<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 8, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
BALANCE BAR COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5149 77-0306617
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1015 MARK AVENUE
CARPINTERIA, CALIFORNIA 93013
(805) 566-0234
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES A. WOLFE
1015 MARK AVENUE
CARPINTERIA, CALIFORNIA 93013
(805) 566-0234
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
KENT V. GRAHAM THOMAS A. BEVILACQUA
O'MELVENY & MYERS LLP TIMOTHY R. CURRY
1999 AVENUE OF THE STARS BROBECK, PHLEGER & HARRISON LLP
SUITE 700 TWO EMBARCADERO PLACE
LOS ANGELES, CALIFORNIA 90067-6035 2200 GENG ROAD
(310) 246-6820 PALO ALTO, CA 94303-0913
(415) 424-0160
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
<TABLE>
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<CAPTION>
PROPOSED MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF OFFERING REGISTRATION
SECURITIES TO BE REGISTERED(1) PRICE(1)(2) FEE(1)
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<S> <C> <C>
Common Stock, $0.01 par value..................................... $35,243,065 $10,397
- ----------------------------------------------------------------------------------------------------
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</TABLE>
(1) Calculated pursuant to Rule 457(o).
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a).
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 8, 1998
PROSPECTUS
- ----------
SHARES
[LOGO]
COMMON STOCK
Of the shares of Common Stock offered hereby, shares
are being sold by Balance Bar Company ("Balance Bar Company" or the "Company")
and shares are being sold by the Selling Stockholders. The
Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $ and $ per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol BBAR.
--------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
--------
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.
<TABLE>
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- -----------------------------------------------------------------------------------------
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
- -----------------------------------------------------------------------------------------
Total (3)..................... $ $ $ $
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- -----------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock solely to cover over-
allotments, if any. If all such shares are purchased, the total Price to
Public, Underwriting Discount and Proceeds to Company, will be $ ,
$ , and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST ADAMS, HARKNESS & HILL, INC.
, 1998.
<PAGE>
[Picture showing Company Products]
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors for each
fiscal year and will make available copies of quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
"BALANCE, THE COMPLETE NUTRITIONAL FOOD"(R) bar is a registered trademark of
the Company. "40-30-30 BALANCE"(TM), is a trademark of the Company. The
prospectus also includes tradenames and trademarks of companies other than the
Company which are the property of their respective owners.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. The Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
THE COMPANY
Balance Bar Company develops and markets branded food and beverage products
in convenient, good-tasting, balanced nutritional formulations that appeal to a
broad consumer base. The Company has targeted its products, the Balance bar and
the 40-30-30 Balance powdered drink mix, at the healthy snack and meal
replacement market and believes that by marketing its products as "nutritious
snacks that taste great" it is highlighting their benefits over typical snacks
and meal replacements. In addition, the Company has targeted other markets
consisting of consumers with specific dietary or nutritional requirements,
including the fitness, weight management and diabetic markets. In order to make
its products available wherever people shop, the Company sells its products
through multiple distribution channels, including natural foods, mass
merchandise, club, grocery, convenience, health and fitness, and drug stores.
Balance Bar Company has experienced significant growth as sales have grown from
$1.3 million in 1995 to $39.6 million in 1997.
Consumers have become increasingly health conscious over the last decade, as
reflected in the surge of activities aimed at maintaining and improving health,
including exercising, dieting and quitting smoking. Despite this concern for
health and nutrition, today's consumers find themselves with less time for
three nutritious meals a day and are seeking healthy snacks and meal
substitutes that can be consumed at any time or place. In response to these
trends, many new food and beverage products have been introduced to satisfy
consumer demand for nutritious snacks and meal replacements and have achieved
increasingly broad distribution. The Company believes that the consumer trends
towards health and nutrition will continue to drive the broad distribution of
convenient, healthy snacks and meal replacements.
