be properly completed and executed. In the event that this
Warrant is exercised in respect to less than all of such Shares, a new Warrant
for the remaining number of Shares will be issued on such surrender.
This Warrant is issued under and the rights represented hereby are subject to
the terms and provisions contained in a Warrant Agreement dated as of May ,
1998, by and among the Company, Continental Stock Transfer & Trust Company, as
Warrant Agent (the Warrant Agent) and Paragon Capital Corporation, all the
terms and provisions of which the registered holder of this Warrant, by
acceptance hereof, assents. Reference is hereby made to said Warrant Agreement
for a more complete statement of the rights and limitations of rights of the
registered holders hereof, the rights and duties of the Warrant Agent and the
rights and obligations of the Company thereunder. Copies of said Warrant
Agreement are on file at the office of the Warrant Agent.
The Company shall not be required upon the exercise of this Warrant to issue
fractions of Shares, but shall make adjustment therefore in cash on the basis
of the current market value of any fractional interest as provided in the
Warrant Agreement.
This Warrant is transferable at the office of the Warrant Agent (or of its
successor as Warrant Agent) by the registered holder hereof in person or by
attorney duly authorized in writing, but only in the manner and subject to the
limitations provided in the Warrant Agreement and upon surrender of this
Warrant and the payment of any transfer taxes. Upon any such transfer, a new
Warrant, or new Warrants of different denominations, of this tenor and
representing in the aggregate the right to purchase a like number of Shares
will be issued to the transferee in exchange for this Warrant. This Warrant,
when surrendered at the office of the Warrant Agent (or its successor as
Warrant Agent) by the registered holder hereof in person or by attorney duly
authorized in writing, may be exchanged in the manner and subject to the
limitations provided in the Warrant Agreement, for another Warrant, or other
Warrants of different denominations, of like tenor and representing in the
aggregate the right to purchase a like number of Shares equal to the number of
such Warrants.
<PAGE>
If this Warrant Certificate shall be surrendered for exercise
within any period during which the transfer books for the Companys Common
Stock or other book securities purchasable upon the exercise of the Warrants
are closed for any purpose, the Company shall not be required to make delivery
of certificates for the securities purchasable upon such exercise until the
date of the reopening of said transfer books.
The holder of this Warrant shall not be entitled to any of the rights of a
shareholder of the Company prior to the exercise hereof. The Warrant
Certificate shall not be valid unless countersigned by the Warrant Agent.
WITNESS the facsimile seal of the Company and the facsimile signatures of its
duly authorized officers.
Dated:
SHERWOOD BRANDS, INC.
--------------------------------
PRESIDENT
--------------------------------
SECRETARY
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(Jersey City, N.J.) as Warrant Agent
By:
Authorized Officer
<PAGE>
SHERWOOD BRANDS, INC.
ELECTION TO PURCHASE
To be executed by the Registered Holder in order to exercise the Warrant
The undersigned hereby irrevocably elects to exercise the right to
purchase represented by the within Warrant(s) for and to purchase thereunder,
shares of Class A Common Stock provided for therein and tenders herewith
payment of the purchase price in full to the order of the Corporation and
requests that certificates for such shares be issued in the name of and
delivered to:
If such number of shares shall not be all the shares purchasable
thereunder, a new Warrant Certificate for the balance remaining of the shares
purchasable under the within Warrant shall be registered in the name of and
delivered to:
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
-------------------------
| |
| |
-------------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------------------------------------------------
(Print name and address)
The undersigned represents that the exercise of the within Warrant was
solicited by a member of the National Association of Securities Dealers, Inc.
If not solicited by a NASD member, please write (3)unsolicited(2) in the space
below. Unless otherwise indicated by listing the name of another NASD member
firm, it will be assumed that the exercise was solicited by Paragon Capital
Corporation.
Dated:
(Signature)
(Print Name)
(Signature must conform in all respects to name of holder as specified on the
face of this Warrant Certificate.)
Signature Guaranteed:*
ASSIGNMENT
To be executed by the Registered Holder in order to transfer the Warrant
FOR VALUE RECEIVED, hereby sells, assigns
and transfers unto
<PAGE>
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
Name:
Address:
(Please type or print in block letters)
( ) Warrants represented by this Warrant Certificate,
together with all rights, title and interest therein, and does hereby
irrevocably constitute and appoint
, attorney
to transfer said Warrant on the books of the within named Company, with full
power of substitution in the premises.
Dated:
X
-----------------------------------
Signature Guaranteed*
-----------------------------------
(Print Name)
-----------------------------------
(Address)
Notice: The signature to the foregoing assignment must correspond to the name
of this Warrant Certificate in every particular, without alteration or
enlargement, or any change whatsoever and must be guaranteed by an Eligible
Institute (as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934) which may include a commercial bank or trust company, savings
association, credit union or a member firm of the American Stock Exchange, New
York Stock Exchange, Pacific Stock Exchange or Midwest Stock Exc hange.
* In case of assignment, or if the Class A Common Stock issued upon exercise
is to be registered in the name of a person other than the holder, the
holder(1)s signature must be guaranteed by a commercial bank, trust company or
a NASD member firm.
<PAGE>
May 4, 1998
Sherwood Brands, Inc.
6110 Executive Blvd.
Suite 1080
Rockville, Maryland 20852
Ladies and Gentlemen:
On May 4, 1998, Sherwood Brands, Inc., a North Carolina corporation
(the "Company"), filed with the Securities and Exchange Commission Amendment
No. 2 to a Registration Statement (File No. 333-44655) on Form SB-2 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"). Such Registration Statement relates to the sale of up to (i) 1,782,500
shares (the "Public Shares") of the Company's Class A Common Stock, par value
$.01 per share (the "Common Stock"), (ii) 891,250 redeemable warrants (the
"Public Warrants"), each entitling the holder to purchase one share of Common
Stock, (iii) 891,250 shares (the "Public Warrant Shares") of Common Stock
issuable upon exercise of the Public Warrants, (iv) 155,000 warrants (the
"Underwriter's Stock Warrants") granted by the Company to its underwriter (the
"Underwriter") to purchase 155,000 shares of Common Stock, (v) 155,000 shares
(the "Underwriter's Warrant Shares") of Common Stock issuable upon exercise of
the Underwriter's Stock Warrants, (vi) 77,500 option warrants granted by the
Company to the Underwriter (the "Underwriter's Option Warrants") to purchase
77,500 Public Warrants (the "Underwriter's Public Warrants" and together with
the Public Warrants, the "Warrants"), each entitling the holder to purchase
one share of Common Stock and (vii) 77,500 shares (together with the Public
Warrant Shares, the "Warrant Shares") of Common Stock issuable upon the
exercise of the Underwriter's Public Warrants. We have acted as counsel to the
Company in connection with the preparation and filing of the Registration
Statement.
In connection with the Registration Statement, we have examined,
considered and relied upon copies of the following documents (collectively,
the "Documents"): (i) the Company's Articles of Incorporation and Bylaws; (ii)
resolutions of the Company's Board of Directors authorizing the offering and
the issuance of the above identified securities to be sold by the Company and
related matters; (iii) the Registration Statement and exhibits thereto; and
(iv) such other documents and instruments that we have deemed necessary for
the expression of the opinions herein contained. In making the foregoing
examinations, we have assumed without investigation the genuineness of all
signatures and the authenticity of all documents submitted to us as originals,
the conformity to authentic original documents of all documents submitted to
us as copies, and the veracity of the Documents. As to various questions of
fact material to the opinion expressed below, we have relied, to the extent we
deemed reasonably appropriate, upon the representations or certificates of
officers and/or directors of the Company and upon documents, records and
instruments furnished to us by the Company, without independently verifying
the accuracy of such certificates, documents, records or instruments.
<PAGE>
Based upon the foregoing examination, and subject to the
qualifications set forth below, we are of the opinion that (i) the Public
Shares and the Warrants have been duly and validly authorized and, when issued
and delivered in accordance with the terms of the underwriting Agreement filed
as Exhibit 1.1 to the Registration Statement, will be validly issued, fully
paid and nonassessable, (ii) the Warrant Shares have been duly and validly
authorized and, when issued and delivered in accordance with the terms of the
Warrants, will be validly issued, fully paid and nonassessable, (iii) the
Underwriter's Stock Warrants and the Underwriter's Option Warrants have been
duly and validly authorized, and when issued and paid for in accordance with
the terms of the Warrant Agreements filed as Exhibits 4.2 to the Registration
Statement, will be validly issued, fully paid and nonassessable and (iv) the
Underwriter's Warrant Shares have been duly and validly authorized and, when
issued and paid for in accordance with the terms of the Underwriter's Stock
Warrants, will be validly issued, fully paid and nonassessable.
Although we have acted as counsel to the Company in connection the
preparation and filing of the Registration Statement, our engagement has been
limited to certain matters about which we have been consulted. Consequently,
there exist matters of a legal nature involving the Company in which we have
not been consulted and have not represented the Company. This opinion letter
is limited to the matters stated herein and no opinions may be implied or
inferred beyond the matters expressly stated herein. The opinions expressed
herein are given as of this date, and we assume no obligation to update or
supplement our opinions to reflect any facts or circumstances that may come to
our attention or any change in law that may occur or become effective at a
later date.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the caption
"Legal Matters" in the prospectus comprising a part of the Registration
Statement. In giving such consent, we do not thereby admit that we are
included within the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations promulgated thereunder.
Sincerely,
GREENBERG TRAURIG HOFFMAN
LIPOFF ROSEN & QUENTEL, P.A.
By: /s/ Gary M. Epstein
-------------------------------
Gary M. Epstein
<PAGE>
Exhibit 10.15
SHERWOOD BRANDS, INC.
1998 Executive Incentive Compensation Plan
<PAGE>
SHERWOOD BRANDS, INC.
1998 Executive Incentive Compensation Plan
<TABLE>
<CAPTION>
<S> <C>
1. Purpose..................................................................................................1
2. Definitions..............................................................................................1
3. Administration...........................................................................................4
(a) Authority of the Committee......................................................................4
(b) Manner of Exercise of Committee Authority.......................................................4
(c) Limitation of Liability.........................................................................5
4. Stock Subject to Plan....................................................................................5
(a) Limitation on Overall Number of Shares Subject to Awards........................................5
(b) Application of Limitations......................................................................5
5. Eligibility; Per-Person Award Limitations................................................................5
6. Specific Terms of Awards.................................................................................6
(a) General.........................................................................................6
(b) Options.........................................................................................6
(c) Stock Appreciation Rights.......................................................................7
(d) Restricted Stock................................................................................8
(e) Deferred Stock..................................................................................9
(f) Bonus Stock and Awards in Lieu of Obligations..................................................10
(g) Dividend Equivalents...........................................................................10
(h) Other Stock-Based Awards.......................................................................10
7. Certain Provisions Applicable to Awards.................................................................11
(a) Stand-Alone, Additional, Tandem, and Substitute Awards.........................................11
(b) Term of Awards.................................................................................11
(c) Form and Timing of Payment Under Awards; Deferrals.............................................11
(d) Exemptions from Section 16(b) Liability........................................................11
8. Performance and Annual Incentive Awards.................................................................12
(a) Performance Conditions.........................................................................12
(b) Performance Awards Granted to Designated Covered Employees.....................................12
(c) Annual Incentive Awards Granted to Designated Covered Employees................................14
(d) Written Determinations.........................................................................15
(e) Status of Section 8(b) and Section 8(c) Awards Under Code Section 162(m).......................15
9. Change in Control.......................................................................................15
(a) Effect of "Change in Control.".................................................................15
(b) Definition of "Change in Control...............................................................16
(c) Definition of "Change in Control Price.".......................................................16
10. General Provisions......................................................................................17
(a) Compliance With Legal and Other Requirements...................................................17
(b) Limits on Transferability; Beneficiaries.......................................................17
(c) Adjustments....................................................................................18
(d) Taxes..........................................................................................18
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
(e) Changes to the Plan and Awards.................................................................19
(f) Limitation on Rights Conferred Under Plan......................................................19
(g) Unfunded Status of Awards; Creation of Trusts..................................................19
(h) Nonexclusivity of the Plan.....................................................................20
(i) Payments in the Event of Forfeitures; Fractional Shares........................................20
(j) Governing Law..................................................................................20
(k) Plan Effective Date and Stockholder Approval; Termination of Plan..............................20
</TABLE>
(ii)
<PAGE>
SHERWOOD BRANDS, INC.
1998 Executive Incentive Compensation Plan
1. Purpose. The purpose of this 1998 Executive Incentive Compensation
Plan (the "Plan") is to assist Sherwood Brands, Inc. (the "Company") and its
subsidiaries in attracting, motivating, retaining and rewarding high-quality
executives and other employees, officers, Directors and independent contractors
enabling such persons to acquire or increase a proprietary interest in the
Company in order to strengthen the mutuality of interests between such persons
and the Company's stockholders, and providing such persons with annual and long
term performance incentives to expend their maximum efforts in the creation of
shareholder value. The Plan is also intended to qualify certain compensation
awarded under the Plan for tax deductibility under Section 162(m) of the Code
(as hereafter defined) to the extent deemed appropriate by the Committee (or any
successor committee) of the Board of Directors of the Company.
2. Definitions. For purposes of the Plan, the following terms shall
be defined as set forth below, in addition to such terms defined in Section 1
hereof.
(a) "Annual Incentive Award" means a conditional right granted to a
Participant under Section 8(c) hereof to receive a cash payment, Stock or
other Award, unless otherwise determined by the Committee, after the end of a
specified fiscal year.
(b) "Award" means any Option, SAR (including Limited SAR),
Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of
another award, Dividend Equivalent, Other Stock-Based Award, Performance Award
or Annual Incentive Award, together with any other right or interest granted
to a Participant under the Plan.
(c) "Beneficiary" means the person, persons, trust or trusts which
have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or to which Awards or
other rights are transferred if and to the extent permitted under Section
10(b) hereof. If, upon a Participant's death, there is no designated
Beneficiary or surviving designated Beneficiary, then the term Beneficiary
means the person, persons, trust or trusts entitled by will or the laws of
descent and distribution to receive such benefits.
(d) "Beneficial Owner", "Beneficially Owning" and "Beneficial
Ownership" shall have the meanings ascribed to such terms in Rule 13d-3 under
the Exchange Act and any successor to such Rule.
(e) "Board" means the Company's Board of Directors.
(f) "Change in Control" means Change in Control as defined with
related terms in Section 9 of the Plan.
<PAGE>
(g) "Change in Control Price" means the amount calculated in
accordance with Section 9(c) of the Plan.
(h) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, including regulations thereunder and successor provisions and
regulations thereto.
(i) "Committee" means a committee designated by the Board to
administer the Plan; provided, however, that the Committee shall consist
solely of at least two directors, each of whom shall be (i) a "non-employee
director" within the meaning of Rule 16b-3 under the Exchange Act, unless
administration of the Plan by "non-employee directors" is not then required in
order for exemptions under Rule 16b-3 to apply to transactions under the Plan,
and (ii) an "outside director" within the meaning of Section 162(m) of the
Code, unless administration of the Plan by "outside directors" is not then
required in order to qualify for tax deductibility under Section 162(m) of the
Code.
(j) "Corporate Transaction" means a Corporate Transaction as defined
in Section 9(b)(i) of the Plan.
(k) "Covered Employee" means an Eligible Person who is a Covered
Employee as specified in Section 8(e) of the Plan.
(l) "Deferred Stock" means a right, granted to a Participant under
Section 6(e) hereof, to receive Stock, cash or a combination thereof at the
end of a specified deferral period.
(m) "Director" means a member of the Board.
(n) "Disability" means a permanent and total disability (within the
meaning of Section 22(e) of the Code), as determined by a medical doctor
satisfactory to the Committee.
(o) "Dividend Equivalent" means a right, granted to a Participant
under Section 6(g) hereof, to receive cash, Stock, other Awards or other
property equal in value to dividends paid with respect to a specified number
of shares of Stock, or other periodic payments.
(p) "Effective Date" means the effective date of the Plan, which
shall be [ ].
(q) "Eligible Person" means each Executive Officer of the Company
(as defined under the Exchange Act) and other officers, Directors and
employees of the Company or of any Subsidiary, and independent contractors
with the Company or any Subsidiary. The foregoing notwithstanding, only
employees of the Company or any Subsidiary shall be an Eligible Persons for
purposes of receiving any Incentive Stock Options. An employee on leave of
absence may be considered as still in the employ of the Company or a
Subsidiary for purposes of eligibility for participation in the Plan.
(r) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, including rules thereunder and successor provisions
and rules thereto.
2
<PAGE>
(s) "Executive Officer" means an executive officer of the Company
as defined under the Exchange Act.
(t) "Fair Market Value" means the fair market value of Stock,
Awards or other property as determined by the Committee or the Board, or under
procedures established by the Committee or the Board. Unless otherwise
determined by the Committee or the Board, the Fair Market Value of Stock as of
any given date shall be the closing sale price per share reported on a
consolidated basis for stock listed on the principal stock exchange or market
on which Stock is traded on the date as of which such value is being
determined or, if there is no sale on that date, then on the last previous day
on which a sale was reported.
(u) "Incentive Stock Option" or "ISO" means any Option intended to
be designated as an incentive stock option within the meaning of Section 422
of the Code or any successor provision thereto.
(v) "Incumbent Board" means the Incumbent Board as defined in
Section 9(b)(ii) of the Plan.
(w) "Limited SAR" means a right granted to a Participant under
Section 6(c) hereof.
(x) "Option" means a right granted to a Participant under Section
6(b) hereof, to purchase Stock or other Awards at a specified price during
specified time periods.
(y) "Other Stock-Based Awards" means Awards granted to a
Participant under Section 6(h) hereof.
(z) "Parent Corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company, if each
of the corporations in the chain (other than the Company) owns stock
possessing 50% or more of the combined voting power of all classes of stock in
one of the other corporations in the chain.
(aa) "Participant" means a person who has been granted an Award
under the Plan which remains outstanding, including a person who is no longer
an Eligible Person.
(bb) "Performance Award" means a right, granted to a Eligible
Person under Section 8 hereof, to receive Awards based upon performance
criteria specified by the Committee or the Board.
(cc) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, and shall include a "group" as defined in Section 13(d) thereof.
(dd) "Restricted Stock" means Stock granted to a Participant under
Section 6(d) hereof, that is subject to certain restrictions and to a risk of
forfeiture.
3
<PAGE>
(ee) "Rule 16b-3" and "Rule 16a-1(c)(3)" means Rule 16b-3 and Rule
16a-1(c)(3), as from time to time in effect and applicable to the Plan and
Participants, promulgated by the Securities and Exchange Commission under
Section 16 of the Exchange Act
(ff) "Stock" means the Company's Common Stock, and such other
securities as may be substituted (or resubstituted) for Stock pursuant to
Section 10(c) hereof.
(gg) "Stock Appreciation Rights" or "SAR" means a right granted to
a Participant under Section 6(c) hereof.
(hh) "Subsidiary" means any corporation or other entity in which
the Company has a direct or indirect ownership interest of 50% or more of the
total combined voting power of the then outstanding securities or interests of
such corporation or other entity entitled to vote generally in the election of
directors or in which the Company has the right to receive 50% or more of the
distribution of profits or 50% or more of the assets on liquidation or
dissolution.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by
the Committee; provided, however, that except as otherwise expressly provided
in this Plan or in order to comply with Code Section 162(m) or Rule 16b-3
under the Exchange Act, the Board may exercise any power or authority granted
to the Committee under this Plan. The Committee or the Board shall have full
and final authority, in each case subject to and consistent with the
provisions of the Plan, to select Eligible Persons to become Participants,
grant Awards, determine the type, number and other terms and conditions of,
and all other matters relating to, Awards, prescribe Award agreements (which
need not be identical for each Participant) and rules and regulations for the
administration of the Plan, construe and interpret the Plan and Award
agreements and correct defects, supply omissions or reconcile inconsistencies
therein, and to make all other decisions and determinations as the Committee
or the Board may deem necessary or advisable for the administration of the
Plan. In exercising any discretion granted to the Committee or the Board under
the Plan or pursuant to any Award, the Committee or the Board shall not be
required to follow past practices, act in a manner consistent with past
practices, or treat any Eligible Person in a manner consistent with the
treatment of other Eligible Persons.
(b) Manner of Exercise of Committee Authority. The Committee, and
not the Board, shall exercise sole and exclusive discretion on any matter
relating to a Participant then subject to Section 16 of the Exchange Act with
respect to the Company to the extent necessary in order that transactions by
such Participant shall be exempt under Rule 16b-3 under the Exchange Act. Any
action of the Committee or the Board shall be final, conclusive and binding on
all persons, including the Company, its subsidiaries, Participants,
Beneficiaries, transferees under Section 10(b) hereof or other persons
claiming rights from or through a Participant, and stockholders. The express
grant of any specific power to the Committee or the Board, and the taking of
any action by the Committee or the Board, shall not be construed as limiting
any power or authority of the Committee or the Board. The Committee or the
Board may delegate to officers or managers of the Company or any subsidiary,
or committees thereof, the authority, subject to such terms as the Committee
or the Board shall determine, (i) to perform
4
<PAGE>
administrative functions, (ii) with respect to Participants not subject to
Section 16 of the Exchange Act, to perform such other functions as the
Committee or the Board may determine, and (iii) with respect to Participants
subject to Section 16, to perform such other functions of the Committee or the
Board as the Committee or the Board may determine to the extent performance of
such functions will not result in the loss of an exemption under Rule 16b-3
otherwise available for transactions by such persons, in each case to the
extent permitted under applicable law and subject to the requirements set
forth in Section 8(d). The Committee or the Board may appoint agents to assist
it in administering the Plan.