The Company has differentiated its brand from other snack products and meal
replacements by focusing on the combination of nutrition, good taste and
convenience. The Company's current product lines are based on balanced
proportions of 40% carbohydrates, 30% protein and 30% dietary fat, a
formulation designed to sustain energy and satisfy hunger. The Company
currently sells ten flavors of Balance bars in two sizes and five flavors of
powdered drinks in canisters or single serving envelopes. Although the
Company's current products are based upon the 40-30-30 concept, a Company
survey indicates that the popularity of its products extends to a much broader
consumer base.
The Balance bar has made significant penetration into the natural foods
channel with approximately 69% of the Company's 1997 sales in this channel.
According to SPINS data from Spence Information Services, the Balance bar was
the number one selling brand of nutrition bar in the natural foods channel,
achieving a 31.0% share in 1997. In 1997 and 1998, the Company expanded its
strategic focus to the wider mass market, including mass merchandise, club,
grocery, convenience, health and fitness and drug stores. For the
November/December 1997 reporting period, the top two selling nutrition bar
flavors per point of distribution in grocery stores were Balance bars. In
addition the leading Balance bar flavor outsold the nearest competitor flavor
per point of distribution in grocery stores by 56.6% in December 1997 . The
Company believes that expanding distribution within the mass market represents
a significant growth opportunity.
The Company's goal is to become a recognized leader in providing nutritious,
good tasting and convenient snack and meal replacement products for a wide
variety of consumer needs. In order to achieve its goal, the Company's strategy
is to: (i) continue positioning Balance products as good tasting, nutritious
snacks and meal replacements; (ii) expand the Company's consumer base and brand
awareness through increased advertising and promotional activities; (iii)
expand existing and new channels of distribution; (iv) focus on in-store
promotion and marketing; (v) continue to promote the nutritional qualities of
Balance products; (vi) introduce new products and product line extensions; and
(vii) acquire complimentary companies or product lines.
The Company's principal executive office is located at 1015 Mark Avenue,
Carpinteria, California 93013. Its telephone number is (805) 566-0234.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. shares
Common Stock offered by the Selling Stockholders.... shares
Common Stock to be outstanding after the offering... shares (1)
Use of proceeds..................................... To retire short and long-term
debt and for working capital and
general corporate purposes which
could include the acquisition of
companies or product lines.
Proposed Nasdaq National Market symbol.............. BBAR
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS YEAR ENDED
MAY 31, ENDED DECEMBER 31,
--------------- DECEMBER 31, -----------------------
1993 1994 1994 1995 1996 1997
------- ------ ------------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Sales.................. $ 481 $ 692 $ 576 $1,262 $10,544 $39,634
Income (loss) before
income tax............ (1,262) (312) 7 (84) 1,840 2,876
Net income (loss)...... (1,263) (313) 6 (85) 1,615 1,660
Net income (loss) per
diluted share......... (1.30) (0.24) -- (0.07) 1.04 0.90
Weighted average number
of shares outstanding
(2)................... 971 1,278 1,286 1,300 1,557 1,841
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
ACTUAL AS ADJUSTED(3)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash.................................................... $ 89
Working capital......................................... 2,974
Total assets............................................ 10,796
Long-term debt, net of current portion.................. 228
Total shareholders' equity.............................. 4,104
</TABLE>
- --------
(1) Based on the number of shares outstanding at February 28, 1998. Excludes
(i) shares of Common Stock reserved for issuance under the
Company's 1998 Stock Incentive Plan (the "1998 Plan"), of which no shares
were subject to outstanding options as of February 28, 1998, and (ii)
438,091 shares of Common Stock issuable upon the exercise of options
outstanding at February 28, 1998 at a weighted average exercise price of
$4.39 per share. See "Capitalization," "Management--Stock Options and Stock
Plans" and Note 8 of Notes to Financial Statements.
(2) See Note 3 of Notes to Financial Statements for an explanation of the
determination of shares used in computing net earnings (loss) per diluted
share.
(3) Adjusted to reflect the sale of shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $ per share and the receipt of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
----------------
Unless otherwise indicated, all information in this Prospectus assumes no
exercise of the underwriters' over-allotment option and gives effect to [(i)
the conversion of all shares of Series A Preferred Stock into Common Stock, and
(ii) the for one stock split (the "Stock Split"). Note to SEC: preferred
stock conversion and Stock Split still to be determined] See "Description of
Capital Stock", "Underwriting" and Notes to Financial Statements.