(c) Limitation of Liability. The Committee and the Board, and each
member thereof, shall be entitled to, in good faith, rely or act upon any
report or other information furnished to him or her by any executive officer,
other officer or employee of the Company or a Subsidiary, the Company's
independent auditors, consultants or any other agents assisting in the
administration of the Plan. Members of the Committee and the Board, and any
officer or employee of the Company or a subsidiary acting at the direction or
on behalf of the Committee or the Board, shall not be personally liable for
any action or determination taken or made in good faith with respect to the
Plan, and shall, to the extent permitted by law, be fully indemnified and
protected by the Company with respect to any such action or determination.
4. Stock Subject to Plan.
(a) Limitation on Overall Number of Shares Subject to Awards.
Subject to adjustment as provided in Section 10(c) hereof, the total number of
shares of Stock reserved and available for delivery in connection with Awards
under the Plan shall be the sum of (i)350,000, plus (ii) the number of shares
with respect to Awards previously granted under the Plan that terminate
without being exercised, expire, are forfeited or canceled, and the number of
shares of Stock that are surrendered in payment of any Awards or any tax
withholding with regard thereto. Any shares of Stock delivered under the Plan
may consist, in whole or in part, of authorized and unissued shares or
treasury shares. Subject to adjustment as provided in Section 10(c) hereof, in
no event shall the aggregate number of shares of Stock which may be issued
pursuant to ISOs exceed 350,000 shares.
(b) Application of Limitations. The limitation contained in
Section 4(a) shall apply not only to Awards that are settleable by the
delivery of shares of Stock but also to Awards relating to shares of Stock but
settleable only in cash (such as cash-only SARs). The Committee or the Board
may adopt reasonable counting procedures to ensure appropriate counting, avoid
double counting (as, for example, in the case of tandem or substitute awards)
and make adjustments if the number of shares of Stock actually delivered
differs from the number of shares previously counted in connection with an
Award.
5. Eligibility; Per-Person Award Limitations. Awards may be
granted under the Plan only to Eligible Persons. In each fiscal year during
any part of which the Plan is in effect, an Eligible Person may not be granted
Awards relating to more than [ ] shares of Stock, subject to adjustment as
provided in Section 10(c), under each of Sections 6(b), 6(c), 6(d), 6(e),
6(f), 6(g), 6(h), 8(b) and 8(c). In addition, the maximum amount that may be
earned as an
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Annual Incentive Award or other cash Award in any fiscal year by any one
Participant shall be [$2,000,000], and the maximum amount that may be earned as
a Performance Award or other cash Award in respect of a performance period by
any one Participant shall be [$5,000,000].
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set
forth in this Section 6. In addition, the Committee or the Board may impose on
any Award or the exercise thereof, at the date of grant or thereafter (subject
to Section 10(e)), such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Committee or the Board shall determine,
including terms requiring forfeiture of Awards in the event of termination of
employment by the Participant and terms permitting a Participant to make
elections relating to his or her Award. The Committee or the Board shall
retain full power and discretion to accelerate, waive or modify, at any time,
any term or condition of an Award that is not mandatory under the Plan. Except
in cases in which the Committee or the Board is authorized to require other
forms of consideration under the Plan, or to the extent other forms of
consideration must be paid to satisfy the requirements of Maryland law, no
consideration other than services may be required for the grant (but not the
exercise) of any Award.
(b) Options. The Committee and the Board each is authorized to
grant Options to Participants on the following terms and conditions:
(i) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee
or the Board, provided that such exercise price shall not, in the
case of Incentive Stock Options, be less than 100% of the Fair
Market Value of the Stock on the date of grant of the Option and
shall not, in any event, be less than the par value of a share of
Stock on the date of grant of such Option. If an employee owns or
is deemed to own (by reason of the attribution rules applicable
under Section 424(d) of the Code) more than 10% of the combined
voting power of all classes of stock of the Company or any Parent
Corporation and an Incentive Stock Option is granted to such
employee, the option price of such Incentive Stock Option (to the
extent required by the Code at the time of grant) shall be no less
than 110% of the Fair Market Value of the Stock on the date such
Incentive Stock Option is granted.
(ii) Time and Method of Exercise. The Committee or the Board
shall determine the time or times at which or the circumstances
under which an Option may be exercised in whole or in part
(including based on achievement of performance goals and/or future
service requirements), the time or times at which Options shall
cease to be or become exercisable following termination of
employment or upon other conditions, the methods by which such
exercise price may be paid or deemed to be paid (including in the
discretion of the Committee or the Board a cashless exercise
procedure), the form of such payment, including, without
limitation, cash, Stock, other Awards or awards granted under
other plans of the Company or any subsidiary, or other property
(including notes or other
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contractual obligations of Participants to make payment on a
deferred basis), and the methods by or forms in which Stock will
be delivered or deemed to be delivered to Participants.
(iii) ISOs. The terms of any ISO granted under the Plan shall
comply in all respects with the provisions of Section 422 of the
Code. Anything in the Plan to the contrary notwithstanding, no
term of the Plan relating to ISOs (including any SAR in tandem
therewith) shall be interpreted, amended or altered, nor shall any
discretion or authority granted under the Plan be exercised, so as
to disqualify either the Plan or any ISO under Section 422 of the
Code, unless the Participant has first requested the change that
will result in such disqualification. Thus, if and to the extent
required to comply with Section 422 of the Code, Options granted
as Incentive Stock Options shall be subject to the following
special terms and conditions:
(A) the Option shall not be exercisable more than ten
years after the date such Incentive Stock Option is granted;
provided, however, that if a Participant owns or is deemed to own
(by reason of the attribution rules of Section 424(d) of the Code)
more than 10% of the combined voting power of all classes of stock
of the Company or any Parent Corporation and the Incentive Stock
Option is granted to such Participant, the term of the Incentive
Stock Option shall be (to the extent required by the Code at the
time of the grant) for no more than five years from the date of
grant; and
(B) The aggregate Fair Market Value (determined as of the
date the Incentive Stock Option is granted) of the shares of stock
with respect to which Incentive Stock Options granted under the
Plan and all other option plans of the Company or its Parent
Corporation during any calendar year exercisable for the first
time by the Participant during any calendar year shall not (to the
extent required by the Code at the time of the grant) exceed
$100,000.
(c) Stock Appreciation Rights. The Committee and the Board each
is authorized to grant SAR's to Participants on the following terms and
conditions:
(i) Right to Payment. A SAR shall confer on the Participant to
whom it is granted a right to receive, upon exercise thereof, the
excess of (A) the Fair Market Value of one share of stock on the
date of exercise (or, in the case of a "Limited SAR" that may be
exercised only in the event of a Change in Control, the Fair
Market Value determined by reference to the Change in Control
Price, as defined under Section 9(c) hereof), over (B) the grant
price of the SAR as determined by the Committee or the Board. The
grant price of an SAR shall not be less than the Fair Market Value
of a share of Stock on the date of grant except as provided under
Section 7(a) hereof.
(ii) Other Terms. The Committee or the Board shall determine at
the date of grant or thereafter, the time or times at which and
the circumstances under
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which a SAR may be exercised in whole or in part (including based
on achievement of performance goals and/or future service
requirements), the time or times at which SARs shall cease to be
or become exercisable following termination of employment or upon
other conditions, the method of exercise, method of settlement,
form of consideration payable in settlement, method by or forms in
which Stock will be delivered or deemed to be delivered to
Participants, whether or not a SAR shall be in tandem or in
combination with any other Award, and any other terms and
conditions of any SAR. Limited SARs that may only be exercised in
connection with a Change in Control or other event as specified by
the Committee or the Board, may be granted on such terms, not
inconsistent with this Section 6(c), as the Committee or the Board
may determine. SARs and Limited SARs may be either freestanding or
in tandem with other Awards.
(d) Restricted Stock. The Committee and the Board each is authorized
to grant Restricted Stock to Participants on the following terms and
conditions:
(i) Grant and Restrictions. Restricted Stock shall be subject to
such restrictions on transferability, risk of forfeiture and other
restrictions, if any, as the Committee or the Board may impose,
which restrictions may lapse separately or in combination at such
times, under such circumstances (including based on achievement of
performance goals and/or future service requirements), in such
installments or otherwise, as the Committee or the Board may
determine at the date of grant or thereafter. Except to the extent
restricted under the terms of the Plan and any Award agreement
relating to the Restricted Stock, a Participant granted Restricted
Stock shall have all of the rights of a stockholder, including the
right to vote the Restricted Stock and the right to receive
dividends thereon (subject to any mandatory reinvestment or other
requirement imposed by the Committee or the Board). During the
restricted period applicable to the Restricted Stock, subject to
Section 10(b) below, the Restricted Stock may not be sold,
transferred, pledged, hypothecated, margined or otherwise
encumbered by the Participant.
(ii) Forfeiture. Except as otherwise determined by the Committee
or the Board at the time of the Award, upon termination of a
Participant's employment during the applicable restriction period,
the Participant's Restricted Stock that is at that time subject to
restrictions shall be forfeited and reacquired by the Company;
provided that the Committee or the Board may provide, by rule or
regulation or in any Award agreement, or may determine in any
individual case, that restrictions or forfeiture conditions
relating to Restricted Stock shall be waived in whole or in part
in the event of terminations resulting from specified causes, and
the Committee or the Board may in other cases waive in whole or in
part the forfeiture of Restricted Stock.
(iii) Certificates for Stock. Restricted Stock granted under
the Plan may be evidenced in such manner as the Committee or the
Board shall determine.
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If certificates representing Restricted Stock are registered in
the name of the Participant, the Committee or the Board may
require that such certificates bear an appropriate legend
referring to the terms, conditions and restrictions applicable to
such Restricted Stock, that the Company retain physical possession
of the certificates, and that the Participant deliver a stock
power to the Company, endorsed in blank, relating to the
Restricted Stock.
(iv) Dividends and Splits. As a condition to the grant of an
Award of Restricted Stock, the Committee or the Board may require
that any cash dividends paid on a share of Restricted Stock be
automatically reinvested in additional shares of Restricted Stock
or applied to the purchase of additional Awards under the Plan.
Unless otherwise determined by the Committee or the Board, Stock
distributed in connection with a Stock split or Stock dividend,
and other property distributed as a dividend, shall be subject to
restrictions and a risk of forfeiture to the same extent as the
Restricted Stock with respect to which such Stock or other
property has been distributed.
(e) Deferred Stock. The Committee and the Board each is authorized
to grant Deferred Stock to Participants, which are rights to receive Stock,
cash, or a combination thereof at the end of a specified deferral period,
subject to the following terms and conditions:
(i) Award and Restrictions. Satisfaction of an Award of Deferred
Stock shall occur upon expiration of the deferral period specified
for such Deferred Stock by the Committee or the Board (or, if
permitted by the Committee or the Board, as elected by the
Participant). In addition, Deferred Stock shall be subject to such
restrictions (which may include a risk of forfeiture) as the
Committee or the Board may impose, if any, which restrictions may
lapse at the expiration of the deferral period or at earlier
specified times (including based on achievement of performance
goals and/or future service requirements), separately or in
combination, in installments or otherwise, as the Committee or the
Board may determine. Deferred Stock may be satisfied by delivery
of Stock, cash equal to the Fair Market Value of the specified
number of shares of Stock covered by the Deferred Stock, or a
combination thereof, as determined by the Committee or the Board
at the date of grant or thereafter. Prior to satisfaction of an
Award of Deferred Stock, an Award of Deferred Stock carries no
voting or dividend or other rights associated with share
ownership.
(ii) Forfeiture. Except as otherwise determined by the
Committee or the Board, upon termination of a Participant's
employment during the applicable deferral period thereof to which
forfeiture conditions apply (as provided in the Award agreement
evidencing the Deferred Stock), the Participant's Deferred Stock
that is at that time subject to deferral (other than a deferral at
the election of the Participant) shall be forfeited; provided that
the Committee or the Board may provide, by rule or regulation or
in any Award agreement, or may determine in any individual case,
that restrictions or forfeiture conditions relating to Deferred
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Stock shall be waived in whole or in part in the event of
terminations resulting from specified causes, and the Committee or
the Board may in other cases waive in whole or in part the
forfeiture of Deferred Stock.
(iii) Dividend Equivalents. Unless otherwise determined by the
Committee or the Board at date of grant, Dividend Equivalents on
the specified number of shares of Stock covered by an Award of
Deferred Stock shall be either (A) paid with respect to such
Deferred Stock at the dividend payment date in cash or in shares
of unrestricted Stock having a Fair Market Value equal to the
amount of such dividends, or (B) deferred with respect to such
Deferred Stock and the amount or value thereof automatically
deemed reinvested in additional Deferred Stock, other Awards or
other investment vehicles, as the Committee or the Board shall
determine or permit the Participant to elect.
(f) Bonus Stock and Awards in Lieu of Obligations. The Committee and
the Board each is authorized to grant Stock as a bonus, or to grant Stock or
other Awards in lieu of Company obligations to pay cash or deliver other
property under the Plan or under other plans or compensatory arrangements,
provided that, in the case of Participants subject to Section 16 of the
Exchange Act, the amount of such grants remains within the discretion of the
Committee to the extent necessary to ensure that acquisitions of Stock or
other Awards are exempt from liability under Section 16(b) of the Exchange
Act. Stock or Awards granted hereunder shall be subject to such other terms as
shall be determined by the Committee or the Board.
(g) Dividend Equivalents. The Committee and the Board each is
authorized to grant Dividend Equivalents to a Participant entitling the
Participant to receive cash, Stock, other Awards, or other property equal in
value to dividends paid with respect to a specified number of shares of Stock,
or other periodic payments. Dividend Equivalents may be awarded on a
free-standing basis or in connection with another Award. The Committee or the
Board may provide that Dividend Equivalents shall be paid or distributed when
accrued or shall be deemed to have been reinvested in additional Stock,
Awards, or other investment vehicles, and subject to such restrictions on
transferability and risks of forfeiture, as the Committee or the Board may
specify.
(h) Other Stock-Based Awards. The Committee and the Board each is
authorized, subject to limitations under applicable law, to grant to
Participants such other Awards that may be denominated or payable in, valued
in whole or in part by reference to, or otherwise based on, or related to,
Stock, as deemed by the Committee or the Board to be consistent with the
purposes of the Plan, including, without limitation, convertible or
exchangeable debt securities, other rights convertible or exchangeable into
Stock, purchase rights for Stock, Awards with value and payment contingent
upon performance of the Company or any other factors designated by the
Committee or the Board, and Awards valued by reference to the book value of
Stock or the value of securities of or the performance of specified
subsidiaries or business units. The Committee or the Board shall determine the
terms and conditions of such Awards. Stock delivered pursuant to an Award in
the nature of a purchase right granted under this Section 6(h) shall be
purchased for such consideration, paid for at such times, by such methods, and
in such forms, including, without limitation, cash, Stock, other Awards or
other property, as the
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Committee or the Board shall determine. Cash awards, as an element of or
supplement to any other Award under the Plan, may also be granted pursuant to
this Section 6(h).
7. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards
granted under the Plan may, in the discretion of the Committee or the Board,
be granted either alone or in addition to, in tandem with, or in substitution
or exchange for, any other Award or any award granted under another plan of
the Company, any subsidiary, or any business entity to be acquired by the
Company or a subsidiary, or any other right of a Participant to receive
payment from the Company or any subsidiary. Such additional, tandem, and
substitute or exchange Awards may be granted at any time. If an Award is
granted in substitution or exchange for another Award or award, the Committee
or the Board shall require the surrender of such other Award or award in
consideration for the grant of the new Award. In addition, Awards may be
granted in lieu of cash compensation, including in lieu of cash amounts
payable under other plans of the Company or any subsidiary, in which the value
of Stock subject to the Award is equivalent in value to the cash compensation
(for example, Deferred Stock or Restricted Stock), or in which the exercise
price, grant price or purchase price of the Award in the nature of a right
that may be exercised is equal to the Fair Market Value of the underlying
Stock minus the value of the cash compensation surrendered (for example,
Options granted with an exercise price "discounted" by the amount of the cash
compensation surrendered).
(b) Term of Awards. The term of each Award shall be for such period
as may be determined by the Committee or the Board; provided that in no event
shall the term of any Option or SAR exceed a period of ten years (or such
shorter term as may be required in respect of an ISO under Section 422 of the
Code).
(c) Form and Timing of Payment Under Awards; Deferrals. Subject to
the terms of the Plan and any applicable Award agreement, payments to be made
by the Company or a subsidiary upon the exercise of an Option or other Award
or settlement of an Award may be made in such forms as the Committee or the
Board shall determine, including, without limitation, cash, Stock, other
Awards or other property, and may be made in a single payment or transfer, in
installments, or on a deferred basis. The settlement of any Award may be
accelerated, and cash paid in lieu of Stock in connection with such
settlement, in the discretion of the Committee or the Board or upon occurrence
of one or more specified events (in addition to a Change in Control).
Installment or deferred payments may be required by the Committee or the Board
(subject to Section 10(e) of the Plan) or permitted at the election of the
Participant on terms and conditions established by the Committee or the Board.
Payments may include, without limitation, provisions for the payment or
crediting of a reasonable interest rate on installment or deferred payments or
the grant or crediting of Dividend Equivalents or other amounts in respect of
installment or deferred payments denominated in Stock.
(d) Exemptions from Section 16(b) Liability. It is the intent of the
Company that this Plan comply in all respects with applicable provisions of
Rule 16b-3 or Rule 16a-1(c)(3) to the extent necessary to ensure that neither
the grant of any Awards to nor other transaction by
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a Participant who is subject to Section 16 of the Exchange Act is subject to
liability under Section 16(b) thereof (except for transactions acknowledged in
writing to be non-exempt by such Participant). Accordingly, if any provision
of this Plan or any Award agreement does not comply with the requirements of
Rule 16b-3 or Rule 16a-1(c)(3) as then applicable to any such transaction,
such provision will be construed or deemed amended to the extent necessary to
conform to the applicable requirements of Rule 16b-3 or Rule 16a-1(c)(3) so
that such Participant shall avoid liability under Section 16(b). In addition,
the purchase price of any Award conferring a right to purchase Stock shall be
not less than any specified percentage of the Fair Market Value of Stock at
the date of grant of the Award then required in order to comply with Rule
16b-3.
8. Performance and Annual Incentive Awards.
(a) Performance Conditions. The right of a Participant to exercise
or receive a grant or settlement of any Award, and the timing thereof, may be
subject to such performance conditions as may be specified by the Committee or
the Board. The Committee or the Board may use such business criteria and other
measures of performance as it may deem appropriate in establishing any
performance conditions, and may exercise its discretion to reduce the amounts
payable under any Award subject to performance conditions, except as limited
under Sections 8(b) and 8(c) hereof in the case of a Performance Award or
Annual Incentive Award intended to qualify under Code Section 162(m). If and
to the extent required under Code Section 162(m), any power or authority
relating to a Performance Award or Annual Incentive Award intended to qualify
under Code Section 162(m), shall be exercised by the Committee and not the
Board.
(b) Performance Awards Granted to Designated Covered Employees. If
and to the extent that the Committee determines that a Performance Award to be
granted to an Eligible Person who is designated by the Committee as likely to
be a Covered Employee should qualify as "performance-based compensation" for
purposes of Code Section 162(m), the grant, exercise and/or settlement of such
Performance Award shall be contingent upon achievement of preestablished
performance goals and other terms set forth in this Section 8(b).
(i) Performance Goals Generally. The performance goals for such
Performance Awards shall consist of one or more business criteria and
a targeted level or levels of performance with respect to each of
such criteria, as specified by the Committee consistent with this
Section 8(b). Performance goals shall be objective and shall
otherwise meet the requirements of Code Section 162(m) and
regulations thereunder including the requirement that the level or
levels of performance targeted by the Committee result in the
achievement of performance goals being "substantially uncertain." The
Committee may determine that such Performance Awards shall be
granted, exercised and/or settled upon achievement of any one
performance goal or that two or more of the performance goals must be
achieved as a condition to grant, exercise and/or settlement of such
Performance Awards. Performance goals may differ for Performance
Awards granted to any one Participant or to different Participants.
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(ii) Business Criteria. One or more of the following business
criteria for the Company, on a consolidated basis, and/or specified
subsidiaries or business units of the Company (except with respect to
the total stockholder return and earnings per share criteria), shall
be used exclusively by the Committee in establishing performance
goals for such Performance Awards: (1) total stockholder return; (2)
such total stockholder return as compared to total return (on a
comparable basis) of a publicly available index such as, but not
limited to, the Standard & Poor's 500 Stock Index or the S&P
Specialty Retailer Index; (3) net income; (4) pretax earnings; (5)
earnings before interest expense, taxes, depreciation and
amortization; (6) pretax operating earnings after interest expense
and before bonuses, service fees, and extraordinary or special items;
(7) operating margin; (8) earnings per share; (9) return on equity;
(10) return on capital; (11) return on investment; (12) operating
earnings; (13) working capital or inventory; and (14) ratio of debt
to stockholders' equity. One or more of the foregoing business
criteria shall also be exclusively used in establishing performance
goals for Annual Incentive Awards granted to a Covered Employee under
Section 8(c) hereof that are intended to qualify as
"performanced-based compensation under Code Section 162(m).