4
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. These statements can be identified by the use of forward-
looking terminology such as "believes," "expects," "intends," "plans," "may,"
"will," "should," or "anticipation" or the negative thereof or other
variations thereon or comparable terminology. Actual results could differ
materially from those discussed in the forward-looking statements as a result
of certain factors, including those set forth below and elsewhere in this
Prospectus. The following risk factors should be considered carefully in
addition to the other information in this Prospectus before purchasing the
shares of Common Stock offered hereby.
Trade and Consumer Acceptance in New Distribution Channels. Until recently,
virtually all of the Company's sales were made in natural food stores. In
1997, sales to natural food stores accounted for approximately 69% of the
Company's sales. The Company's growth will depend on its ability to expand
other channels of distribution, including mass merchandise, club, grocery,
convenience, and drug stores, without significant impact on current channels.
These new channels of distribution have presented, and will continue to
present, competitive and marketing challenges, risks, and marketing and
distribution costs that are different from those faced by the Company in the
natural foods channel. In addition, the Company's expansion in these new
channels of distribution will require it to attract and retain consumers in
broader demographic and geographic markets. Although the Company has initiated
distribution through new nationwide distribution channels, there can be no
assurance that the Company will achieve the same success with consumers in
other demographic and geographic markets. The inability to obtain consumer
acceptance in new markets could have a material adverse effect on the
Company's business, results of operations, and financial condition. See
"Business--Growth Strategy" and "--Sales and Distribution."
Potential Sales and Earnings Volatility. The Company has experienced, and
will continue to experience, period-to-period fluctuations in its operating
results as a result of a variety of factors, including: (i) fluctuations in
promotional, advertising, and marketing expenditures; (ii) the introduction of
new products or delays in such introductions; (iii) the introduction or
announcement of new products by the Company's competitors; (iv) customer
acceptance of new products; (v) shipment delays; (vi) consumer perceptions of
the Company's products and operations, including the 40-30-30 nutritional
concept; (vii) competitive pricing pressures; (viii) the adverse effect of
distributors', suppliers', or the Company's failure, and allegations of their
failure, to comply with applicable regulations; (ix) the availability and cost
of raw materials; (x) economic conditions in general and in the food industry
in particular; (xi) the negative effect of changes in or interpretations of
regulations that may limit or restrict the sale of certain of the Company's
products; (xii) the expansion of its operations into new markets; (xiii) the
introduction of its products into each such market; and (xiv) unanticipated
changes in the timing of customer promotions, any of which could have a
material adverse effect on the Company's business, results of operations, and
financial condition. The Company has a limited operating history, and
therefore it is difficult to predict the Company's future sales or its ability
to identify and adapt its products successfully to meet changing dietary
trends and other elements that affect the Company's results of operations.
The Company has increased its expense levels to support its recent growth,
particularly expenses associated with advertising, marketing, promotions, and
employees. The Company expects to continue to increase its operating expenses
in these areas. If the Company does not achieve increased levels of sales
commensurate with these increased operating expenses, or if the Company's
revenues decrease or do not meet the Company's expectations for a particular
period, the Company's business, results of operations, and financial condition
may be materially and adversely affected.
Dependence on Third Party Manufacturers. The Company does not own or operate
any manufacturing facilities and is, therefore, dependent on third parties for
the manufacture of its products. The Company currently relies and expects to
continue to rely on two contract manufacturers to produce all of its products.