(iii) Performance Period; Timing For Establishing Performance
Goals. Achievement of performance goals in respect of such
Performance Awards shall be measured over a performance period of up
to ten years, as specified by the Committee. Performance goals shall
be established not later than 90 days after the beginning of any
performance period applicable to such Performance Awards, or at such
other date as may be required or permitted for "performance-based
compensation" under Code Section 162(m).
(iv) Performance Award Pool. The Committee may establish a
Performance Award pool, which shall be an unfunded pool, for purposes
of measuring Company performance in connection with Performance
Awards. The amount of such Performance Award pool shall be based upon
the achievement of a performance goal or goals based on one or more
of the business criteria set forth in Section 8(b)(ii) hereof during
the given performance period, as specified by the Committee in
accordance with Section 8(b)(iii) hereof. The Committee may specify
the amount of the Performance Award pool as a percentage of any of
such business criteria, a percentage thereof in excess of a threshold
amount, or as another amount which need not bear a strictly
mathematical relationship to such business criteria.
(v) Settlement of Performance Awards; Other Terms. Settlement of
such Performance Awards shall be in cash, Stock, other Awards or
other property, in the discretion of the Committee. The Committee
may, in its discretion, reduce the amount of a settlement otherwise
to be made in connection with such Performance Awards. The Committee
shall specify the circumstances in which such Performance Awards
shall be paid or forfeited in the event of termination of
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employment by the Participant prior to the end of a performance period
or settlement of Performance Awards.
(c) Annual Incentive Awards Granted to Designated Covered Employees. If
and to the extent that the Committee determines that an Annual Incentive Award
to be granted to an Eligible Person who is designated by the Committee as
likely to be a Covered Employee should qualify as "performance-based
compensation" for purposes of Code Section 162(m), the grant, exercise and/or
settlement of such Annual Incentive Award shall be contingent upon achievement
of preestablished performance goals and other terms set forth in this Section
8(c).
(i) Annual Incentive Award Pool. The Committee may establish an
Annual Incentive Award pool, which shall be an unfunded pool, for
purposes of measuring Company performance in connection with Annual
Incentive Awards. The amount of such Annual Incentive Award pool
shall be based upon the achievement of a performance goal or goals
based on one or more of the business criteria set forth in Section
8(b)(ii) hereof during the given performance period, as specified by
the Committee in accordance with Section 8(b)(iii) hereof. The
Committee may specify the amount of the Annual Incentive Award pool
as a percentage of any such business criteria, a percentage thereof
in excess of a threshold amount, or as another amount which need not
bear a strictly mathematical relationship to such business criteria.
(ii) Potential Annual Incentive Awards. Not later than the end of
the 90th day of each fiscal year, or at such other date as may be
required or permitted in the case of Awards intended to be
"performance-based compensation" under Code Section 162(m), the
Committee shall determine the Eligible Persons who will potentially
receive Annual Incentive Awards, and the amounts potentially payable
thereunder, for that fiscal year, either out of an Annual Incentive
Award pool established by such date under Section 8(c)(i) hereof or
as individual Annual Incentive Awards. In the case of individual
Annual Incentive Awards intended to qualify under Code Section
162(m), the amount potentially payable shall be based upon the
achievement of a performance goal or goals based on one or more of
the business criteria set forth in Section 8(b)(ii) hereof in the
given performance year, as specified by the Committee; in other
cases, such amount shall be based on such criteria as shall be
established by the Committee. In all cases, the maximum Annual
Incentive Award of any Participant shall be subject to the limitation
set forth in Section 5 hereof.
(iii) Payout of Annual Incentive Awards. After the end of each
fiscal year, the Committee shall determine the amount, if any, of (A)
the Annual Incentive Award pool, and the maximum amount of potential
Annual Incentive Award payable to each Participant in the Annual
Incentive Award pool, or (B) the amount of potential Annual Incentive
Award otherwise payable to each Participant. The Committee may, in
its discretion, determine that the amount payable to any Participant
as an Annual Incentive Award shall be reduced from
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the amount of his or her potential Annual Incentive Award, including a
determination to make no Award whatsoever. The Committee shall specify
the circumstances in which an Annual Incentive Award shall be paid or
forfeited in the event of termination of employment by the Participant
prior to the end of a fiscal year or settlement of such Annual
Incentive Award.
(d) Written Determinations. All determinations by the Committee as to
the establishment of performance goals, the amount of any Performance Award
pool or potential individual Performance Awards and as to the achievement of
performance goals relating to Performance Awards under Section 8(b), and the
amount of any Annual Incentive Award pool or potential individual Annual
Incentive Awards and the amount of final Annual Incentive Awards under Section
8(c), shall be made in writing in the case of any Award intended to qualify
under Code Section 162(m). The Committee may not delegate any responsibility
relating to such Performance Awards or Annual Incentive Awards if and to the
extent required to comply with Code Section 162(m).
(e) Status of Section 8(b) and Section 8(c) Awards Under Code Section
162(m). It is the intent of the Company that Performance Awards and Annual
Incentive Awards under Section 8(b) and 8(c) hereof granted to persons who are
designated by the Committee as likely to be Covered Employees within the
meaning of Code Section 162(m) and regulations thereunder shall, if so
designated by the Committee, constitute "qualified performance-based
compensation" within the meaning of Code Section 162(m) and regulations
thereunder. Accordingly, the terms of Sections 8(b), (c), (d) and (e),
including the definitions of Covered Employee and other terms used therein,
shall be interpreted in a manner consistent with Code Section 162(m) and
regulations thereunder. The foregoing notwithstanding, because the Committee
cannot determine with certainty whether a given Participant will be a Covered
Employee with respect to a fiscal year that has not yet been completed, the
term Covered Employee as used herein shall mean only a person designated by
the Committee, at the time of grant of Performance Awards or an Annual
Incentive Award, as likely to be a Covered Employee with respect to that
fiscal year. If any provision of the Plan or any agreement relating to such
Performance Awards or Annual Incentive Awards does not comply or is
inconsistent with the requirements of Code Section 162(m) or regulations
thereunder, such provision shall be construed or deemed amended to the extent
necessary to conform to such requirements.
9. Change in Control.
(a) Effect of "Change in Control." If and to the extent provided in
the Award, in the event of a "Change in Control," as defined in Section 9(b),
the following provisions shall apply:
(i) Any Award carrying a right to exercise that was not previously
exercisable and vested shall become fully exercisable and vested as
of the time of the Change in Control, subject only to applicable
restrictions set forth in Section 10(a) hereof;
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(ii) Limited SARs (and other SARs if so provided by their terms)
shall become exercisable for amounts, in cash, determined by
reference to the Change in Control Price;
(iii) The restrictions, deferral of settlement, and forfeiture
conditions applicable to any other Award granted under the Plan shall
lapse and such Awards shall be deemed fully vested as of the time of
the Change in Control, except to the extent of any waiver by the
Participant and subject to applicable restrictions set forth in
Section 10(a) hereof; and
(iv) With respect to any such outstanding Award subject to
achievement of performance goals and conditions under the Plan, such
performance goals and other conditions will be deemed to be met if
and to the extent so provided by the Committee in the Award agreement
relating to such Award.
(b) Definition of "Change in Control. A "Change in Control" shall be
deemed to have occurred upon:
(i) Approval by the shareholders of the Company of a
reorganization, merger, consolidation or other form of corporate
transaction or series of transactions, in each case, with respect to
which persons who were the shareholders of the Company immediately
prior to such reorganization, merger or consolidation or other
transaction do not, immediately thereafter, own more than 50% of the
combined voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's then
outstanding voting securities, or a liquidation or dissolution of the
Company or the sale of all or substantially all of the assets of the
Company (unless such reorganization, merger, consolidation or other
corporate transaction, liquidation, dissolution or sale (any such
event being referred to as a "Corporate Transaction") is subsequently
abandoned); or
(ii) Individuals who, as of the date hereof, constitute the Board
(as of the date hereof the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any person
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved
by a vote of at least a majority of the directors then comprising the
Incumbent Board (other than an election or nomination of an
individual whose initial assumption of office is in connection with
an actual or threatened election contest relating to the election of
the Directors of the Company, as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Securities Exchange Act)
shall be, for purposes of this Agreement, considered as though such
person were a member of the Incumbent Board.
(c c) Definition of "Change in Control Price." The "Change in
Control Price" means an amount in cash equal to the higher of (i) the amount
of cash and fair market value of property that is the highest price per share
paid (including extraordinary dividends) in any Corporate Transaction
triggering the Change in Control under Section 9(b)(i) hereof or any
liquidation of shares following a sale of substantially all of the assets of
the Company, or (ii)
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the highest Fair Market Value per share at any time during the 60-day period
preceding and the 60-day period following the Change in Control.
10. General Provisions.
(a) Compliance With Legal and Other Requirements. The Company may, to
the extent deemed necessary or advisable by the Committee or the Board,
postpone the issuance or delivery of Stock or payment of other benefits under
any Award until completion of such registration or qualification of such Stock
or other required action under any federal or state law, rule or regulation,
listing or other required action with respect to any stock exchange or
automated quotation system upon which the Stock or other Company securities
are listed or quoted, or compliance with any other obligation of the Company,
as the Committee or the Board, may consider appropriate, and may require any
Participant to make such representations, furnish such information and comply
with or be subject to such other conditions as it may consider appropriate in
connection with the issuance or delivery of Stock or payment of other benefits
in compliance with applicable laws, rules, and regulations, listing
requirements, or other obligations. The foregoing notwithstanding, in
connection with a Change in Control, the Company shall take or cause to be
taken no action, and shall undertake or permit to arise no legal or
contractual obligation, that results or would result in any postponement of
the issuance or delivery of Stock or payment of benefits under any Award or
the imposition of any other conditions on such issuance, delivery or payment,
to the extent that such postponement or other condition would represent a
greater burden on a Participant than existed on the 90th day preceding the
Change in Control.
(b) Limits on Transferability; Beneficiaries. No Award or other right
or interest of a Participant under the Plan, including any Award or right
which constitutes a derivative security as generally defined in Rule 16a-1(c)
under the Exchange Act, shall be pledged, hypothecated or otherwise encumbered
or subject to any lien, obligation or liability of such Participant to any
party (other than the Company or a Subsidiary), or assigned or transferred by
such Participant otherwise than by will or the laws of descent and
distribution or to a Beneficiary upon the death of a Participant, and such
Awards or rights that may be exercisable shall be exercised during the
lifetime of the Participant only by the Participant or his or her guardian or
legal representative, except that Awards and other rights (other than ISOs and
SARs in tandem therewith) may be transferred to one or more Beneficiaries or
other transferees during the lifetime of the Participant, and may be exercised
by such transferees in accordance with the terms of such Award, but only if
and to the extent such transfers and exercises are permitted by the Committee
or the Board pursuant to the express terms of an Award agreement (subject to
any terms and conditions which the Committee or the Board may impose thereon,
and further subject to any prohibitions or restrictions on such transfers
pursuant to Rule 16b-3). A Beneficiary, transferee, or other person claiming
any rights under the Plan from or through any Participant shall be subject to
all terms and conditions of the Plan and any Award agreement applicable to
such Participant, except as otherwise determined by the Committee or the
Board, and to any additional terms and conditions deemed necessary or
appropriate by the Committee or the Board.
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(c) Adjustments. In the event that any dividend or other distribution
(whether in the form of cash, Stock, or other property), recapitalization,
forward or reverse split, reorganization, merger, consolidation, spin-off,
combination, repurchase, share exchange, liquidation, dissolution or other
similar corporate transaction or event affects the Stock such that a
substitution or adjustment is determined by the Committee or the Board to be
appropriate in order to prevent dilution or enlargement of the rights of
Participants under the Plan, then the Committee or the Board shall, in such
manner as it may deem equitable, substitute or adjust any or all of (i) the
number and kind of shares of Stock which may be delivered in connection with
Awards granted thereafter, (ii) the number and kind of shares of Stock by
which annual per-person Award limitations are measured under Section 5 hereof,
(iii) the number and kind of shares of Stock subject to or deliverable in
respect of outstanding Awards and (iv) the exercise price, grant price or
purchase price relating to any Award and/or make provision for payment of cash
or other property in respect of any outstanding Award. In addition, the
Committee (and the Board if and only to the extent such authority is not
required to be exercised by the Committee to comply with Code Section 162(m))
is authorized to make adjustments in the terms and conditions of, and the
criteria included in, Awards (including Performance Awards and performance
goals, and Annual Incentive Awards and any Annual Incentive Award pool or
performance goals relating thereto) in recognition of unusual or nonrecurring
events (including, without limitation, events described in the preceding
sentence, as well as acquisitions and dispositions of businesses and assets)
affecting the Company, any Subsidiary or any business unit, or the financial
statements of the Company or any Subsidiary, or in response to changes in
applicable laws, regulations, accounting principles, tax rates and regulations
or business conditions or in view of the Committee's assessment of the
business strategy of the Company, any Subsidiary or business unit thereof,
performance of comparable organizations, economic and business conditions,
personal performance of a Participant, and any other circumstances deemed
relevant; provided that no such adjustment shall be authorized or made if and
to the extent that such authority or the making of such adjustment would cause
Options, SARs, Performance Awards granted under Section 8(b) hereof or Annual
Incentive Awards granted under Section 8(c) hereof to Participants designated
by the Committee as Covered Employees and intended to qualify as
"performance-based compensation" under Code Section 162(m) and the regulations
thereunder to otherwise fail to qualify as "performance-based compensation"
under Code Section 162(m) and regulations thereunder.
(d) Taxes. The Company and any Subsidiary is authorized to withhold
from any Award granted, any payment relating to an Award under the Plan,
including from a distribution of Stock, or any payroll or other payment to a
Participant, amounts of withholding and other taxes due or potentially payable
in connection with any transaction involving an Award, and to take such other
action as the Committee or the Board may deem advisable to enable the Company
and Participants to satisfy obligations for the payment of withholding taxes
and other tax obligations relating to any Award. This authority shall include
authority to withhold or receive Stock or other property and to make cash
payments in respect thereof in satisfaction of a Participant's tax
obligations, either on a mandatory or elective basis in the discretion of the
Committee.
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(e) Changes to the Plan and Awards. The Board may amend, alter,
suspend, discontinue or terminate the Plan, or the Committee's authority to
grant Awards under the Plan, without the consent of stockholders or
Participants, except that any amendment or alteration to the Plan shall be
subject to the approval of the Company's stockholders not later than the
annual meeting next following such Board action if such stockholder approval
is required by any federal or state law or regulation (including, without
limitation, Rule 16b-3 or Code Section 162(m)) or the rules of any stock
exchange or automated quotation system on which the Stock may then be listed
or quoted, and the Board may otherwise, in its discretion, determine to submit
other such changes to the Plan to stockholders for approval; provided that,
without the consent of an affected Participant, no such Board action may
materially and adversely affect the rights of such Participant under any
previously granted and outstanding Award. The Committee or the Board may waive
any conditions or rights under, or amend, alter, suspend, discontinue or
terminate any Award theretofore granted and any Award agreement relating
thereto, except as otherwise provided in the Plan; provided that, without the
consent of an affected Participant, no such Committee or the Board action may
materially and adversely affect the rights of such Participant under such
Award. Notwithstanding anything in the Plan to the contrary, if any right
under this Plan would cause a transaction to be ineligible for pooling of
interest accounting that would, but for the right hereunder, be eligible for
such accounting treatment, the Committee or the Board may modify or adjust the
right so that pooling of interest accounting shall be available, including the
substitution of Stock having a Fair Market Value equal to the cash otherwise
payable hereunder for the right which caused the transaction to be ineligible
for pooling of interest accounting.
(f) Limitation on Rights Conferred Under Plan. Neither the Plan nor
any action taken hereunder shall be construed as (i) giving any Eligible
Person or Participant the right to continue as an Eligible Person or
Participant or in the employ of the Company or a Subsidiary; (ii) interfering
in any way with the right of the Company or a Subsidiary to terminate any
Eligible Person's or Participant's employment at any time, (iii) giving an
Eligible Person or Participant any claim to be granted any Award under the
Plan or to be treated uniformly with other Participants and employees, or (iv)
conferring on a Participant any of the rights of a stockholder of the Company
unless and until the Participant is duly issued or transferred shares of Stock
in accordance with the terms of an Award.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant or
obligation to deliver Stock pursuant to an Award, nothing contained in the
Plan or any Award shall give any such Participant any rights that are greater
than those of a general creditor of the Company; provided that the Committee
may authorize the creation of trusts and deposit therein cash, Stock, other
Awards or other property, or make other arrangements to meet the Company's
obligations under the Plan. Such trusts or other arrangements shall be
consistent with the "unfunded" status of the Plan unless the Committee
otherwise determines with the consent of each affected Participant. The
trustee of such trusts may be authorized to dispose of trust assets and
reinvest the proceeds in alternative investments, subject to such terms and
conditions as the Committee or the Board may specify and in accordance with
applicable law.
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(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by
the Board nor its submission to the stockholders of the Company for approval
shall be construed as creating any limitations on the power of the Board or a
committee thereof to adopt such other incentive arrangements as it may deem
desirable including incentive arrangements and awards which do not qualify
under Code Section 162(m).
(i) Payments in the Event of Forfeitures; Fractional Shares. Unless
otherwise determined by the Committee or the Board, in the event of a
forfeiture of an Award with respect to which a Participant paid cash or other
consideration, the Participant shall be repaid the amount of such cash or
other consideration. No fractional shares of Stock shall be issued or
delivered pursuant to the Plan or any Award. The Committee or the Board shall
determine whether cash, other Awards or other property shall be issued or paid
in lieu of such fractional shares or whether such fractional shares or any
rights thereto shall be forfeited or otherwise eliminated.
(j) Governing Law. The validity, construction and effect of the Plan,
any rules and regulations under the Plan, and any Award agreement shall be
determined in accordance with the laws of the State of Maryland without giving
effect to principles of conflicts of laws, and applicable federal law.
(k) Plan Effective Date and Stockholder Approval; Termination of
Plan. The Plan shall become effective on the Effective Date, subject to
subsequent approval within 12 months of its adoption by the Board by
stockholders of the Company eligible to vote in the election of directors, by
a vote sufficient to meet the requirements of Code Sections 162(m) and 422,
Rule 16b-3 under the Exchange Act, applicable NASDAQ requirements, and other
laws, regulations, and obligations of the Company applicable to the Plan.
Awards may be granted subject to stockholder approval, but may not be
exercised or otherwise settled in the event stockholder approval is not
obtained. The Plan shall terminate at such time as no shares of Common Stock
remain available for issuance under the Plan and the Company has no further
rights or obligations with respect to outstanding Awards under the Plan.
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EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into on
this ___ day of ______________ effective as of May 1, 1998 by and between
SHERWOOD BRANDS, INC., a Maryland corporation (the "Company"), and UZIEL
FRYDMAN (hereinafter called the "Executive").
R E C I T A L S
A. The Executive is currently employed as the Chief Executive Officer
of the Company.
B. The Executive possesses intimate knowledge of the business and
affairs of the Company, its policies, methods and personnel.
C. The Board of Directors of the Company (the "Board") recognizes
that the Executive has contributed to the growth and success of the Company,
and desires to assure the Company of the Executive's continued employment and
to compensate him therefor.
D. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
E. The Executive is willing to make his services available to the
Company and on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties agree as follows:
1 1. Employment.
1.1 1 Employment and Term. The Company hereby agrees to
employ the Executive and the Executive hereby agrees to serve the Company on
the terms and conditions set forth herein.
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1.2 2 Duties of Executive. During the term of this
Agreement, the Executive shall serve as the Chief Executive Officer of the
Company, shall diligently perform all services as may be assigned to him by
the Board (provided that such services shall not materially differ from the
services currently provided by the Executive), and shall exercise such power
and authority as may from time to time be delegated to him by the Board. The
Executive shall devote his full time and attention to the business and affairs
of the Company, render such services to the best of his ability, and use his
best efforts to promote the interests of the Company.
2 2. Term.
2.1 1 Initial Term. The initial term of this Agreement, and
the employment of the Executive hereunder, shall commence on April 1, 1998
(the "Commencement Date") and shall expire on July 31, 2001, unless sooner
terminated in accordance with the terms and conditions hereof (the "Initial
Term").
2.2 2 Renewal Terms. Unless written notice stating otherwise
is received by the Company or the Executive within six months prior to the
Expiration Date (as described in Section 2.3), this Agreement shall
automatically renew for successive three-year terms.
2.3 3 Expiration Date. The date on which the term of this
Agreement shall expire (including the date on which any renewal term shall
expire), is sometimes referred to in this Agreement as the Expiration Date.
3 3. Compensation.
3.1 1 Base Salary. For the period April 1, 1998 through July
31, 1998, the Executive shall receive a base salary at the annual rate of
$175,000 (the "Base Salary"), with such Base Salary payable in installments
consistent with the Company's normal payroll schedule, subject to applicable
withholding and other taxes. For the fiscal year beginning August 1, 1998, the
Executive's Base Salary shall increase to an annual rate of $225,000. For all
subsequent years that this Agreement is in effect, the Base Salary shall be
reviewed, at least annually, for merit increases and may, by action and in the
discretion of the Compensation Committee or the Board, be increased at any
time or from time to time. In addition, on August 1, 1999, and each subsequent
August 1 prior to the Expiration Date, the Base Salary shall be increased, but
shall not be decreased, by the greatest of: (i) five percent (5%); (ii) that
percentage by which the net sales of the Company for the immediately preceding
fiscal year exceeds such net sales for the next preceding fiscal year; or
(iii) that percentage by which the Consumer Price Index, for the Rockville,
Maryland area published by the United States government (the "Index") for the
immediately preceding fiscal year exceeds such index for the next preceding
fiscal year. If publication of the Index is discontinued, the parties hereto
shall accept comparable statistics on the cost of living for the Rockville,
Maryland area as computed and published by an agency of the United States
government, or if no such agency computes and publishes such statistics, by
any regularly published national financial periodical that does compute and
publish such statistics. For this purpose, "net sales" shall mean the net
sales of the Company, as reflected on the Company's financial statements for
the fiscal year.
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3.2 2 Awards. During the term of this Agreement, the
Executive shall be eligible to receive performance and annual incentive awards
(the "Awards") payable in cash in accordance with Section 8 of the SHERWOOD
FOODS, INC. 1998 EXECUTIVE COMPENSATION PLAN, as may be amended from time to
time (the "Executive Plan"). Except as otherwise provided for in this Section
3.2, the Awards, if any, shall be determined pursuant to such formulae as the
Committee or the Board, in its sole and absolute discretion, shall set forth
from time to time in accordance with the Executive Plan. Notwithstanding the
foregoing, no Awards shall be payable to the Executive under the Executive
Plan for a fiscal year if the pre-tax profits of the Company for such fiscal
year do not exceed one million dollars ($1,000,000). If the pre-tax profits of
the Company for a fiscal year exceed one million dollars ($1,000,000), then
the following shall apply:
(i) for the fiscal year ending July 31, 1998, in no
event shall the Awards payable to
the Executive under the Executive Plan be less than thirty-four percent (34%)
of the sum of (x) the first one hundred fifty thousand dollars ($150,000) of
the pre-tax profits in excess of one million dollars ($1,000,000), and (y)
fifteen percent (15%) of the amount, if any, by which the pre-tax profits
exceeds one million one hundred fifty thousand dollars ($1,150,000);
(ii) for the fiscal year ending July 31, 1999, in
no event shall the Awards payable to
the Executive under the Executive Plan be less than thirty-four percent (34%)
of the product of (x) fifteen percent (15%), and (y) the amount, if any, by
which the pre-tax profits exceeds one million two hundred seventy thousand
dollars ($1,270,000); and
(iii) for the fiscal years ending July 31, 2000 and
July 31, 2001, in no event shall
the Awards payable to the Executive under the Executive Plan be less than
thirty-four percent (34%) of the product of (x) fifteen percent (15%), and (y)
of the amount, if any, by which the pre-tax profits exceeds one million four
hundred thousand dollars ($1,400,000).
For this purpose, "pre-tax profits" shall mean those profits of the Company
for any fiscal year determined prior to the reduction for any federal or state
income taxes and prior to the grant of any Awards to the Executive or any
other individual under the Executive Plan and determined in accordance with
generally accepted accounting principles as consistently applied. Any Awards
payable pursuant to this Section 3.2 are sometimes hereinafter referred to as
"Incentive Compensation." Each period for which Incentive Compensation is
payable under the Executive Plan is sometimes hereinafter referred to as a
Bonus Period. Unless otherwise specified by the Committee or the Board
pursuant to the Executive Plan, the Bonus Period shall be the fiscal year of
the Company.
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4 4. Expense Reimbursement and Other Benefits.
4.1 1 Reimbursement of Expenses. During the term of the
Executive's employment hereunder, upon the submission of proper substantiation
by the Executive, and subject to such rules and guidelines as the Company may
from time to time adopt, the Company shall reimburse the Executive for all
reasonable expenses actually paid or incurred by the Executive in the course
of and pursuant to the business of the Company. The Executive shall account to
the Company in writing for all expenses for which reimbursement is sought and
shall supply to the Company copies of all relevant invoices, receipts or other
evidence reasonably requested by the Company.
4.2 2 Compensation/Benefit Programs. During the term of this
Agreement, the Executive shall be entitled to participate in all medical,
dental, hospitalization, accidental death and dismemberment, disability,
travel and life insurance plans, and any and all other plans as are presently
and hereinafter offered by the Company to its executives, including savings,
pension, profit-sharing and deferred compensation plans, subject to the
general eligibility and participation provisions set forth in such plans.
4.3 3 Working Facilities. The Company shall furnish the
Executive with an office, secretarial help and such other facilities and
services suitable to his position and adequate for the performance of his
duties hereunder.
4.4 4 Automobile. The Company shall continue to provide the
Executive with an automobile comparable to the existing automobile provided by
the Company to Executive, together with reimbursement of the reasonable
operating expenses thereof.
4.5 5 Stock Options. During the term of this Agreement, the
Executive shall be eligible to be granted options (the "Stock Options") to
purchase common stock (the "Common Stock") of Sherwood Brands, Inc. under (and
therefore subject to all terms and conditions of) the Company's Executive Plan
as amended, and any successor plan thereto, and all rules of regulation of the
Securities and Exchange Commission applicable to such plans then in effect.
The number of Stock Options and terms and conditions of the Stock Options
shall be determined by the Committee appointed pursuant to the Executive Plan,
or by the Board, in its discretion and pursuant to the Executive Plan.
4.6 6 Other Benefits. The Executive shall be entitled to
eight (8) weeks of vacation each calendar year during the term of this
Agreement, to be taken at such times as the Executive and the Company shall
mutually determine and provided that no vacation time shall interfere with the
duties required to be rendered by the Executive hereunder. Any vacation time
not taken by Executive during any calendar year may not be carried forward
into any succeeding calendar year. The Executive shall receive such additional
benefits, if any, as the Board of the Company shall from time to time
determine.
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5 5. Termination.
5.1 1 Termination for Cause. The Company shall at all times
have the right, upon written notice to the Executive, to terminate the
Executive's employment hereunder, for Cause. For purposes of this Agreement,
the term "Cause" shall mean (i) an action or omission of the Executive which
constitutes a willful and material breach of this Agreement which is not cured
within sixty (60) days after receipt by the Executive of written notice of
same, (ii) fraud, embezzlement, misappropriation of funds or breach of trust
in connection with his services hereunder, (iii) conviction of any crime which
involves dishonesty or a breach of trust, (iv) gross negligence in connection
with the performance of the Executive's duties hereunder, or (v) the material
and willful or knowing failure or refusal (other than as a result of a
disability) by the Executive to perform his duties hereunder. Any termination
for cause shall be made in writing to the Executive, which notice shall set
forth in detail all acts or omissions upon which the Company is relying for
such termination. The Executive shall have the right to address the Board
regarding the acts set forth in the notice of termination. Upon any
termination pursuant to this Section 5.1, the Company shall (i) pay to the
Executive his Base Salary to the date of termination and (ii) pay to the
Executive his accrued but unpaid Incentive Compensation, if any, for any Bonus
Period ending on or before the date of the termination of Executive's
employment with the Company. The Company shall have no further liability
hereunder (other than for (x) reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however, to the provisions
of Section 4.1, and (y) payment of compensation for unused vacation days that
have accumulated during the calendar year in which such termination occurs).
5.2 2 Disability. The Company shall at all times have the
right, upon written notice to the Executive, to terminate the Executive's
employment hereunder if the Executive shall as the result of mental or
physical incapacity, illness or disability, become unable to perform his
obligations hereunder for a period of 180 days in any 12-month period. The
Company shall have sole discretion based upon competent medical advice to
determine whether the Executive continues to be disabled. Upon any termination
pursuant to this Section 5.2, the Company shall (i) pay to the Executive any
unpaid Base Salary through the effective date of termination specified in such
notice, (ii) pay to the Executive his accrued but unpaid Incentive
Compensation, if any, for any Bonus Period ending on or before the date of
termination of the Executive's employment with the Company, (iii) pay to the
Executive a severance payment equal to twelve months, or if greater the total
months that would otherwise remain under the term of this Agreement but for
this Section 5.2, of the Executive's Base Salary at the time of the
termination of the Executive's employment with the Company, and (iv) pay to
the Executive (within 45 days after the end of the fiscal quarter in which
such termination occurs) a prorata portion (based upon the period ending on
the date of termination of the Executive's employment hereunder) of the
Incentive Compensation, if any, for the Bonus Period in which such termination
occurs, as calculated pursuant to Section 3.2 hereof and the Executive Plan;
provided that the goals under Section 3.2 hereof and the Executive Plan for
each period used in the calculation of the Executive's Incentive Compensation,
shall be based on (1) the portion of the Bonus Period through the end of the
fiscal quarter in which such termination occurs and (2) unaudited financial
information prepared in accordance with generally accepted accounting
principles, applied consistently with prior periods, as approved and reviewed
by the Board. The Company shall have no further liability hereunder (other
than for (x) reimbursement for reasonable business expenses incurred prior to
the date of termination, subject, however to the provisions of Section 4.1,
and (y) payment of compensation for unused vacation days that have accumulated
during the calendar year in which such termination occurs).
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5.3 3 Death. In the event of the death of the Executive
during the term of his employment hereunder, the Company shall (i) pay to the
estate of the deceased Executive any unpaid Base Salary through the
Executive's date of death, (ii) pay to the estate of the deceased Executive
his accrued but unpaid Incentive Compensation, if any, for any Bonus Period
ending on or before the Executive's date of death, (iii) pay to the estate of
the deceased Executive (within 45 days after the end of the fiscal quarter in
which his death occurs) a prorata portion (based upon the period ending on the
date of death) of the Incentive Compensation, if any, for the Bonus Period in
which his death occurs, as calculated pursuant to the terms of Section 3.2
hereof and the Executive Plan; provided that, the goals under Section 3.2
hereof and the Executive Plan for each period used in the calculation of the
Executive's Incentive Compensation shall be based on (1) the portion of the
Bonus Period through the end of the fiscal quarter in which the Executive's
death occurs, and (2) unaudited financial information prepared in accordance
with generally accepted accounting principles, applied consistently with prior
periods, as approved and reviewed by the Board. The Company shall have no
further liability hereunder (other than for (x) reimbursement for reasonable
business expenses incurred prior to the date of the Executive's death,
subject, however to the provisions of Section 4.1, and (y) payment of
compensation for unused vacation days that have accumulated during the
calendar year in which such termination occurs).
5.4 4 Termination Without Cause. At any time the Company
shall have the right to terminate the Executive's employment hereunder by
written notice to the Executive. Upon any termination pursuant to this Section
5.4 (that is not a termination under any of Sections 5.1, 5.2, 5.3 or 5.5),
the Company shall (i) pay to the Executive any unpaid Base Salary through the
effective date of termination specified in such notice, (ii) pay to the
Executive the accrued but unpaid Incentive Compensation, if any, for any Bonus
Period ending on or before the date of the termination of the Executive's
employment with the Company, (iii) pay to the Executive a lump sum amount
equal to thirty-six (36) months of the Executive's Base Salary at the time of
termination of employment with the Company, (iv) pay to the Executive (within
45 days after the end of the fiscal quarter in which such termination occurs)
a prorata portion (based upon the period ending on the date of termination of
the Executive's employment hereunder) of the Incentive Compensation, if any,
for the Bonus Period in which such termination occurs, as calculated pursuant
to Section 3.2 hereof and the Executive Plan; provided that the goals under
Section 3.2 hereof and the Executive Plan for each period used in the
calculation of the Executive's Incentive Compensation, shall be based on (1)
the portion of the Bonus Period through the end of the fiscal quarter in which
such termination occurs and (2) unaudited financial information prepared in
accordance with generally accepted accounting principles, applied consistently
with prior periods, as approved and reviewed by the Board, (v) continue to
provide the Executive with the benefits he was receiving under Sections 4.2
and 4.4 hereof (the "Benefits") in the manner and at such times as the
compensation or Benefits otherwise would have been payable or provided to the
Executive, and (vi) pay to the Executive as a single lump sum payment, within
30 days of the termination of his employment hereunder, a lump sum benefit
equal to the value of the portion of his benefits under any savings, pension,
profit sharing or deferred compensation plans that are forfeited under such
plans by reason of the termination of his employment hereunder prior to the
Expiration Date. In the event that the Company is unable to provide the
Executive with any Benefits required hereunder by reason of the termination of
the Executive's employment pursuant to this Section 5.4, then the Company
shall pay the Executive cash equal to the value of the Benefit that otherwise
would have accrued for the Executive's benefit under the plan, for the period
during which such Benefits could not be provided under the plans, said cash
payments to be made within 45 days after the end of the year for which such
contributions would have been made or would have accrued. The Company's good
faith determination of the amount that would have been contributed or the
value of any Benefits that would have accrued under any plan shall be binding
and conclusive on the Executive. For this purpose, the Company may use as the
value of any Benefit the cost to the Company of providing that Benefit to the
Executive. Further, the Executive shall become immediately fully vested in his
or her Stock Options as of the date of such termination of employment. The
Company shall have no further liability hereunder (other than for (x)
reimbursement for reasonable business expenses incurred prior to the date of
termination, subject, however, to the provisions of Section 4.1, and (y)
payment of compensation for unused vacation days that have accumulated during
the calendar year in which such termination occurs.
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5.5 5 Termination by Executive.
a. The Executive shall at all times have the right,
upon sixty (60) days written notice to the Company, to terminate the
Executive's employment hereunder.
b. Upon any termination pursuant to this Section
5.5 by the Executive without Good Reason, the Company shall (i) pay to the
Executive any unpaid Base Salary through the effective date of termination
specified in such notice and (ii) pay to the Executive his accrued but unpaid
Incentive Compensation, if any, for any Bonus Period ending on or before the
termination of Executive's employment with the Company. The Company shall have
no further liability hereunder (other than for (x) reimbursement for
reasonable business expenses incurred prior to the date of termination,
subject, however, to the provisions of Section 4.1, and (y) payment of
compensation for unused vacation days that have accumulated during the
calendar year in which such termination occurs.
c. Upon any termination pursuant to this Section
5.5 by the Executive for Good Reason, the Company shall pay to the Executive
the same amounts that would have been payable by the Company to the Executive
under Section 5.4 of this Agreement if the Executive's employment had been
terminated by the Company without Cause. The Company shall have no further
liability hereunder (other than for (x) reimbursement for reasonable business
expenses incurred prior to the date of termination, subject, however, to the
provisions of Section 4.1, and (y) payment of compensation for unused vacation
days that have accumulated during the calendar year in which such termination
occurs).
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d. For purposes of this Agreement, "Good Reason"
shall mean (i) the assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by Section 1.2 of this Agreement, or any other action by the
Company which results in a diminution in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the Executive; (ii) any
failure by the Company to comply with any of the provisions of Article 3 of
this Agreement, other than an isolated, insubstantial and inadvertent failure
not occurring in bad faith and which is remedied by the Company promptly after
receipt of notice thereof given by the Executive; (iii) the Company's
requiring the Executive to be based at any office or location more than fifty
(50) miles outside of City limits of Rockville, Maryland, except for travel
reasonably required in the performance of the Executive's responsibilities;
(iv) any purported termination by the Company of the Executive's employment
otherwise than for Cause pursuant to Section 5.1, or by reason of the
Executive's disability pursuant to Section 5.2 of this Agreement prior to the
Expiration Date.
5.6 Change in Control of the Company.
a. Unless otherwise provided in Section 5.7 hereof,
in the event that (i) a Change in Control (as defined in paragraph (b) of this
Section 5.6) in the Company shall occur prior to the Expiration Date, and (ii)
either (A) prior to the earlier of the Expiration Date and one year after the
date of the Change in Control, either (x) the Executive's employment with the
Company is terminated by the Company without Cause, as defined in Section 5.1
(and other than pursuant to Section 5.2 by reason of the Executive's
disability or Section 5.3 by reason of the Executive's death) or (y) the
Executive terminates his employment with the Company for Good Reason, as
defined in Section 5.5(d) hereof, or (B) within the thirty (30) day period
beginning one year after the date of the Change in Control, the Executives
terminates his employment with the Company for any reason, the Company shall
pay to the Executive those amounts Executive would be entitled to under
Section 5.4 hereof as if his employment was terminated without Cause. Further,
upon the Change in Control, any stock options granted to the Executive by the
Company that were outstanding as of the date of the Change in Control shall
become immediately exercisable. The Company shall have no further liability
hereunder (other than for (1) reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however, to the provisions
of Section 4.1, and (2) payment of compensation for unused vacation days that
have accumulated during the calendar year in which such termination occurs).
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<PAGE>
b. For purposes of this Agreement, the term "Change
in Control" shall mean:
(i) Approval by the shareholders of the
Company of (x) a reorganization, merger, consolidation or other form of
corporate transaction or series of transactions, other than a public offering
of the Company's securities, in each case, with respect to which persons who
were the shareholders of the Company immediately prior to such reorganization,
merger or consolidation or other transaction do not, immediately thereafter,
own more than 50% of the combined voting power entitled to vote generally in
the election of directors of the reorganized, merged or consolidated company's
then outstanding voting securities, or (y) a liquidation or dissolution of the
Company or (z) the sale of all or substantially all of the assets of the
Company (unless such reorganization, merger, consolidation or other corporate
transaction, liquidation, dissolution or sale is subsequently abandoned); or
(ii) Individuals who, as of the date
hereof, constitute the Board (as of the date hereof the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board, provided
that any person becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board (other than an election or nomination of an individual whose
initial assumption of office is in connection with an actual or threatened
election contest relating to the election of the Directors of the Company, as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Securities Exchange Act) shall be, for purposes of this Agreement, considered
as though such person were a member of the Incumbent Board; or
(iii) The acquisition (other than from the
Company and other than pursuant to a public offering of the Company's
securities) by any person, entity or "group", within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act, (excluding, for this
purpose, the Frydman Family, the Company or its Subsidiaries, or any employee
benefit plan of the Company or its Subsidiaries which acquires beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Securities
Exchange Act) of 30% or more of either the then outstanding shares of the
Company's Common Stock or the combined voting power of the Company's then
outstanding voting securities entitled to vote generally in the election of
directors. For this purpose, "Frydman Family" shall mean Uziel Frydman, his
spouse, his ancestors, his lineal descendants, and the spouses of his
ancestors and lineal descendants.
5.7 Certain Additional Payments by the Company.
a. Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment,
distribution or other action by the Company to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a "Payment") would be subject to an
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"), or any interest or penalties are incurred by the
Executive with respect to any such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as
the "Excise Tax"), the Company shall make a payment to the Executive (a
"Gross-Up Payment") in an amount equal to the Excise Tax imposed upon the
Payments.
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<PAGE>
b. Subject to the provisions of paragraph (c) of
this Section 5.7, all determinations required to be made under this Section
5.7, including whether and when a Gross-Up Payment is required and the amount
of such Gross-Up Payment and the assumptions to be utilized in arriving at
such determination, shall be made by BDO Seidman, LLP (the "Accounting Firm")
which shall provide detailed supporting calculations both to the Company and
the Executive within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is requested
by the Company. In the event that the Accounting Firm is serving as accountant
or auditor for the individual, entity or group effecting the Change of
Control, the Executive shall appoint another nationally recognized accounting
firm to make the determinations required hereunder (which accounting firm
shall then be referred to as the Accounting Firm hereunder). All fees and
expenses of the Accounting Firm shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this Section 5.7, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. If the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the Executive with a written
opinion that failure to report the Excise Tax on the Executive's applicable
federal income tax return would not result in the imposition of a negligence
or similar penalty. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies pursuant to
Section 5.7 and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
c. The Executive shall notify the Company in
writing of any claim by the Internal Revenue Service that, if successful,
would require the payment by the Company of the Gross-Up Payment. Such
notification shall be given as soon as practicable but no later than ten
business days after the Executive is informed in writing of such claim and
shall apprise the Company of the nature of such claim and the date on which
such claim is requested to be paid. The Executive shall not pay such claim
prior to the expiration of the 30-day period following the date on which it
gives such notice to the Company (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If the Company
notifies the Executive in writing prior to the expiration of such period that
it desires to contest such claim, the Executive shall:
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(i) give the Company any information
reasonably requested by the Company relating to such claim,
(ii) take such action in connection with
contesting such claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good
faith in order effectively to contest such claim, and
(iv) permit the Company to participate in
any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 5.7(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forego any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct the Executive to pay the tax claimed and sue for a refund or contest
the claim in any permissible manner, and the Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts, as the Company
shall determine; provided, however, that if the Company directs the Executive
to pay such claim and sue for a refund, the Company shall advance the amount
of such payment to the Executive, on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension
of the statute of limitations relating to payment of taxes for the taxable
year of the Executive with respect to which such contested amount is claimed
to be due is limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by
the Internal Revenue Service or any other taxing authority.
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<PAGE>
d. If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 5.7(c), the Executive
becomes entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the requirements of
Section 5.7(c)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 5.7(c), a determination is made that the Executive
shall not be entitled to any refund with respect to such claim and the Company
does not notify the Executive in writing of its intent to contest such denial
of refund prior to the expiration of 30 days after such determination, then
such advance shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
5.8 Resignation. Upon any termination of employment pursuant
to this Article 5, the Executive shall be deemed to have resigned as an
officer, and if he or she was then serving as a director of the Company, as a
director, and if required by the Board, the Executive hereby agrees to
immediately execute a resignation letter to the Board.