These contract manufacturers also produce products for some of the Company's
competitors, and the Company competes with these and other companies for
production capacity. If either of the Company's
5
<PAGE>
contract manufacturers were unable or unwilling to produce and ship the
Company's products in a timely manner or to produce sufficient quantities to
support the Company's growth, if any, the Company would have to identify and
qualify new contract manufacturers. There can be no assurance that the Company
would be able to identify and qualify new contract manufacturers in a timely
manner or that such manufacturers would allocate sufficient capacity to the
Company in order to meet its requirements, which could adversely affect the
Company's ability to make timely deliveries of its products. In addition,
there can be no assurance that the capacity of the Company's current contract
manufacturers will be sufficient to fulfill the Company's orders, and any
supply shortfall could materially and adversely affect the Company's business,
results of operations, and financial condition. The Company's contract
manufacturers each store the Company's products in a warehouse prior to
shipment to distributors. Shipments to and from the warehouses could be
delayed for a variety of reasons including weather conditions, strikes, and
shipping delays. Any significant delay in shipments of the Company's products
would have a material adverse effect on the Company's business, results of
operations, and financial condition. The Company has from time to time
experienced, and may in the future experience, delays in the production and
delivery of its products.
In addition, the contract manufacturers are contractually required to
maintain the quality of the Company's products and to comply with applicable
laws and regulations relating to the production of food products. There can be
no assurance that the Company's contract manufacturers will continue to
produce products that are consistent with the Company's standards. The Company
has occasionally received, and might from time to time receive, shipments of
products that fail to conform to the Company's standards. The failure of any
contract manufacturer to produce products that conform to the Company's
standards could materially and adversely affect the Company's reputation in
the marketplace and result in product recalls, product liability claims, and
severe economic loss. See "--Government Regulation" and "Business--Contract
Manufacturers and Quality Assurance."
Changes in Dietary Trends. The snack food industry in general and the
nutritional food industry in particular are subject to changing consumer
trends, demands, and preferences. Trends within the nutritional food industry
change often, and the failure of the Company to anticipate, identify or react
to changes in these trends could lead, among other things, to reduced demand
and price reductions, and could have a material adverse effect on the
Company's business, results of operations, and financial condition. These
changes might include consumer demand for new products or formulations that
include health promoting ingredients such as nutraceuticals. The Company's
success depends, in part, on its ability to anticipate the tastes and dietary
habits of consumers and to offer products that appeal to their preferences on
a timely and affordable basis. The Company believes that its growth to date
has been due, to some extent, to the popularity of the "40-30-30" nutritional
concept, which was popularized in 1995 in a nationally best selling book, The
Zone, and has attracted significant media attention and scientific
controversy. All of the Company's current and planned future products are
based on a 40-30-30 ratio, and the ratio is mentioned on all of the Company's
packaging and in most of its advertising and promotional materials. Although
the 40-30-30 concept has achieved a measure of popularity in some consumer
groups, it has also received significant criticism from certain portions of
the scientific and nutritional communities. Although the Company's surveys
indicate that a majority of its products are purchased by consumers for
reasons other than adherence to the 40-30-30 concept, there can be no
assurance that the popularity of the Company's products will continue to grow
if the 40-30-30 concept declines in popularity, or that the Company's products
will continue to receive the same level of acceptance in consumer groups that
are making purchasing decisions for reasons other than the 40-30-30 concept.
See "Business--Consumer Trends" and "--Industry Overview."
Risk of Adverse Publicity. The Company is highly dependent upon consumers'
perception of the safety, quality, and possible dietary benefits of its
products. As a result, substantial negative publicity concerning the 40-30-30
concept, one or more of the Company's products, or other nutritional foods
similar to the Company's products could lead to a loss of consumer confidence
in the Company's products, removal of the Company's products from retailers'
shelves and reduced sales and prices of the Company's products. Any of these
events could have a material adverse effect on the Company's business, results
of operations, and financial condition.
6
<PAGE>
Narrow Product Line; Dependence on New Products. The Company currently has
only two product lines: nutrition bars (in ten flavors and two sizes) and
powdered drink mixes (in five flavors and two sizes), both of which are based
on a 40-30-30 formulation. In 1997, Balance bars accounted for approximately
92% of sales and powdered drink mixes accounted for approximately 8% of sales.