5.9 Survival. The provisions of this Article 5 shall survive
the termination of this Agreement, as applicable.
6. Restrictive Covenants.
6.1 Non-competition. At all times while the Executive is
employed by the Company and for a twelve (12) month period after the
termination of the Executive's employment with the Company for any reason, the
Executive shall not, directly or indirectly, engage in or have any interest in
any sole proprietorship, partnership, corporation or business or any other
person or entity (whether as an employee, officer, director, partner, agent,
security holder, creditor, consultant or otherwise) that directly or
indirectly (or through any affiliated entity) engages in a Competitive
Business; provided that such provision shall not apply to the Executive's
ownership of Common Stock of the Company or the acquisition by the Executive,
solely as an investment, of securities of any issuer that is registered under
Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended, and
that are listed or admitted for trading on any United States national
securities exchange or that are quoted on the National Association of
Securities Dealers Automated Quotations System, or any similar system or
automated dissemination of quotations of securities prices in common use, so
long as the Executive does not control, acquire a controlling interest in or
become a member of a group which exercises direct or indirect control or, more
than five percent of any class of capital stock of such corporation. For these
purposes, "Competitive Business" shall mean the marketing of any Restricted
Product to any Restricted Class of Accounts. For purposes of this Agreement,
"Restricted Product" means butter toffees, tea biscuits, wafers or any item
from which the Company derives more than thirty percent (30%) of its net
sales, as defined in Section 3.1 hereof, for any fiscal year of the Company
during the term of this Agreement. For purposes of this Agreement, "Restricted
Class of Accounts" shall mean, with respect to any Restricted Product, any of
the following classes of accounts if more than thirty percent (30%) of the
Company's net sales from the Restricted Product for any fiscal year during the
term of this Agreement are derived from sales to that class of account: (1)
mass merchandisers; (2) dollar stores; (3) groceries; (4) grocery wholesalers;
(5) candy and tobacco jobbers; (6) gift baskets; (7) specialty food
distributors; (8) food distributors; (9) vending operators; and (10) vending
distributors. Upon the expiration of the term of this Agreement, the Company
shall deliver to the Executive within ninety (90) days a list of the
Restricted Products and the classes of accounts relating to such Restricted
Products.
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6.2 Nondisclosure. The Executive shall not at any time
divulge, communicate, use to the detriment of the Company or for the benefit
of any other person or persons, or misuse in any way, any Confidential
Information (as hereinafter defined) pertaining to the business of the
Company. Any Confidential Information or data now or hereafter acquired by the
Executive with respect to the business of the Company (which shall include,
but not be limited to, information concerning the Company's financial
condition, prospects, technology, customers, suppliers, sources of leads and
methods of doing business) shall be deemed a valuable, special and unique
asset of the Company that is received by the Executive in confidence and as a
fiduciary, and Executive shall remain a fiduciary to the Company with respect
to all of such information. For purposes of this Agreement, "Confidential
Information" means information disclosed to the Executive or known by the
Executive as a consequence of or through his employment by the Company
(including information conceived, originated, discovered or developed by the
Executive) prior to or after the date hereof, and not generally known, about
the Company or its business. Notwithstanding the foregoing, nothing herein
shall be deemed to restrict the Executive from disclosing Confidential
Information to the extent required by law.
6.3 Ownership of Developments. All copyrights, patents,
trade secrets, or other intellectual property rights associated with any
ideas, concepts, techniques, inventions, processes, or works of authorship
developed or created by Executive during the course of performing work for the
Company or its clients (collectively, the "Work Product") shall belong
exclusively to the Company and shall, to the extent possible, be considered a
work made by the Executive for hire for the Company within the meaning of
Title 17 of the United States Code. To the extent the Work Product may not be
considered work made by the Executive for hire for the Company, the Executive
agrees to assign, and automatically assign at the time of creation of the Work
Product, without any requirement of further consideration, any right, title,
or interest the Executive may have in such Work Product. Upon the request of
the Company, the Executive shall take such further actions, including
execution and delivery of instruments of conveyance, as may be appropriate to
give full and proper effect to such assignment.
6.4 Books and Records. All books, records, and accounts
relating in any manner to the customers or clients of the Company, whether
prepared by the Executive or otherwise coming into the Executive's possession,
shall be the exclusive property of the Company and shall be returned
immediately to the Company on termination of the Executive's employment
hereunder or on the Company's request at any time.
6.5 Definition of Company. Solely for purposes of this
Article 6, the term "Company" also shall include any existing or future
subsidiaries of the Company that are operating during the time periods
described herein.
6.6 Acknowledgment by Executive. The Executive acknowledges
and confirms that (a) the restrictive covenants contained in this Article 6
are reasonably necessary to protect the legitimate business interests of the
Company, and (b) the restrictions contained in this Article 6 (including
without limitation the length of the term of the provisions of this Article 6)
are not overbroad, overlong, or unfair and are not the result of overreaching,
duress or coercion of any kind. The Executive further acknowledges that the
restrictions contained in this Article 6 are intended to be, and shall be, for
the benefit of and shall be enforceable by, the Company's successors and
assigns.
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6.7 Reformation by Court. In the event that a court of
competent jurisdiction shall determine that any provision of this Article 6 is
invalid or more restrictive than permitted under the governing law of such
jurisdiction, then only as to enforcement of this Article 6 within the
jurisdiction of such court, such provision shall be interpreted and enforced
as if it provided for the maximum restriction permitted under such governing
law.
6.8 Extension of Time. If the Executive shall be in
violation of any provision of this Article 6, then each time limitation set
forth in this Article 6 shall be extended for a period of time equal to the
period of time during which such violation or violations occur. If the Company
seeks injunctive relief from such violation in any court, then the covenants
set forth in this Article 6 shall be extended for a period of time equal to
the pendency of such proceeding including all appeals by the Executive.
6.9 Survival. The provisions of this Article 6 shall survive
the termination of this Agreement, as applicable.
7. Mediation. In the event a dispute arises out of or relates to this
Agreement, or the breach thereof, and if the dispute cannot be settled through
negotiation, the parties hereby agree first to attempt in good faith to settle
the dispute by mediation administered by the American Arbitration Association
under its Employment Mediation Rules before resorting to litigation or some
other dispute resolution procedure. Any mediation procedures in regard to this
Agreement shall be instituted and maintained in Rockville, Maryland.
8. Section 162(m) Limits. Notwithstanding any other provision of this
Agreement to the contrary, if and to the extent that any remuneration payable
by the Company to the Executive for any year would exceed the maximum amount
of remuneration that the Company may deduct for that year under Section 162(m)
("Section 162(m)") of the Internal Revenue Code of 1986, as amended (the
"Code"), payment of the portion of the remuneration for that year that would
not be so deductible under Section 162(m) shall, in the sole discretion of the
Board, be deferred and become payable at such time or times as the Board
determines that it first would be deductible by the Company under Section
162(m), with interest at the "short-term applicable rate" as such term is
defined in Section 1274(d) of the Code. The limitation set forth under this
Section 8 shall not apply with respect to any amounts payable to the Executive
pursuant to Article 5 hereof.
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9. Assignment. Neither party shall have the right to assign or
delegate his rights or obligations hereunder, or any portion thereof, to any
other person.
10. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Maryland. Any action in regard to
this Agreement or arising out of its terms and conditions shall be instituted
and litigated in the courts in Rockville, Maryland and in no other. In
accordance, the parties hereby submit to the jurisdiction of the courts of
Maryland.
11. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and, upon
its effectiveness, shall supersede all prior agreements, understandings and
arrangements, both oral and written, between the Executive and the Company (or
any of its affiliates) with respect to such subject matter. This Agreement may
not be modified in any way unless by a written instrument signed by both the
Company and the Executive.
12. Notices: All notices required or permitted to be given hereunder
shall be in writing and shall be personally delivered by courier, sent by
registered or certified mail, return receipt requested or sent by confirmed
facsimile transmission addressed as set forth herein. Notices personally
delivered, sent by facsimile or sent by overnight courier shall be deemed
given on the date of delivery and notices mailed in accordance with the
foregoing shall be deemed given upon the earlier of receipt by the addressee,
as evidenced by the return receipt thereof, or three (3) days after deposit in
the U.S. mail. Notice shall be sent (i) if to the Company, addressed to
Sherwood Brands, Inc., 6110 Executive Boulevard, Suite 1080, Rockland,
Maryland 20852, Attention: President, and (ii) if to the Executive, to his
address as reflected on the payroll records of the Company, or to such other
address as either party hereto may from time to time give notice of to the
other.
13. Benefits; Binding Effect. This Agreement shall be for the benefit
of and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns, including, without limitation, any successor to the Company, whether
by merger, consolidation, sale of stock, sale of assets or otherwise.
14. Severability. The invalidity of any one or more of the words,
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid,
this Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by length of time or size of
area, or both, the otherwise invalid provision will be considered to be
reduced to a period or area which would cure such invalidity.
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15. Waivers. The waiver by either party hereto of a breach or
violation of any term or provision of this Agreement shall not operate nor be
construed as a waiver of any subsequent breach or violation.
16. Damages. Nothing contained herein shall be construed to prevent
the Company or the Executive from seeking and recovering from the other
damages sustained by either or both of them as a result of its or his breach
of any term or provision of this Agreement. In the event that either party
hereto brings suit for the collection of any damages resulting from, or the
injunction of any action constituting, a breach of any of the terms or
provisions of this Agreement, then the party found to be at fault shall pay
all reasonable court costs and attorneys' fees of the other.
17. Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
18. No Third Party Beneficiary. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any
person other than the Company, the parties hereto and their respective heirs,
personal representatives, legal representatives, successors and assigns, any
rights or remedies under or by reason of this Agreement.
19. Indemnification.
a. Subject to limitations imposed by law, the Company shall
indemnify and hold harmless the Executive to the fullest extent permitted by
law from and against any and all claims, damages, expenses (including
attorneys' fees), judgments, penalties, fines, settlements, and all other
liabilities incurred or paid by him in connection with the investigation,
defense, prosecution, settlement or appeal of any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative and to which the Executive was or is a party or is threatened
to be made a party by reason of the fact that the Executive is or was an
officer, employee or agent of the Company, or by reason of anything done or
not done by the Executive in any such capacity or capacities, provided that
the Executive acted in good faith, in a manner that was not grossly negligent
or constituted wilful misconduct and in a manner he reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The Company also shall pay any and all expenses
(including attorney's fees) incurred by the Executive as a result of the
Executive being called as a witness in connection with any matter involving
the Company and/or any of its officers or directors.
b. The Company shall pay any expenses (including attorneys'
fees), judgments, penalties, fines, settlements, and other liabilities
incurred by the Executive in investigating, defending, settling or appealing
any action, suit or proceeding described in this Section 19 in advance of the
final disposition of such action, suit or proceeding. The Company shall
promptly pay the amount of such expenses to the Executive, but in no event
later than 10 days following the Executive's delivery to the Company of a
written request for an advance pursuant to this Section 19, together with a
reasonable accounting of such expenses.
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c. The Executive hereby undertakes and agrees to repay to
the Company any advances made pursuant to this Section 19 if and to the extent
that it shall ultimately be found that the Executive is not entitled to be
indemnified by the Company for such amounts.
d. The Company shall make the advances contemplated by this
Section 19 regardless of the Executive's financial ability to make repayment,
and regardless whether indemnification of the Indemnitee by the Company will
ultimately be required. Any advances and undertakings to repay pursuant to
this Section 19 shall be unsecured and interest-free.
e. The provisions of this Section 19 executed this Agreement
as of the date first above written.
COMPANY:
SHERWOOD BRANDS, INC.
By:
-------------------------------------
Name:
Title:
EXECUTIVE:
-----------------------------------------
Uziel Frydman
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into on
this ___ day of [ ] effective as of [ ] by and between SHERWOOD BRANDS, INC.,
a Maryland corporation (the "Company"), and ANAT SCHWARTZ (hereinafter called
the "Executive").
RECITALS
A. The Executive is currently employed as the ______________ of the
Company.
B. The Executive possesses intimate knowledge of the business and
affairs of the Company, its policies, methods and personnel.
C. The Board of Directors of the Company (the "Board") recognizes
that the Executive has contributed to the growth and success of the Company,
and desires to assure the Company of the Executive's continued employment and
to compensate him therefor.
D. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
E. The Executive is willing to make her services available to the
Company and on the terms and conditions hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties agree as follows:
1. Employment.
1.1 Employment and Term. The Company hereby agrees to employ the
Executive and the Executive hereby agrees to serve the Company on the terms
and conditions set forth herein.
1.2 Duties of Executive. During the term of this Agreement, the
Executive shall serve as the ____________________ of the Company, shall
diligently perform all services as may be assigned to him by the Board
(provided that such services shall not materially differ from the services
currently provided by the Executive), and shall exercise such power and
authority as may from time to time be delegated to him by the Board. The
Executive shall devote substantial time and attention to the business and
affairs of the Company, render such services to the best of her ability, and
use her best efforts to promote the interests of the Company.
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2. Term.
2.1 Initial Term. The initial term of this Agreement, and the
employment of the Executive hereunder, shall commence on April 1, 1998 (the
"Commencement Date") and shall expire on July 31, 2001, unless sooner
terminated in accordance with the terms and conditions hereof (the "Initial
Term").
2.2 Renewal Terms. Unless written notice stating otherwise is
received by the Company or the Executive within six months prior to the
Expiration Date (as described in Section 2.3), this Agreement shall
automatically renew for successive three-year terms.
2.3 Expiration Date. The date on which the term of this Agreement
shall expire (including the date on which any renewal term shall expire), is
sometimes referred to in this Agreement as the Expiration Date.
3. Compensation.
3.1 Base Salary. For the period April 1, 1998 through July 31,
1998, the Executive shall receive a base salary at the annual rate of $105,000
(the "Base Salary"), with such Base Salary payable in installments consistent
with the Company's normal payroll schedule, subject to applicable withholding
and other taxes. For the fiscal year beginning August 1, 1998, the Executive's
Base Salary shall increase to an annual rate of $135,000. For all subsequent
years that this Agreement is in effect, the Base Salary shall be reviewed, at
least annually, for merit increases and may, by action and in the discretion
of the Compensation Committee or the Board, be increased at any time or from
time to time. In addition, on August 1, 1999, and each subsequent August 1
prior to the Expiration Date, the Base Salary shall be increased, but shall
not be decreased, by the greatest of: (i) five percent (5%); (ii) that
percentage by which the net sales of the Company for the immediately preceding
fiscal year exceeds such net sales for the next preceding fiscal year; or
(iii) that percentage by which the Consumer Price Index, for the Rockville,
Maryland area published by the United States government (the "Index") for the
immediately preceding fiscal year exceeds such index for the next preceding
fiscal year. If publication of the Index is discontinued, the parties hereto
shall accept comparable statistics on the cost of living for the Rockville,
Maryland area as computed and published by an agency of the United States
government, or if no such agency computes and publishes such statistics, by
any regularly published national financial periodical that does compute and
publish such statistics. For this purpose, "net sales" shall mean the net
sales of the Company, as reflected on the Company's financial statements for
the fiscal year.
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3.2 Awards. During the term of this Agreement, the Executive shall
be eligible to receive performance and annual incentive awards (the "Awards")
payable in cash in accordance with Section 8 of the SHERWOOD FOODS, INC. 1998
EXECUTIVE COMPENSATION PLAN, as may be amended from time to time (the
"Executive Plan"). Except as otherwise provided for in this Section 3.2, the
Awards, if any, shall be determined pursuant to such formulae as the Committee
or the Board, in its sole and absolute discretion, shall set forth from time
to time in accordance with the Executive Plan. Notwithstanding the foregoing,
no Awards shall be payable to the Executive under the Executive Plan for a
fiscal year if the pre-tax profits of the Company for such fiscal year do not
exceed one million dollars ($1,000,000). If the pre-tax profits of the Company
for a fiscal year exceed one million dollars ($1,000,000), then the following
shall apply:
(i) for the fiscal year ending July 31, 1998, in no event
shall the Awards payable to the Executive under the Executive Plan be less
than twenty percent (20%) of the sum of (x) the first one hundred fifty
thousand dollars ($150,000) of the pre-tax profits in excess of one million
dollars ($1,000,000), and (y) fifteen percent (15%) of the amount, if any, by
which the pre-tax profits exceeds one million one hundred fifty thousand
dollars ($1,150,000);
(ii) for the fiscal year ending July 31, 1999, in no event
shall the Awards payable to the Executive under the Executive Plan be less
than twenty percent (20%) of the product of (x) fifteen percent (15%), and (y)
the amount, if any, by which the pre-tax profits exceeds one million two
hundred seventy thousand dollars ($1,270,000); and
(iii) for the fiscal years ending July 31, 2000 and July 31,
2001, in no event shall the Awards payable to the Executive under the
Executive Plan be less than twenty percent (20%) of the product of (x) fifteen
percent (15%), and (y) of the amount, if any, by which the pre-tax profits
exceeds one million four hundred thousand dollars ($1,400,000).
For this purpose, "pre-tax profits" shall mean those profits of the Company
for any fiscal year determined prior to the reduction for any federal or state
income taxes and prior to the grant of any Awards to the Executive or any
other individual under the Executive Plan and determined in accordance with
generally accepted accounting principles as consistently applied. Any Awards
payable pursuant to this Section 3.2 are sometimes hereinafter referred to as
"Incentive Compensation." Each period for which Incentive Compensation is
payable under the Executive Plan is sometimes hereinafter referred to as a
Bonus Period. Unless otherwise specified by the Committee or the Board
pursuant to the Executive Plan, the Bonus Period shall be the fiscal year of
the Company.
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4. Expense Reimbursement and Other Benefits.
4.1 Reimbursement of Expenses. During the term of the Executive's
employment hereunder, upon the submission of proper substantiation by the
Executive, and subject to such rules and guidelines as the Company may from
time to time adopt, the Company shall reimburse the Executive for all
reasonable expenses actually paid or incurred by the Executive in the course
of and pursuant to the business of the Company. The Executive shall account to
the Company in writing for all expenses for which reimbursement is sought and
shall supply to the Company copies of all relevant invoices, receipts or other
evidence reasonably requested by the Company.
4.2 Compensation/Benefit Programs. During the term of this
Agreement, the Executive shall be entitled to participate in all medical,
dental, hospitalization, accidental death and dismemberment, disability,
travel and life insurance plans, and any and all other plans as are presently
and hereinafter offered by the Company to its executives, including savings,
pension, profit-sharing and deferred compensation plans, subject to the
general eligibility and participation provisions set forth in such plans.
4.3 Working Facilities. The Company shall furnish the Executive
with an office, secretarial help and such other facilities and services
suitable to her position and adequate for the performance of her duties
hereunder.
4.4 Automobile. The Company shall continue to provide the
Executive with an automobile comparable to the existing automobile provided by
the Company to Executive, together with reimbursement of the reasonable
operating expenses thereof.
4.5 Stock Options. During the term of this Agreement, the
Executive shall be eligible to be granted options (the "Stock Options") to
purchase common stock (the "Common Stock") of Sherwood Brands, Inc. under (and
therefore subject to all terms and conditions of) the Company's Executive Plan
as amended, and any successor plan thereto, and all rules of regulation of the
Securities and Exchange Commission applicable to such plans then in effect.
The number of Stock Options and terms and conditions of the Stock Options
shall be determined by the Committee appointed pursuant to the Executive Plan,
or by the Board, in its discretion and pursuant to the Executive Plan.
4.6 Other Benefits. The Executive shall be entitled to eight (8)
weeks of vacation each calendar year during the term of this Agreement, to be
taken at such times as the Executive and the Company shall mutually determine
and provided that no vacation time shall interfere with the duties required to
be rendered by the Executive hereunder. Any vacation time not taken by
Executive during any calendar year may not be carried forward into any
succeeding calendar year. The Executive shall receive such additional
benefits, if any, as the Board of the Company shall from time to time
determine.
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5. Termination.
5.1 Termination for Cause. The Company shall at all times have the
right, upon written notice to the Executive, to terminate the Executive's
employment hereunder, for Cause. For purposes of this Agreement, the term
"Cause" shall mean (i) an action or omission of the Executive which
constitutes a willful and material breach of this Agreement which is not cured
within sixty (60) days after receipt by the Executive of written notice of
same, (ii) fraud, embezzlement, misappropriation of funds or breach of trust
in connection with her services hereunder, (iii) conviction of any crime which
involves dishonesty or a breach of trust, (iv) gross negligence in connection
with the performance of the Executive's duties hereunder, or (v) the material
and willful or knowing failure or refusal (other than as a result of a
disability) by the Executive to perform her duties hereunder. Any termination
for cause shall be made in writing to the Executive, which notice shall set
forth in detail all acts or omissions upon which the Company is relying for
such termination. The Executive shall have the right to address the Board
regarding the acts set forth in the notice of termination. Upon any
termination pursuant to this Section 5.1, the Company shall (i) pay to the
Executive her Base Salary to the date of termination and (ii) pay to the
Executive her accrued but unpaid Incentive Compensation, if any, for any Bonus
Period ending on or before the date of the termination of Executive's
employment with the Company. The Company shall have no further liability
hereunder (other than for (x) reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however, to the provisions
of Section 4.1, and (y) payment of compensation for unused vacation days that
have accumulated during the calendar year in which such termination occurs).
5.2 Disability. The Company shall at all times have the right,
upon written notice to the Executive, to terminate the Executive's employment
hereunder if the Executive shall as the result of mental or physical
incapacity, illness or disability, become unable to perform her obligations
hereunder for a period of 180 days in any 12-month period. The Company shall
have sole discretion based upon competent medical advice to determine whether
the Executive continues to be disabled. Upon any termination pursuant to this
Section 5.2, the Company shall (i) pay to the Executive any unpaid Base Salary
through the effective date of termination specified in such notice, (ii) pay
to the Executive her accrued but unpaid Incentive Compensation, if any, for
any Bonus Period ending on or before the date of termination of the
Executive's employment with the Company, (iii) pay to the Executive a
severance payment equal to twelve months, or if greater the total months that
would otherwise remain under the term of this Agreement but for this Section
5.2, of the Executive's Base Salary at the time of the termination of the
Executive's employment with the Company, and (iv) pay to the Executive (within
45 days after the end of the fiscal quarter in which such termination occurs)
a prorata portion (based upon the period ending on the date of termination of
the Executive's employment hereunder) of the Incentive Compensation, if any,
for the Bonus Period in which such termination occurs, as calculated pursuant
to Section 3.2 hereof and the Executive Plan; provided that the goals under
Section 3.2 hereof and the Executive Plan for each period used in the
calculation of the Executive's Incentive Compensation, shall be based on (1)
the portion of the Bonus Period through the end of the fiscal quarter in which
such termination occurs and (2) unaudited financial information prepared in
accordance with generally accepted accounting principles, applied consistently
with prior periods, as approved and reviewed by the Board. The Company shall
have no further liability hereunder (other than for (x) reimbursement for
reasonable business expenses incurred prior to the date of termination,
subject, however to the provisions of Section 4.1, and (y) payment of
compensation for unused vacation days that have accumulated during the
calendar year in which such termination occurs).
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5.3 Death. In the event of the death of the Executive during the
term of her employment hereunder, the Company shall (i) pay to the estate of
the deceased Executive any unpaid Base Salary through the Executive's date of
death, (ii) pay to the estate of the deceased Executive her accrued but unpaid
Incentive Compensation, if any, for any Bonus Period ending on or before the
Executive's date of death, (iii) pay to the estate of the deceased Executive
(within 45 days after the end of the fiscal quarter in which her death occurs)
a prorata portion (based upon the period ending on the date of death) of the
Incentive Compensation, if any, for the Bonus Period in which her death
occurs, as calculated pursuant to the terms of Section 3.2 hereof and the
Executive Plan; provided that, the goals under Section 3.2 hereof and the
Executive Plan for each period used in the calculation of the Executive's
Incentive Compensation shall be based on (1) the portion of the Bonus Period
through the end of the fiscal quarter in which the Executive's death occurs,
and (2) unaudited financial information prepared in accordance with generally
accepted accounting principles, applied consistently with prior periods, as
approved and reviewed by the Board. The Company shall have no further
liability hereunder (other than for (x) reimbursement for reasonable business
expenses incurred prior to the date of the Executive's death, subject, however
to the provisions of Section 4.1, and (y) payment of compensation for unused
vacation days that have accumulated during the calendar year in which such
termination occurs).
5.4 Termination Without Cause. At any time the Company shall have
the right to terminate the Executive's employment hereunder by written notice
to the Executive. Upon any termination pursuant to this Section 5.4 (that is
not a termination under any of Sections 5.1, 5.2, 5.3 or 5.5), the Company
shall (i) pay to the Executive any unpaid Base Salary through the effective
date of termination specified in such notice, (ii) pay to the Executive the
accrued but unpaid Incentive Compensation, if any, for any Bonus Period ending
on or before the date of the termination of the Executive's employment with
the Company, (iii) pay to the Executive a lump sum amount equal to thirty-six
(36) months of the Executive's Base Salary at the time of termination of
employment with the Company, (iv) pay to the Executive (within 45 days after
the end of the fiscal quarter in which such termination occurs) a prorata
portion (based upon the period ending on the date of termination of the
Executive's employment hereunder) of the Incentive Compensation, if any, for
the Bonus Period in which such termination occurs, as calculated pursuant to
Section 3.2 hereof and the Executive Plan; provided that the goals under
Section 3.2 hereof and the Executive Plan for each period used in the
calculation of the Executive's Incentive Compensation, shall be based on (1)
the portion of the Bonus Period through the end of the fiscal quarter in which
such termination occurs and (2) unaudited financial information prepared in
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accordance with generally accepted accounting principles, applied consistently
with prior periods, as approved and reviewed by the Board, (v) continue to
provide the Executive with the benefits he was receiving under Sections 4.2
and 4.4 hereof (the "Benefits") in the manner and at such times as the
compensation or Benefits otherwise would have been payable or provided to the
Executive, and (vi) pay to the Executive as a single lump sum payment, within
30 days of the termination of her employment hereunder, a lump sum benefit
equal to the value of the portion of her benefits under any savings, pension,
profit sharing or deferred compensation plans that are forfeited under such
plans by reason of the termination of her employment hereunder prior to the
Expiration Date. In the event that the Company is unable to provide the
Executive with any Benefits required hereunder by reason of the termination of
the Executive's employment pursuant to this Section 5.4, then the Company
shall pay the Executive cash equal to the value of the Benefit that otherwise
would have accrued for the Executive's benefit under the plan, for the period
during which such Benefits could not be provided under the plans, said cash
payments to be made within 45 days after the end of the year for which such
contributions would have been made or would have accrued. The Company's good
faith determination of the amount that would have been contributed or the
value of any Benefits that would have accrued under any plan shall be binding
and conclusive on the Executive. For this purpose, the Company may use as the
value of any Benefit the cost to the Company of providing that Benefit to the
Executive. Further, the Executive shall become immediately fully vested in his
or her Stock Options as of the date of such termination of employment. The
Company shall have no further liability hereunder (other than for (x)
reimbursement for reasonable business expenses incurred prior to the date of
termination, subject, however, to the provisions of Section 4.1, and (y)
payment of compensation for unused vacation days that have accumulated during
the calendar year in which such termination occurs.
5.5 Termination by Executive.
a. The Executive shall at all times have the right, upon sixty
(60) days written notice to the Company, to terminate the Executive's
employment hereunder.
b. Upon any termination pursuant to this Section 5.5 by the
Executive without Good Reason, the Company shall (i) pay to the Executive any
unpaid Base Salary through the effective date of termination specified in such
notice and (ii) pay to the Executive her accrued but unpaid Incentive
Compensation, if any, for any Bonus Period ending on or before the termination
of Executive's employment with the Company. The Company shall have no further
liability hereunder (other than for (x) reimbursement for reasonable business
expenses incurred prior to the date of termination, subject, however, to the
provisions of Section 4.1, and (y) payment of compensation for unused vacation
days that have accumulated during the calendar year in which such termination
occurs.
c. Upon any termination pursuant to this Section 5.5 by the
Executive for Good Reason, the Company shall pay to the Executive the same
amounts that would have been payable by the Company to the Executive under
Section 5.4 of this Agreement if the Executive's employment had been
terminated by the Company without Cause. The Company shall have no further
liability hereunder (other than for (x) reimbursement for reasonable business
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expenses incurred prior to the date of termination, subject, however, to the
provisions of Section 4.1, and (y) payment of compensation for unused vacation
days that have accumulated during the calendar year in which such termination
occurs).
d. For purposes of this Agreement, "Good Reason" shall mean
(i) the assignment to the Executive of any duties inconsistent in any respect
with the Executive's position (including status, offices, titles and reporting
requirements), authority, duties or responsibilities as contemplated by
Section 1.2 of this Agreement, or any other action by the Company which
results in a diminution in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the Executive; (ii) any
failure by the Company to comply with any of the provisions of Article 3 of
this Agreement, other than an isolated, insubstantial and inadvertent failure
not occurring in bad faith and which is remedied by the Company promptly after
receipt of notice thereof given by the Executive; (iii) the Company's
requiring the Executive to be based at any office or location more than fifty
(50) miles outside of City limits of Rockville, Maryland, except for travel
reasonably required in the performance of the Executive's responsibilities;
(iv) any purported termination by the Company of the Executive's employment
otherwise than for Cause pursuant to Section 5.1, or by reason of the
Executive's disability pursuant to Section 5.2 of this Agreement prior to the
Expiration Date.
5.6 Change in Control of the Company.
a. Unless otherwise provided in Section 5.7 hereof, in the
event that (i) a Change in Control (as defined in paragraph (b) of this
Section 5.6) in the Company shall occur prior to the Expiration Date, and (ii)
either (A) prior to the earlier of the Expiration Date and one year after the
date of the Change in Control, either (x) the Executive's employment with the
Company is terminated by the Company without Cause, as defined in Section 5.1
(and other than pursuant to Section 5.2 by reason of the Executive's
disability or Section 5.3 by reason of the Executive's death) or (y) the
Executive terminates her employment with the Company for Good Reason, as
defined in Section 5.5(d) hereof, or (B) within the thirty (30) day period
beginning one year after the date of the Change in Control, the Executives
terminates her employment with the Company for any reason, the Company shall
pay to the Executive those amounts Executive would be entitled to under
Section 5.4 hereof as if her employment was terminated without Cause. Further,
upon the Change in Control, any stock options granted to the Executive by the
Company that were outstanding as of the date of the Change in Control shall
become immediately exercisable. The Company shall have no further liability
hereunder (other than for (1) reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however, to the provisions
of Section 4.1, and (2) payment of compensation for unused vacation days that
have accumulated during the calendar year in which such termination occurs).
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b. For purposes of this Agreement, the term "Change in
Control" shall mean:
(i) Approval by the shareholders of the Company of (x) a
reorganization, merger, consolidation or other form of corporate transaction
or series of transactions, other than a public offering of the Company's
securities, in each case, with respect to which persons who were the
shareholders of the Company immediately prior to such reorganization, merger
or consolidation or other transaction do not, immediately thereafter, own more
than 50% of the combined voting power entitled to vote generally in the
election of directors of the reorganized, merged or consolidated company's
then outstanding voting securities, or (y) a liquidation or dissolution of the
Company or (z) the sale of all or substantially all of the assets of the
Company (unless such reorganization, merger, consolidation or other corporate
transaction, liquidation, dissolution or sale is subsequently abandoned); or
(ii) Individuals who, as of the date hereof, constitute the
Board (as of the date hereof the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any person becoming
a director subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board (other than an
election or nomination of an individual whose initial assumption of office is
in connection with an actual or threatened election contest relating to the
election of the Directors of the Company, as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Securities Exchange Act) shall
be, for purposes of this Agreement, considered as though such person were a
member of the Incumbent Board; or
(iii) The acquisition (other than from the Company and
other than pursuant to a public offering of the Company's securities) by any
person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2)
of the Securities Exchange Act, (excluding, for this purpose, the Frydman
Family, the Company or its Subsidiaries, or any employee benefit plan of the
Company or its Subsidiaries which acquires beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Securities Exchange Act) of 30% or
more of either the then outstanding shares of the Company's Common Stock or
the combined voting power of the Company's then outstanding voting securities
entitled to vote generally in the election of directors. For this purpose,
"Frydman Family" shall mean Uziel Frydman, his spouse, his ancestors, his
lineal descendants, and the spouses of his ancestors and lineal descendants.
5.7 Certain Additional Payments by the Company.
a. Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that any payment, distribution or other
action by the Company to or for the benefit of the Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise) (a "Payment") would be subject to an excise tax
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imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any interest or penalties are incurred by the Executive with
respect to any such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), the Company shall make a payment to the Executive (a "Gross-Up
Payment") in an amount equal to the Excise Tax imposed upon the Payments.
b. Subject to the provisions of paragraph (c) of this Section
5.7, all determinations required to be made under this Section 5.7, including
whether and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by BDO Seidman, LLP (the "Accounting Firm") which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the Executive
that there has been a Payment, or such earlier time as is requested by the
Company. In the event that the Accounting Firm is serving as accountant or
auditor for the individual, entity or group effecting the Change of Control,
the Executive shall appoint another nationally recognized accounting firm to
make the determinations required hereunder (which accounting firm shall then
be referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 5.7, shall be paid by the Company to the
Executive within five days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is payable
by the Executive, it shall furnish the Executive with a written opinion that
failure to report the Excise Tax on the Executive's applicable federal income
tax return would not result in the imposition of a negligence or similar
penalty. Any determination by the Accounting Firm shall be binding upon the
Company and the Executive. As a result of the uncertainty in the application
of Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will
not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 5.7 and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the Company to or
for the benefit of the Executive.
c. The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than ten business days after the
Executive is informed in writing of such claim and shall apprise the Company
of the nature of such claim and the date on which such claim is requested to
be paid. The Executive shall not pay such claim prior to the expiration of the
30-day period following the date on which it gives such notice to the Company
(or such shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Executive in
writing prior to the expiration of such period that it desires to contest such
claim, the Executive shall:
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(i) give the Company any information reasonably requested
by the Company relating to such claim,
(ii) take such action in connection with contesting such
claim as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 5.7(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forego any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct the Executive to pay the tax claimed and sue for a refund or contest
the claim in any permissible manner, and the Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts, as the Company
shall determine; provided, however, that if the Company directs the Executive
to pay such claim and sue for a refund, the Company shall advance the amount
of such payment to the Executive, on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension
of the statute of limitations relating to payment of taxes for the taxable
year of the Executive with respect to which such contested amount is claimed
to be due is limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by
the Internal Revenue Service or any other taxing authority.
d. If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 5.7(c), the Executive becomes
entitled to receive any refund with respect to such claim, the Executive shall
(subject to the Company's complying with the requirements of Section 5.7(c))
promptly pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto). If, after
the receipt by the Executive of an amount advanced by the Company pursuant to
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Section 5.7(c), a determination is made that the Executive shall not be
entitled to any refund with respect to such claim and the Company does not
notify the Executive in writing of its intent to contest such denial of refund
prior to the expiration of 30 days after such determination, then such advance
shall be forgiven and shall not be required to be repaid and the amount of
such advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
5.8 Resignation. Upon any termination of employment pursuant to
this Article 5, the Executive shall be deemed to have resigned as an officer,
and if he or she was then serving as a director of the Company, as a director,
and if required by the Board, the Executive hereby agrees to immediately
execute a resignation letter to the Board.
5.9 Survival. The provisions of this Article 5 shall survive the
termination of this Agreement, as applicable.
6. Restrictive Covenants.
6.1 Non-competition. At all times while the Executive is employed
by the Company and for a twelve (12) month period after the termination of the
Executive's employment with the Company for any reason, the Executive shall
not, directly or indirectly, engage in or have any interest in any sole
proprietorship, partnership, corporation or business or any other person or
entity (whether as an employee, officer, director, partner, agent, security
holder, creditor, consultant or otherwise) that directly or indirectly (or
through any affiliated entity) engages in a Competitive Business; provided
that such provision shall not apply to the Executive's ownership of Common
Stock of the Company or the acquisition by the Executive, solely as an
investment, of securities of any issuer that is registered under Section 12(b)
or 12(g) of the Securities Exchange Act of 1934, as amended, and that are
listed or admitted for trading on any United States national securities
exchange or that are quoted on the National Association of Securities Dealers
Automated Quotations System, or any similar system or automated dissemination
of quotations of securities prices in common use, so long as the Executive
does not control, acquire a controlling interest in or become a member of a
group which exercises direct or indirect control or, more than five percent of
any class of capital stock of such corporation. For these purposes,
"Competitive Business" shall mean the marketing of any Restricted Product to
any Restricted Class of Accounts. For purposes of this Agreement, "Restricted
Product" means butter toffees, tea biscuits, wafers or any item from which the
Company derives more than thirty percent (30%) of its net sales, as defined in
Section 3.1 hereof, for any fiscal year of the Company during the term of this
Agreement. For purposes of this Agreement, "Restricted Class of Accounts"
shall mean, with respect to any Restricted Product, any of the following
classes of accounts if more than thirty percent (30%) of the Company's net
sales from the Restricted Product for any fiscal year during the term of this
Agreement are derived from sales to that class of account: (1) mass
merchandisers; (2) dollar stores; (3) groceries; (4) grocery wholesalers; (5)
candy and tobacco jobbers; (6) gift baskets; (7) specialty food distributors;
(8) food distributors; (9) vending operators; and (10) vending distributors.
Upon the expiration of the term of this Agreement, the Company shall deliver
to the Executive within ninety (90) days a list of the Restricted Products and
the classes of accounts relating to such Restricted Products.
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6.2 Nondisclosure. The Executive shall not at any time divulge,
communicate, use to the detriment of the Company or for the benefit of any
other person or persons, or misuse in any way, any Confidential Information
(as hereinafter defined) pertaining to the business of the Company. Any
Confidential Information or data now or hereafter acquired by the Executive
with respect to the business of the Company (which shall include, but not be
limited to, information concerning the Company's financial condition,
prospects, technology, customers, suppliers, sources of leads and methods of
doing business) shall be deemed a valuable, special and unique asset of the
Company that is received by the Executive in confidence and as a fiduciary,
and Executive shall remain a fiduciary to the Company with respect to all of
such information. For purposes of this Agreement, "Confidential Information"
means information disclosed to the Executive or known by the Executive as a
consequence of or through his employment by the Company (including information
conceived, originated, discovered or developed by the Executive) prior to or
after the date hereof, and not generally known, about the Company or its
business. Notwithstanding the foregoing, nothing herein shall be deemed to
restrict the Executive from disclosing Confidential Information to the extent
required by law.
6.3 Ownership of Developments. All copyrights, patents, trade
secrets, or other intellectual property rights associated with any ideas,
concepts, techniques, inventions, processes, or works of authorship developed
or created by Executive during the course of performing work for the Company
or its clients (collectively, the "Work Product") shall belong exclusively to
the Company and shall, to the extent possible, be considered a work made by
the Executive for hire for the Company within the meaning of Title 17 of the
United States Code. To the extent the Work Product may not be considered work
made by the Executive for hire for the Company, the Executive agrees to
assign, and automatically assign at the time of creation of the Work Product,
without any requirement of further consideration, any right, title, or
interest the Executive may have in such Work Product. Upon the request of the
Company, the Executive shall take such further actions, including execution
and delivery of instruments of conveyance, as may be appropriate to give full
and proper effect to such assignment.
6.4 Books and Records. All books, records, and accounts relating
in any manner to the customers or clients of the Company, whether prepared by
the Executive or otherwise coming into the Executive's possession, shall be
the exclusive property of the Company and shall be returned immediately to the
Company on termination of the Executive's employment hereunder or on the
Company's request at any time.
6.5 Definition of Company. Solely for purposes of this Article 6,
the term "Company" also shall include any existing or future subsidiaries of
the Company that are operating during the time periods described herein.
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6.6 Acknowledgment by Executive. The Executive acknowledges and
confirms that (a) the restrictive covenants contained in this Article 6 are
reasonably necessary to protect the legitimate business interests of the
Company, and (b) the restrictions contained in this Article 6 (including
without limitation the length of the term of the provisions of this Article 6)
are not overbroad, overlong, or unfair and are not the result of overreaching,
duress or coercion of any kind. The Executive further acknowledges that the
restrictions contained in this Article 6 are intended to be, and shall be, for
the benefit of and shall be enforceable by, the Company's successors and
assigns.
6.7 Reformation by Court. In the event that a court of competent
jurisdiction shall determine that any provision of this Article 6 is invalid
or more restrictive than permitted under the governing law of such
jurisdiction, then only as to enforcement of this Article 6 within the
jurisdiction of such court, such provision shall be interpreted and enforced
as if it provided for the maximum restriction permitted under such governing
law.
6.8 Extension of Time. If the Executive shall be in violation of
any provision of this Article 6, then each time limitation set forth in this
Article 6 shall be extended for a period of time equal to the period of time
during which such violation or violations occur. If the Company seeks
injunctive relief from such violation in any court, then the covenants set
forth in this Article 6 shall be extended for a period of time equal to the
pendency of such proceeding including all appeals by the Executive.
6.9 Survival. The provisions of this Article 6 shall survive the
termination of this Agreement, as applicable.
7. Mediation. In the event a dispute arises out of or relates to this
Agreement, or the breach thereof, and if the dispute cannot be settled through
negotiation, the parties hereby agree first to attempt in good faith to settle
the dispute by mediation administered by the American Arbitration Association
under its Employment Mediation Rules before resorting to litigation or some
other dispute resolution procedure. Any mediation procedures in regard to this
Agreement shall be instituted and maintained in Rockville, Maryland.
8. Section 162(m) Limits. Notwithstanding any other provision of this
Agreement to the contrary, if and to the extent that any remuneration payable
by the Company to the Executive for any year would exceed the maximum amount
of remuneration that the Company may deduct for that year under Section 162(m)
("Section 162(m)") of the Internal Revenue Code of 1986, as amended (the
"Code"), payment of the portion of the remuneration for that year that would
not be so deductible under Section 162(m) shall, in the sole discretion of the
Board, be deferred and become payable at such time or times as the Board
determines that it first would be deductible by the Company under Section
162(m), with interest at the "short-term applicable rate" as such term is
defined in Section 1274(d) of the Code. The limitation set forth under this
Section 8 shall not apply with respect to any amounts payable to the Executive
pursuant to Article 5 hereof.