There can be no assurance that the Company's existing products will continue
to achieve market acceptance. Any such failure could have a material adverse
effect on the Company's business, results of operations, and financial
condition. The Company believes its ability to increase sales is partially
dependent upon its ability to introduce new and innovative products into its
existing markets. The success of new products depends on a number of factors,
including the Company's ability to develop products that appeal to consumers
and that are priced competitively. There can be no assurance that the
Company's efforts to develop new products will be successful, that consumers
will accept new products, or that the Company's competitors will not introduce
products that achieve greater market acceptance than the Company's products.
See "Business--Growth Strategy" and "--Competition."
Dependence on Significant Retail Customers and Distributors. A limited
number of distributors and retail customers have historically accounted, and
are likely to continue to account in the future, for a substantial portion of
the Company's revenues. Most of the Company's sales are made to distributors
(with the assistance of commissioned brokers) that resell to retail customers.
The Company's two largest retail customers in 1997 were Trader Joe's and
General Nutrition Companies ("GNC") and two largest distributor customers were
Tree of Life and United Natural Foods. Trader Joe's and GNC accounted for
approximately 25% and 7%, respectively, of the Company's sales in 1997. The
Company anticipates that Costco will be a significant customer in 1998. United
Natural Foods acquired one of the Company's other natural foods distributors
in October 1997. Including sales to the acquired distributor as if it had been
owned for all of 1997, sales to United Natural Foods accounted for
approximately 14% of the Company's sales in 1997. Tree of Life accounted for
approximately 9% of the Company's sales in 1997. The Company's distributors
and retail customers typically purchase the Company's products with standard
purchase orders and, in general, are not bound by long-term contracts. There
can be no assurance that Trader Joe's, GNC, Costco, Tree of Life or United
Natural Foods will continue their relationships with the Company. The loss of
Trader Joe's, GNC, or CostCo as a retail customer or the loss of a significant
number of other major customers, the loss of major distributors such as Tree
of Life or United Natural Foods, or a significant reduction in purchase volume
by or financial difficulty of such customers or distributors could have a
material adverse effect on the Company's business, results of operations, and
financial condition. See "Business--Sales and Distribution," and "--
Marketing."
Competition. The Company competes across a number of markets with a variety
of competitors, including other makers of nutrition bars and beverages, both
powdered and ready-to-drinks, and many other snacks and meal substitutes. Many
of these companies are larger than the Company and have substantially greater
financial, distribution, and marketing resources than the Company. In
addition, those of the Company's competitors selling products containing less
than 5 grams of fat per serving are permitted by FDA regulations to use the
term "healthy" in advertising their products. These competitors may have a
competitive advantage in marketing to certain consumer markets. Several
companies with strong brand names and substantially greater financial
resources than the Company have announced plans to launch or have launched
directly competitive nutrition bar and powdered drink mix products during the
past several months. All of these competitors also compete for shelf space in
all distribution channels and for suppliers and contract manufacturers.
Increased competition from such companies could have a material adverse effect
on the Company's business, results of operations, and financial condition. See
"Business--Competition."
Product Liability. The Company, like any marketer, distributor or
manufacturer of products that are designed to be ingested, faces an inherent
risk of exposure to product liability claims if the use of its products
results, or is alleged to result, in injury or death. With respect to product
liability claims, the Company has $1.0 million per occurrence and $2.0 million
in aggregate liability insurance. The Company has excess umbrella liability
insurance of up to $8.0 million. There can be no assurance that such insurance
will continue
7
<PAGE>
to be available at a reasonable cost, or, if available, will be adequate to
cover the Company's liabilities. In addition, the Company is heavily dependent
on its contract manufacturers for compliance with sound and lawful production
of its products. The Company's contract manufacturers are required to
indemnify the Company for product liability claims, arising out of the
manufacturing of the Company's products, and the Company must indemnify the
manufacturers for claims arising out of the labeling and packaging of its
products. Although the Company has contractual indemnification from its
contract manufacturers, and is included as a named insured on each of their
product liability insurance policies, any such indemnification is limited as a
practical matter to the creditworthiness of the indemnifying party, the
availability of such insurance, and such manufacturers' continued maintenance
of such insurance. Therefore, if the Company does not have adequate insurance
or contractual indemnification, product liabilities relating to defective
products could have a material adverse effect on the Company's business,
results of operations, and financial condition. See "Business--Legal
Proceedings," "--Dependence on Third Party Manufacturers" and "--Government
Regulation."