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9. Assignment. Neither party shall have the right to assign or
delegate her rights or obligations hereunder, or any portion thereof, to any
other person.
10. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Maryland. Any action in regard to
this Agreement or arising out of its terms and conditions shall be instituted
and litigated in the courts of Rockville, Maryland and in no other. In
accordance, the parties hereby submit to the jurisdiction of the courts of
Maryland.
11. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and, upon
its effectiveness, shall supersede all prior agreements, understandings and
arrangements, both oral and written, between the Executive and the Company (or
any of its affiliates) with respect to such subject matter. This Agreement may
not be modified in any way unless by a written instrument signed by both the
Company and the Executive.
12. Notices: All notices required or permitted to be given hereunder
shall be in writing and shall be personally delivered by courier, sent by
registered or certified mail, return receipt requested or sent by confirmed
facsimile transmission addressed as set forth herein. Notices personally
delivered, sent by facsimile or sent by overnight courier shall be deemed
given on the date of delivery and notices mailed in accordance with the
foregoing shall be deemed given upon the earlier of receipt by the addressee,
as evidenced by the return receipt thereof, or three (3) days after deposit in
the U.S. mail. Notice shall be sent (i) if to the Company, addressed to
Sherwood Brands, Inc., 6110 Executive Boulevard, Suite 1080, Rockland,
Maryland 20852, Attention: President, and (ii) if to the Executive, to her
address as reflected on the payroll records of the Company, or to such other
address as either party hereto may from time to time give notice of to the
other.
13. Benefits; Binding Effect. This Agreement shall be for the benefit
of and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns, including, without limitation, any successor to the Company, whether
by merger, consolidation, sale of stock, sale of assets or otherwise.
14. Severability. The invalidity of any one or more of the words,
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid,
this Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by length of time or size of
area, or both, the otherwise invalid provision will be considered to be
reduced to a period or area which would cure such invalidity.
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15. Waivers. The waiver by either party hereto of a breach or
violation of any term or provision of this Agreement shall not operate nor be
construed as a waiver of any subsequent breach or violation.
16. Damages. Nothing contained herein shall be construed to prevent
the Company or the Executive from seeking and recovering from the other
damages sustained by either or both of them as a result of its or her breach
of any term or provision of this Agreement. In the event that either party
hereto brings suit for the collection of any damages resulting from, or the
injunction of any action constituting, a breach of any of the terms or
provisions of this Agreement, then the party found to be at fault shall pay
all reasonable court costs and attorneys' fees of the other.
17. Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
18. No Third Party Beneficiary. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any
person other than the Company, the parties hereto and their respective heirs,
personal representatives, legal representatives, successors and assigns, any
rights or remedies under or by reason of this Agreement.
19. Indemnification.
a. Subject to limitations imposed by law, the Company shall
indemnify and hold harmless the Executive to the fullest extent permitted by
law from and against any and all claims, damages, expenses (including
attorneys' fees), judgments, penalties, fines, settlements, and all other
liabilities incurred or paid by him in connection with the investigation,
defense, prosecution, settlement or appeal of any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative and to which the Executive was or is a party or is threatened
to be made a party by reason of the fact that the Executive is or was an
officer, employee or agent of the Company, or by reason of anything done or
not done by the Executive in any such capacity or capacities, provided that
the Executive acted in good faith, in a manner that was not grossly negligent
or constituted wilful misconduct and in a manner he reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe her
conduct was unlawful. The Company also shall pay any and all expenses
(including attorney's fees) incurred by the Executive as a result of the
Executive being called as a witness in connection with any matter involving
the Company and/or any of its officers or directors.
b. The Company shall pay any expenses (including attorneys'
fees), judgments, penalties, fines, settlements, and other liabilities
incurred by the Executive in investigating, defending, settling or appealing
any action, suit or proceeding described in this Section 19 in advance of the
final disposition of such action, suit or proceeding. The Company shall
promptly pay the amount of such expenses to the Executive, but in no event
later than 10 days following the Executive's delivery to the Company of a
written request for an advance pursuant to this Section 19, together with a
reasonable accounting of such expenses.
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<PAGE>
c. The Executive hereby undertakes and agrees to repay to the
Company any advances made pursuant to this Section 19 if and to the extent
that it shall ultimately be found that the Executive is not entitled to be
indemnified by the Company for such amounts.
d. The Company shall make the advances contemplated by this
Section 19 regardless of the Executive's financial ability to make repayment,
and regardless whether indemnification of the Indemnitee by the Company will
ultimately be required. Any advances and undertakings to repay pursuant to
this Section 19 shall be unsecured and interest-free.
e. The provisions of this Section 19 executed this Agreement as
of the date first above written.
COMPANY:
SHERWOOD BRANDS, INC.
By: ____________________________________
Name:
Title:
EXECUTIVE:
---------------------------------------------
Anat Schwartz
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EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into on
this ___ day of [ ] effective as of [ ] by and between SHERWOOD BRANDS, INC.,
a Maryland corporation (the "Company"), and AMIR FRYDMAN (hereinafter called
the "Executive").
R E C I T A L S
- - - - - - - -
A. The Executive is currently employed as the _________________ of the
Company.
B. The Executive possesses intimate knowledge of the business and
affairs of the Company, its policies, methods and personnel.
C. The Board of Directors of the Company (the "Board") recognizes
that the Executive has contributed to the growth and success of the Company,
and desires to assure the Company of the Executive's continued employment and
to compensate him therefor.
D. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
E. The Executive is willing to make his services available to the
Company and on the terms and conditions hereinafter set forth.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties agree as follows:
1. Employment.
----------
1.1 Employment and Term. The Company hereby agrees to
employ the Executive and the Executive hereby agrees to serve the Company on
the terms and conditions set forth herein.
1.2 Duties of Executive. During the term of this
Agreement, the Executive shall serve as the ____________________ of the
Company, shall diligently perform all services as may be assigned to him by
the Board (provided that such services shall not materially differ from the
services currently provided by the Executive), and shall exercise such power
and
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authority as may from time to time be delegated to him by the Board. The
Executive shall devote his full time and attention to the business and affairs
of the Company, render such services to the best of his ability, and use his
best efforts to promote the interests of the Company.
2. Term.
----
2.1 Initial Term. The initial term of this Agreement, and
the employment of the Executive hereunder, shall commence on April 1, 1998
(the "Commencement Date") and shall expire on July 31, 2001, unless sooner
terminated in accordance with the terms and conditions hereof (the "Initial
Term").
2.2 Renewal Terms. Unless written notice stating otherwise
is received by the Company or the Executive within six months prior to the
Expiration Date (as described in Section 2.3), this Agreement shall
automatically renew for successive three-year terms.
2.3 Expiration Date. The date on which the term of this
Agreement shall expire (including the date on which any renewal term shall
expire), is sometimes referred to in this Agreement as the Expiration Date.
3. Compensation.
------------
3.1 Base Salary. For the period April 1, 1998 through July
31, 1998, the Executive shall receive a base salary at the annual rate of
$150,000 (the "Base Salary"), with such Base Salary payable in installments
consistent with the Company's normal payroll schedule, subject to applicable
withholding and other taxes. For the fiscal year beginning April 1, 1998, the
Executive's Base Salary shall increase to an annual rate of $194,000. For all
subsequent years that this Agreement is in effect, the Base Salary shall be
reviewed, at least annually, for merit increases and may, by action and in the
discretion of the Compensation Committee or the Board, be increased at any
time or from time to time. In addition, on August 1, 1999, and each subsequent
August 1 prior to the Expiration Date, the Base Salary shall be increased, but
shall not be decreased, by the greatest of: (i) five percent (5%); (ii) that
percentage by which the net sales of the Company for the immediately preceding
fiscal year exceeds such net sales for the next preceding fiscal year; or
(iii) that percentage by which the Consumer Price Index, for the Rockville,
Maryland area published by the United States government (the "Index") for the
immediately preceding fiscal year exceeds such index for the next preceding
fiscal year. If publication of the Index is discontinued, the parties hereto
shall accept comparable statistics on the cost of living for the Rockville,
Maryland area as computed and published by an agency of the United States
government, or if no such agency computes and publishes such statistics, by
any regularly published national financial periodical that does compute and
publish such statistics. For this purpose, "net sales" shall mean the net
sales of the Company, as reflected on the Company's financial statements for
the fiscal year.
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3.2 Awards. During the term of this Agreement, the
Executive shall be eligible to receive performance and annual incentive awards
(the "Awards") payable in cash in accordance with Section 8 of the SHERWOOD
FOODS, INC. 1998 EXECUTIVE COMPENSATION PLAN, as may be amended from time to
time (the "Executive Plan"). Except as otherwise provided for in this Section
3.2, the Awards, if any, shall be determined pursuant to such formulae as the
Committee or the Board, in its sole and absolute discretion, shall set forth
from time to time in accordance with the Executive Plan. Notwithstanding the
foregoing, no Awards shall be payable to the Executive under the Executive
Plan for a fiscal year if the pre-tax profits of the Company for such fiscal
year do not exceed one million dollars ($1,000,000). If the pre-tax profits of
the Company for a fiscal year exceed one million dollars ($1,000,000), then
the following shall apply:
(i) for the fiscal year ending July 31, 1998, in no
event shall the Awards payable to the Executive under the Executive Plan be less
than twenty-nine percent (29%) of the sum of (x) the first one hundred fifty
thousand dollars ($150,000) of the pre-tax profits in excess of one million
dollars ($1,000,000), and (y) fifteen percent (15%) of the amount, if any, by
which the pre-tax profits exceeds one million one hundred fifty thousand dollars
($1,150,000);
(ii) for the fiscal year ending July 31, 1999, in
no event shall the Awards payable to the Executive under the Executive Plan be
less than twenty-nine percent (29%) of the product of (x) fifteen percent (15%),
and (y) the amount, if any, by which the pre-tax profits exceeds one million two
hundred seventy thousand dollars ($1,270,000); and
(iii) for the fiscal years ending July 31, 2000 and
July 31, 2001, in no event shall the Awards payable to the Executive under the
Executive Plan be less than twenty-nine percent (29%) of the product of (x)
fifteen percent (15%), and (y) of the amount, if any, by which the pre-tax
profits exceeds one million four hundred thousand dollars ($1,400,000).
For this purpose, "pre-tax profits" shall mean those profits of the Company
for any fiscal year determined prior to the reduction for any federal or state
income taxes and prior to the grant of any Awards to the Executive or any
other individual under the Executive Plan and determined in accordance with
generally accepted accounting principles as consistently applied. Any Awards
payable pursuant to this Section 3.2 are sometimes hereinafter referred to as
"Incentive Compensation." Each period for which Incentive Compensation is
payable under the Executive Plan is sometimes hereinafter referred to as a
Bonus Period. Unless otherwise specified by the Committee or the Board
pursuant to the Executive Plan, the Bonus Period shall be the fiscal year of
the Company.
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4. Expense Reimbursement and Other Benefits.
----------------------------------------
4.1 Reimbursement of Expenses. During the term of the
Executive's employment hereunder, upon the submission of proper substantiation
by the Executive, and subject to such rules and guidelines as the Company may
from time to time adopt, the Company shall reimburse the Executive for all
reasonable expenses actually paid or incurred by the Executive in the course
of and pursuant to the business of the Company. The Executive shall account to
the Company in writing for all expenses for which reimbursement is sought and
shall supply to the Company copies of all relevant invoices, receipts or other
evidence reasonably requested by the Company.
4.2 Compensation/Benefit Programs. During the term of this
Agreement, the Executive shall be entitled to participate in all medical,
dental, hospitalization, accidental death and dismemberment, disability,
travel and life insurance plans, and any and all other plans as are presently
and hereinafter offered by the Company to its executives, including savings,
pension, profit-sharing and deferred compensation plans, subject to the
general eligibility and participation provisions set forth in such plans.
4.3 Working Facilities. The Company shall furnish the
Executive with an office, secretarial help and such other facilities and
services suitable to his position and adequate for the performance of his
duties hereunder.
4.4 Automobile. The Company shall continue to provide the
Executive with an automobile comparable to the existing automobile provided by
the Company to Executive, together with reimbursement of the reasonable
operating expenses thereof.
4.5 Stock Options. During the term of this Agreement, the
Executive shall be eligible to be granted options (the "Stock Options") to
purchase common stock (the "Common Stock") of Sherwood Brands, Inc. under (and
therefore subject to all terms and conditions of) the Company's Executive Plan
as amended, and any successor plan thereto, and all rules of regulation of the
Securities and Exchange Commission applicable to such plans then in effect.
The number of Stock Options and terms and conditions of the Stock Options
shall be determined by the Committee appointed pursuant to the Executive Plan,
or by the Board, in its discretion and pursuant to the Executive Plan.
4.6 Other Benefits. The Executive shall be entitled to
eight (8) weeks of vacation each calendar year during the term of this
Agreement, to be taken at such times as the Executive and the Company shall
mutually determine and provided that no vacation time shall interfere with the
duties required to be rendered by the Executive hereunder. Any vacation time
not taken by Executive during any calendar year may not be carried forward
into any succeeding calendar year. The Executive shall receive such additional
benefits, if any, as the Board of the Company shall from time to time
determine.
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<PAGE>
5. Termination.
-----------
5.1 Termination for Cause. The Company shall at all times
have the right, upon written notice to the Executive, to terminate the
Executive's employment hereunder, for Cause. For purposes of this Agreement,
the term "Cause" shall mean (i) an action or omission of the Executive which
constitutes a willful and material breach of this Agreement which is not cured
within sixty (60) days after receipt by the Executive of written notice of
same, (ii) fraud, embezzlement, misappropriation of funds or breach of trust
in connection with his services hereunder, (iii) conviction of any crime which
involves dishonesty or a breach of trust, (iv) gross negligence in connection
with the performance of the Executive's duties hereunder, or (v) the material
and willful or knowing failure or refusal (other than as a result of a
disability) by the Executive to perform his duties hereunder. Any termination
for cause shall be made in writing to the Executive, which notice shall set
forth in detail all acts or omissions upon which the Company is relying for
such termination. The Executive shall have the right to address the Board
regarding the acts set forth in the notice of termination. Upon any
termination pursuant to this Section 5.1, the Company shall (i) pay to the
Executive his Base Salary to the date of termination and (ii) pay to the
Executive his accrued but unpaid Incentive Compensation, if any, for any Bonus
Period ending on or before the date of the termination of Executive's
employment with the Company. The Company shall have no further liability
hereunder (other than for (x) reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however, to the provisions
of Section 4.1, and (y) payment of compensation for unused vacation days that
have accumulated during the calendar year in which such termination occurs).
5.2 Disability. The Company shall at all times have the
right, upon written notice to the Executive, to terminate the Executive's
employment hereunder if the Executive shall as the result of mental or
physical incapacity, illness or disability, become unable to perform his
obligations hereunder for a period of 180 days in any 12-month period. The
Company shall have sole discretion based upon competent medical advice to
determine whether the Executive continues to be disabled. Upon any termination
pursuant to this Section 5.2, the Company shall (i) pay to the Executive any
unpaid Base Salary through the effective date of termination specified in such
notice, (ii) pay to the Executive his accrued but unpaid Incentive
Compensation, if any, for any Bonus Period ending on or before the date of
termination of the Executive's employment with the Company, (iii) pay to the
Executive a severance payment equal to twelve months, or if greater the total
months that would otherwise remain under the term of this Agreement but for
this Section 5.2, of the Executive's Base Salary at the time of the
termination of the Executive's employment with the Company, and (iv) pay to
the Executive (within 45 days after the end of the fiscal quarter in which
such termination occurs) a prorata portion (based upon the period ending on
the date of termination of the Executive's employment hereunder) of the
Incentive Compensation, if any, for the Bonus Period in which such termination
occurs, as calculated pursuant to Section 3.2 hereof and the Executive Plan;
provided that the goals under Section 3.2 hereof and the Executive Plan for
each period used in the calculation of the Executive's Incentive Compensation,
shall be based on (1) the portion of the Bonus Period through the end of the
fiscal quarter in which such termination occurs and (2)
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unaudited financial information prepared in accordance with generally accepted
accounting principles, applied consistently with prior periods, as approved
and reviewed by the Board. The Company shall have no further liability
hereunder (other than for (x) reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however to the provisions
of Section 4.1, and (y) payment of compensation for unused vacation days that
have accumulated during the calendar year in which such termination occurs).
5.3 Death. In the event of the death of the Executive
during the term of his employment hereunder, the Company shall (i) pay to the
estate of the deceased Executive any unpaid Base Salary through the
Executive's date of death, (ii) pay to the estate of the deceased Executive
his accrued but unpaid Incentive Compensation, if any, for any Bonus Period
ending on or before the Executive's date of death, (iii) pay to the estate of
the deceased Executive (within 45 days after the end of the fiscal quarter in
which his death occurs) a prorata portion (based upon the period ending on the
date of death) of the Incentive Compensation, if any, for the Bonus Period in
which his death occurs, as calculated pursuant to the terms of Section 3.2
hereof and the Executive Plan; provided that, the goals under Section 3.2
hereof and the Executive Plan for each period used in the calculation of the
Executive's Incentive Compensation shall be based on (1) the portion of the
Bonus Period through the end of the fiscal quarter in which the Executive's
death occurs, and (2) unaudited financial information prepared in accordance
with generally accepted accounting principles, applied consistently with prior
periods, as approved and reviewed by the Board. The Company shall have no
further liability hereunder (other than for (x) reimbursement for reasonable
business expenses incurred prior to the date of the Executive's death,
subject, however to the provisions of Section 4.1, and (y) payment of
compensation for unused vacation days that have accumulated during the
calendar year in which such termination occurs).
5.4 Termination Without Cause. At any time the Company
shall have the right to terminate the Executive's employment hereunder by
written notice to the Executive. Upon any termination pursuant to this Section
5.4 (that is not a termination under any of Sections 5.1, 5.2, 5.3 or 5.5),
the Company shall (i) pay to the Executive any unpaid Base Salary through the
effective date of termination specified in such notice, (ii) pay to the
Executive the accrued but unpaid Incentive Compensation, if any, for any Bonus
Period ending on or before the date of the termination of the Executive's
employment with the Company, (iii) pay to the Executive a lump sum amount
equal to thirty-six (36) months of the Executive's Base Salary at the time of
termination of employment with the Company, (iv) pay to the Executive (within
45 days after the end of the fiscal quarter in which such termination occurs)
a prorata portion (based upon the period ending on the date of termination of
the Executive's employment hereunder) of the Incentive Compensation, if any,
for the Bonus Period in which such termination occurs, as calculated pursuant
to Section 3.2 hereof and the Executive Plan; provided that the goals under
Section 3.2 hereof and the Executive Plan for each period used in the
calculation of the Executive's Incentive Compensation, shall be based on (1)
the portion of the Bonus Period through the end of the fiscal quarter in which
such termination occurs and (2) unaudited financial information prepared in
accordance with generally accepted accounting principles, applied
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consistently with prior periods, as approved and reviewed by the Board, (v)
continue to provide the Executive with the benefits he was receiving under
Sections 4.2 and 4.4 hereof (the "Benefits") in the manner and at such times
as the compensation or Benefits otherwise would have been payable or provided
to the Executive, and (vi) pay to the Executive as a single lump sum payment,
within 30 days of the termination of his employment hereunder, a lump sum
benefit equal to the value of the portion of his benefits under any savings,
pension, profit sharing or deferred compensation plans that are forfeited
under such plans by reason of the termination of his employment hereunder
prior to the Expiration Date. In the event that the Company is unable to
provide the Executive with any Benefits required hereunder by reason of the
termination of the Executive's employment pursuant to this Section 5.4, then
the Company shall pay the Executive cash equal to the value of the Benefit
that otherwise would have accrued for the Executive's benefit under the plan,
for the period during which such Benefits could not be provided under the
plans, said cash payments to be made within 45 days after the end of the year
for which such contributions would have been made or would have accrued. The
Company's good faith determination of the amount that would have been
contributed or the value of any Benefits that would have accrued under any
plan shall be binding and conclusive on the Executive. For this purpose, the
Company may use as the value of any Benefit the cost to the Company of
providing that Benefit to the Executive. Further, the Executive shall become
immediately fully vested in his or her Stock Options as of the date of such
termination of employment. The Company shall have no further liability
hereunder (other than for (x) reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however, to the provisions
of Section 4.1, and (y) payment of compensation for unused vacation days that
have accumulated during the calendar year in which such termination occurs.
5.5 Termination by Executive.
-------------------------
a. The Executive shall at all times have the right,
upon sixty (60) days written notice to the Company, to terminate the
Executive's employment hereunder.
b. Upon any termination pursuant to this Section
5.5 by the Executive without Good Reason, the Company shall (i) pay to the
Executive any unpaid Base Salary through the effective date of termination
specified in such notice and (ii) pay to the Executive his accrued but unpaid
Incentive Compensation, if any, for any Bonus Period ending on or before the
termination of Executive's employment with the Company. The Company shall have
no further liability hereunder (other than for (x) reimbursement for
reasonable business expenses incurred prior to the date of termination,
subject, however, to the provisions of Section 4.1, and (y) payment of
compensation for unused vacation days that have accumulated during the
calendar year in which such termination occurs.
c. Upon any termination pursuant to this Section
5.5 by the Executive for Good Reason, the Company shall pay to the Executive
the same amounts that would have been payable by the Company to the Executive
under Section 5.4 of this Agreement if the Executive's employment had been
terminated by the Company without Cause. The Company
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shall have no further liability hereunder (other than for (x) reimbursement
for reasonable business expenses incurred prior to the date of termination,
subject, however, to the provisions of Section 4.1, and (y) payment of
compensation for unused vacation days that have accumulated during the
calendar year in which such termination occurs).
d. For purposes of this Agreement, "Good Reason"
shall mean (i) the assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by Section 1.2 of this Agreement, or any other action by the
Company which results in a diminution in such position, authority, duties or
responsibilities, excluding for this purpose an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the Executive; (ii) any
failure by the Company to comply with any of the provisions of Article 3 of
this Agreement, other than an isolated, insubstantial and inadvertent failure
not occurring in bad faith and which is remedied by the Company promptly after
receipt of notice thereof given by the Executive; (iii) the Company's
requiring the Executive to be based at any office or location more than fifty
(50) miles outside of City limits of Rockville, Maryland, except for travel
reasonably required in the performance of the Executive's responsibilities;
(iv) any purported termination by the Company of the Executive's employment
otherwise than for Cause pursuant to Section 5.1, or by reason of the
Executive's disability pursuant to Section 5.2 of this Agreement prior to the
Expiration Date.
5.6 Change in Control of the Company.
--------------------------------
a. Unless otherwise provided in Section 5.7 hereof,
in the event that (i) a Change in Control (as defined in paragraph (b) of this
Section 5.6) in the Company shall occur prior to the Expiration Date, and (ii)
either (A) prior to the earlier of the Expiration Date and one year after the
date of the Change in Control, either (x) the Executive's employment with the
Company is terminated by the Company without Cause, as defined in Section 5.1
(and other than pursuant to Section 5.2 by reason of the Executive's
disability or Section 5.3 by reason of the Executive's death) or (y) the
Executive terminates his employment with the Company for Good Reason, as
defined in Section 5.5(d) hereof, or (B) within the thirty (30) day period
beginning one year after the date of the Change in Control, the Executives
terminates his employment with the Company for any reason, the Company shall
pay to the Executive those amounts Executive would be entitled to under
Section 5.4 hereof as if his employment was terminated without Cause. Further,
upon the Change in Control, any stock options granted to the Executive by the
Company that were outstanding as of the date of the Change in Control shall
become immediately exercisable. The Company shall have no further liability
hereunder (other than for (1) reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however, to the provisions
of Section 4.1, and (2) payment of compensation for unused vacation days that
have accumulated during the calendar year in which such termination occurs).
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b. For purposes of this Agreement, the term "Change
in Control" shall mean:
(i) Approval by the shareholders of the
Company of (x) a reorganization, merger, consolidation or other form of
corporate transaction or series of transactions, other than a public offering
of the Company's securities, in each case, with respect to which persons who
were the shareholders of the Company immediately prior to such reorganization,
merger or consolidation or other transaction do not, immediately thereafter,
own more than 50% of the combined voting power entitled to vote generally in
the election of directors of the reorganized, merged or consolidated company's
then outstanding voting securities, or (y) a liquidation or dissolution of the
Company or (z) the sale of all or substantially all of the assets of the
Company (unless such reorganization, merger, consolidation or other corporate
transaction, liquidation, dissolution or sale is subsequently abandoned); or
(ii) Individuals who, as of the date
hereof, constitute the Board (as of the date hereof the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board, provided
that any person becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board (other than an election or nomination of an individual whose
initial assumption of office is in connection with an actual or threatened
election contest relating to the election of the Directors of the Company, as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Securities Exchange Act) shall be, for purposes of this Agreement, considered
as though such person were a member of the Incumbent Board; or
(iii) The acquisition (other than from the
Company and other than pursuant to a public offering of the Company's
securities) by any person, entity or "group", within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act, (excluding, for this
purpose, the Frydman Family, the Company or its Subsidiaries, or any employee
benefit plan of the Company or its Subsidiaries which acquires beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Securities
Exchange Act) of 30% or more of either the then outstanding shares of the
Company's Common Stock or the combined voting power of the Company's then
outstanding voting securities entitled to vote generally in the election of
directors. For this purpose, "Frydman Family" shall mean Uziel Frydman, his
spouse, his ancestors, his lineal descendants, and the spouses of his
ancestors and lineal descendants.
5.7 Certain Additional Payments by the Company.
------------------------------------------
a. Anything in this Agreement to the contrary
notwithstanding, in the event it shall be determined that any payment,
distribution or other action by the Company to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise) (a "Payment") would be subject to an
excise tax
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imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any interest or penalties are incurred by the Executive with
respect to any such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), the Company shall make a payment to the Executive (a "Gross-Up
Payment") in an amount equal to the Excise Tax imposed upon the Payments.
b. Subject to the provisions of paragraph (c) of
this Section 5.7, all determinations required to be made under this Section
5.7, including whether and when a Gross-Up Payment is required and the amount
of such Gross-Up Payment and the assumptions to be utilized in arriving at
such determination, shall be made by BDO Seidman, LLP (the "Accounting Firm")
which shall provide detailed supporting calculations both to the Company and
the Executive within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is requested
by the Company. In the event that the Accounting Firm is serving as accountant
or auditor for the individual, entity or group effecting the Change of
Control, the Executive shall appoint another nationally recognized accounting
firm to make the determinations required hereunder (which accounting firm
shall then be referred to as the Accounting Firm hereunder). All fees and
expenses of the Accounting Firm shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this Section 5.7, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. If the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the Executive with a written
opinion that failure to report the Excise Tax on the Executive's applicable
federal income tax return would not result in the imposition of a negligence
or similar penalty. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies pursuant to
Section 5.7 and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
c. The Executive shall notify the Company in
writing of any claim by the Internal Revenue Service that, if successful,
would require the payment by the Company of the Gross-Up Payment. Such
notification shall be given as soon as practicable but no later than ten
business days after the Executive is informed in writing of such claim and
shall apprise the Company of the nature of such claim and the date on which
such claim is requested to be paid. The Executive shall not pay such claim
prior to the expiration of the 30-day period following the date on which it
gives such notice to the Company (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If the Company
notifies the Executive in writing prior to the expiration of such period that
it desires to contest such claim, the Executive shall:
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(i) give the Company any information
reasonably requested by the Company relating to such claim,
(ii) take such action in connection with
contesting such claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good
faith in order effectively to contest such claim, and
(iv) permit the Company to participate in
any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 5.7(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forego any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct the Executive to pay the tax claimed and sue for a refund or contest
the claim in any permissible manner, and the Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts, as the Company
shall determine; provided, however, that if the Company directs the Executive
to pay such claim and sue for a refund, the Company shall advance the amount
of such payment to the Executive, on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension
of the statute of limitations relating to payment of taxes for the taxable
year of the Executive with respect to which such contested amount is claimed
to be due is limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by
the Internal Revenue Service or any other taxing authority.
d. If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 5.7(c), the Executive
becomes entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the requirements of
Section 5.7(c)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 5.7(c), a
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determination is made that the Executive shall not be entitled to any refund
with respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior to the expiration
of 30 days after such determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such advance shall
offset, to the extent thereof, the amount of Gross-Up Payment required to be
paid.
5.8 Resignation. Upon any termination of employment pursuant
to this Article 5, the Executive shall be deemed to have resigned as an
officer, and if he or she was then serving as a director of the Company, as a
director, and if required by the Board, the Executive hereby agrees to
immediately execute a resignation letter to the Board.
5.9 Survival. The provisions of this Article 5 shall survive
the termination of this Agreement, as applicable.
6. Restrictive Covenants.
---------------------
6.1 Non-competition. At all times while the Executive is
employed by the Company and for a twelve (12) month period after the
termination of the Executive's employment with the Company for any reason, the
Executive shall not, directly or indirectly, engage in or have any interest in
any sole proprietorship, partnership, corporation or business or any other
person or entity (whether as an employee, officer, director, partner, agent,
security holder, creditor, consultant or otherwise) that directly or
indirectly (or through any affiliated entity) engages in a Competitive
Business; provided that such provision shall not apply to the Executive's
ownership of Common Stock of the Company or the acquisition by the Executive,
solely as an investment, of securities of any issuer that is registered under
Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended, and
that are listed or admitted for trading on any United States national
securities exchange or that are quoted on the National Association of
Securities Dealers Automated Quotations System, or any similar system or
automated dissemination of quotations of securities prices in common use, so
long as the Executive does not control, acquire a controlling interest in or
become a member of a group which exercises direct or indirect control or, more
than five percent of any class of capital stock of such corporation. For these
purposes, "Competitive Business" shall mean the marketing of any Restricted
Product to any Restricted Class of Accounts. For purposes of this Agreement,
"Restricted Product" means butter toffees, tea biscuits, wafers or any item
from which the Company derives more than thirty percent (30%) of its net
sales, as defined in Section 3.1 hereof, for any fiscal year of the Company
during the term of this Agreement. For purposes of this Agreement, "Restricted
Class of Accounts" shall mean, with respect to any Restricted Product, any of
the following classes of accounts if more than thirty percent (30%) of the
Company's net sales from the Restricted Product for any fiscal year during the
term of this Agreement are derived from sales to that class of account: (1)
mass merchandisers; (2) dollar stores; (3) groceries; (4) grocery wholesalers;
(5) candy and tobacco jobbers; (6) gift baskets; (7) specialty food
distributors; (8) food distributors; (9) vending operators; and (10) vending
distributors. Upon the expiration of the term of this
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Agreement, the Company shall deliver to the Executive within ninety (90) days
a list of the Restricted Products and the classes of accounts relating to such
Restricted Products.
6.2 Nondisclosure. The Executive shall not at any time
divulge, communicate, use to the detriment of the Company or for the benefit
of any other person or persons, or misuse in any way, any Confidential
Information (as hereinafter defined) pertaining to the business of the
Company. Any Confidential Information or data now or hereafter acquired by the
Executive with respect to the business of the Company (which shall include,
but not be limited to, information concerning the Company's financial
condition, prospects, technology, customers, suppliers, sources of leads and
methods of doing business) shall be deemed a valuable, special and unique
asset of the Company that is received by the Executive in confidence and as a
fiduciary, and Executive shall remain a fiduciary to the Company with respect
to all of such information. For purposes of this Agreement, "Confidential
Information" means information disclosed to the Executive or known by the
Executive as a consequence of or through his employment by the Company
(including information conceived, originated, discovered or developed by the
Executive) prior to or after the date hereof, and not generally known, about
the Company or its business. Notwithstanding the foregoing, nothing herein
shall be deemed to restrict the Executive from disclosing Confidential
Information to the extent required by law.
6.3 Ownership of Developments. All copyrights, patents,
trade secrets, or other intellectual property rights associated with any
ideas, concepts, techniques, inventions, processes, or works of authorship
developed or created by Executive during the course of performing work for the
Company or its clients (collectively, the "Work Product") shall belong
exclusively to the Company and shall, to the extent possible, be considered a
work made by the Executive for hire for the Company within the meaning of
Title 17 of the United States Code. To the extent the Work Product may not be
considered work made by the Executive for hire for the Company, the Executive
agrees to assign, and automatically assign at the time of creation of the Work
Product, without any requirement of further consideration, any right, title,
or interest the Executive may have in such Work Product. Upon the request of
the Company, the Executive shall take such further actions, including
execution and delivery of instruments of conveyance, as may be appropriate to
give full and proper effect to such assignment.
6.4 Books and Records. All books, records, and accounts
relating in any manner to the customers or clients of the Company, whether
prepared by the Executive or otherwise coming into the Executive's possession,
shall be the exclusive property of the Company and shall be returned
immediately to the Company on termination of the Executive's employment
hereunder or on the Company's request at any time.
6.5 Definition of Company. Solely for purposes of this
Article 6, the term "Company" also shall include any existing or future
subsidiaries of the Company that are operating during the time periods
described herein.
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6.6 Acknowledgment by Executive. The Executive acknowledges
and confirms that (a) the restrictive covenants contained in this Article 6
are reasonably necessary to protect the legitimate business interests of the
Company, and (b) the restrictions contained in this Article 6 (including
without limitation the length of the term of the provisions of this Article 6)
are not overbroad, overlong, or unfair and are not the result of overreaching,
duress or coercion of any kind. The Executive further acknowledges that the
restrictions contained in this Article 6 are intended to be, and shall be, for
the benefit of and shall be enforceable by, the Company's successors and
assigns.
6.7 Reformation by Court. In the event that a court of
competent jurisdiction shall determine that any provision of this Article 6 is
invalid or more restrictive than permitted under the governing law of such
jurisdiction, then only as to enforcement of this Article 6 within the
jurisdiction of such court, such provision shall be interpreted and enforced
as if it provided for the maximum restriction permitted under such governing
law.
6.8 Extension of Time. If the Executive shall be in
violation of any provision of this Article 6, then each time limitation set
forth in this Article 6 shall be extended for a period of time equal to the
period of time during which such violation or violations occur. If the Company
seeks injunctive relief from such violation in any court, then the covenants
set forth in this Article 6 shall be extended for a period of time equal to
the pendency of such proceeding including all appeals by the Executive.
6.9 Survival. The provisions of this Article 6 shall survive
the termination of this Agreement, as applicable.
7. Mediation. In the event a dispute arises out of or relates to this
Agreement, or the breach thereof, and if the dispute cannot be settled through
negotiation, the parties hereby agree first to attempt in good faith to settle
the dispute by mediation administered by the American Arbitration Association
under its Employment Mediation Rules before resorting to litigation or some
other dispute resolution procedure. Any mediation procedures in regard to this
Agreement shall be instituted and maintained in Rockville, Maryland.
8. Section 162(m) Limits. Notwithstanding any other provision of this
Agreement to the contrary, if and to the extent that any remuneration payable
by the Company to the Executive for any year would exceed the maximum amount
of remuneration that the Company may deduct for that year under Section 162(m)
("Section 162(m)") of the Internal Revenue Code of 1986, as amended (the
"Code"), payment of the portion of the remuneration for that year that would
not be so deductible under Section 162(m) shall, in the sole discretion of the
Board, be deferred and become payable at such time or times as the Board
determines that it first would be deductible by the Company under Section
162(m), with interest at the "short-term applicable rate" as such term is
defined in Section 1274(d) of the Code. The limitation set forth under this
Section 8 shall not apply with respect to any amounts payable to the Executive
pursuant to Article 5 hereof.
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9. Assignment. Neither party shall have the right to assign or
delegate his rights or obligations hereunder, or any portion thereof, to any
other person.
10. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Maryland. Any action in regard to
this Agreement or arising out of its terms and conditions shall be instituted
and litigated in the courts of Rockville, Maryland and in no other. In
accordance, the parties hereby submit to the jurisdiction of the courts of
Maryland.
11. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and, upon
its effectiveness, shall supersede all prior agreements, understandings and
arrangements, both oral and written, between the Executive and the Company (or
any of its affiliates) with respect to such subject matter. This Agreement may
not be modified in any way unless by a written instrument signed by both the
Company and the Executive.
12. Notices: All notices required or permitted to be given hereunder
shall be in writing and shall be personally delivered by courier, sent by
registered or certified mail, return receipt requested or sent by confirmed
facsimile transmission addressed as set forth herein. Notices personally
delivered, sent by facsimile or sent by overnight courier shall be deemed
given on the date of delivery and notices mailed in accordance with the
foregoing shall be deemed given upon the earlier of receipt by the addressee,
as evidenced by the return receipt thereof, or three (3) days after deposit in
the U.S. mail. Notice shall be sent (i) if to the Company, addressed to
Sherwood Brands, Inc., 6110 Executive Boulevard, Suite 1080, Rockland,
Maryland 20852, Attention: President, and (ii) if to the Executive, to his
address as reflected on the payroll records of the Company, or to such other
address as either party hereto may from time to time give notice of to the
other.
13. Benefits; Binding Effect. This Agreement shall be for the benefit
of and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns, including, without limitation, any successor to the Company, whether
by merger, consolidation, sale of stock, sale of assets or otherwise.
14. Severability. The invalidity of any one or more of the words,
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid,
this Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by length of time or size of
area, or both, the otherwise invalid provision will be considered to be
reduced to a period or area which would cure such invalidity.
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15. Waivers. The waiver by either party hereto of a breach or
violation of any term or provision of this Agreement shall not operate nor be
construed as a waiver of any subsequent breach or violation.
16. Damages. Nothing contained herein shall be construed to prevent
the Company or the Executive from seeking and recovering from the other
damages sustained by either or both of them as a result of its or his breach
of any term or provision of this Agreement. In the event that either party
hereto brings suit for the collection of any damages resulting from, or the
injunction of any action constituting, a breach of any of the terms or
provisions of this Agreement, then the party found to be at fault shall pay
all reasonable court costs and attorneys' fees of the other.
17. Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
18. No Third Party Beneficiary. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any
person other than the Company, the parties hereto and their respective heirs,
personal representatives, legal representatives, successors and assigns, any
rights or remedies under or by reason of this Agreement.
19. Indemnification.
---------------
a. Subject to limitations imposed by law, the Company shall
indemnify and hold harmless the Executive to the fullest extent permitted by
law from and against any and all claims, damages, expenses (including
attorneys' fees), judgments, penalties, fines, settlements, and all other
liabilities incurred or paid by him in connection with the investigation,
defense, prosecution, settlement or appeal of any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative and to which the Executive was or is a party or is threatened
to be made a party by reason of the fact that the Executive is or was an
officer, employee or agent of the Company, or by reason of anything done or
not done by the Executive in any such capacity or capacities, provided that
the Executive acted in good faith, in a manner that was not grossly negligent
or constituted wilful misconduct and in a manner he reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The Company also shall pay any and all expenses
(including attorney's fees) incurred by the Executive as a result of the
Executive being called as a witness in connection with any matter involving
the Company and/or any of its officers or directors.
b. The Company shall pay any expenses (including attorneys'
fees), judgments, penalties, fines, settlements, and other liabilities
incurred by the Executive in investigating, defending, settling or appealing
any action, suit or proceeding described in this Section 19 in
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advance of the final disposition of such action, suit or proceeding. The
Company shall promptly pay the amount of such expenses to the Executive, but
in no event later than 10 days following the Executive's delivery to the
Company of a written request for an advance pursuant to this Section 19,
together with a reasonable accounting of such expenses.
c. The Executive hereby undertakes and agrees to repay to
the Company any advances made pursuant to this Section 19 if and to the extent
that it shall ultimately be found that the Executive is not entitled to be
indemnified by the Company for such amounts.
d. The Company shall make the advances contemplated by this
Section 19 regardless of the Executive's financial ability to make repayment,
and regardless whether indemnification of the Indemnitee by the Company will
ultimately be required. Any advances and undertakings to repay pursuant to
this Section 19 shall be unsecured and interest-free.
e. The provisions of this Section 19 executed this Agreement
as of the date first above written.
COMPANY:
SHERWOOD BRANDS, INC.
By: ____________________________________
Name:
Title:
EXECUTIVE:
-----------------------------------------
Amir Frydman
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EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Sherwood Brands, Inc. and Subsidiaries
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated October 7, 1997, except
for Note 18, the date of which is December 12, 1997, relating to the
consolidated financial statements of Sherwood Brands, Inc. and Subsidiaries,
which is contained in that Prospectus, and of our report dated October 7, 1997,
except for Note 18, the date of which is December 12, 1997, relating to the
schedule, which is contained in Part II of the Registration Statement.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Washington, D.C.
May 4, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Form SB-2
for the year ended July 31, 1997, and the six months ended January 31, 1998, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> JUL-31-1997 JUL-31-1997
<PERIOD-END> JUL-31-1997 JAN-31-1997
<CASH> 614,109 625,363
<SECURITIES> 0 0
<RECEIVABLES> 2,125,350 2,154,986
<ALLOWANCES> 23,400 27,800
<INVENTORY> 3,412,962 4,080,698
<CURRENT-ASSETS> 6,608,357 7,119,699
<PP&E> 2,679,628 2,880,694
<DEPRECIATION> 344,072 399,338
<TOTAL-ASSETS> 8,963,360 9,685,944
<CURRENT-LIABILITIES> 4,388,622 4,393,662
<BONDS> 1,870,485 1,828,607
0 0
0 0
<COMMON> 21,500 21,500
<OTHER-SE> 1,670,973 2,491,373
<TOTAL-LIABILITY-AND-EQUITY> 8,963,360 9,685,944
<SALES> 17,424,243 9,720,784
<TOTAL-REVENUES> 17,424,243 9,720,784
<CGS> 12,570,606 6,515,462
<TOTAL-COSTS> 12,570,606 6,515,462
<OTHER-EXPENSES> 1,950,107 575,166
<LOSS-PROVISION> 72,606 37,166
<INTEREST-EXPENSE> 273,511 122,424
<INCOME-PRETAX> 326,380 1,206,667
<INCOME-TAX> 23,100 386,267
<INCOME-CONTINUING> 222,633 1,213,339
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 303,280 820,400
<EPS-PRIMARY> .14 .38
<EPS-DILUTED> .14 .38
</TABLE>