In August 1997, the Company, together with one of its contract manufacturers
and a retailer of its products, was named in a lawsuit, filed but not served
on the Company, for a death allegedly resulting from the ingestion of a
Balance bar that allegedly contained nuts. Although the Company believes that
damages from such lawsuit, if served and adversely determined, would not have
a material adverse effect on the Company's business, results of operations, or
financial condition, no assurance can be given that such lawsuit will not be
served on the Company and, if served, no assurance can be given that any
outcome adverse to the Company would not have a material adverse effect on the
business, results of operations, and financial condition of the Company. See
"Business--Legal Proceedings."
Intellectual Property Protection. The Company relies on a combination of
common law trademark rights, U.S. federal registration rights, and trade
secret laws to protect its proprietary rights. The Company uses the word
"balance" in its corporate name and in each of its two current product line
names. The term "balance" and variations thereof are widely used for many food
products other than those sold by the Company. Such widespread use may weaken
the Company's trademark rights and may dilute any unique, distinctive
significance the word "balance" may have as a means of identifying the
Company's products. In addition, the Company uses "40-30-30" on all of its
product packaging and in advertising and promotional materials. There can be
no assurance that the Company will be able to enforce its trademark rights for
current products or register trademarks or obtain common law trademark rights
using "balance" or "40-30-30" for any new product lines it may introduce. Such
inability to have exclusive use of the word "balance" or "40-30-30" in new
product names could weaken the Company's ability to create a strong "balance"
brand in existing and new product categories.
In addition, the Company only has one federally registered trademark,
"BALANCE--THE COMPLETE NUTRITIONAL FOOD" and 18 applications for federal
registration of marks in the United States. Common law trademark rights do not
provide the Company with the same level of protection as afforded by a United
States federal registration of a trademark. In addition, common law trademark
rights are limited to the geographic area in which the trademark is actually
used plus a reasonable zone of future expansion, while U.S. federal
registration on the Principal Register gives the registrant superior rights
throughout the United States, subject to certain exceptions. The Company has
registered its trademarks in certain foreign jurisdictions where the Company's
products are or will be sold. The protection available in such jurisdictions
may not be as extensive as the protection available to the Company in the
United States.
The Company and one of its largest distributors, Tree of Life, which uses
"Balanced--The Total Nutritional Drink" for an existing beverage, have agreed
to limit their use of the term "balance," "balanced" and variations thereof.
Under the contract, the Company and Tree of Life may continue to use the
current names for their respective products. However, the Company may not use
the trademark or tradename "balanced" in connection with any goods or services
or the term "balance" at the beginning of any name of a nutritional drink
product or certain processed foods and meals produced by Tree of Life. Tree of
Life may not use the trademark or tradename "balance" in connection with any
goods or services or the term
8
<PAGE>
"balanced" in connection with nutritional bar products. These restrictions
could adversely affect the Company's ability to successfully expand into new
product categories or strengthen its brand name.
Although the Company's formula for its products is a trade secret, it may be
independently developed or duplicated. In addition, the Company does not have
any proprietary rights in the 40-30-30 nutritional concept. The Company
protects its proprietary formula and processes, in part, by confidentiality
agreements with its employees and contract manufacturers. There can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach, or that the Company's trade secrets or
those of its contract manufacturers will not otherwise become known or
discovered independently by competitors. The Company owns the formula for the
products produced by its two contract manufacturers, Bariatrix International,
Inc. ("Bariatrix") and Nellson Nutraceutical, Inc. ("Nellson"). However,
pursuant to the terms of the Company's agreement with Nellson, Nellson will
obtain all rights to the nutritional bar formula if the Company does not meet
certain minimum purchase volumes. However, the Company's current purchase
volumes significantly exceed these minimum guaranteed purchase volumes. If the
Company fails to meet the purchase requirements, it has an option to buy out
any remaining purchase requirements to maintain ownership of the formula.
Although the Company believes that it will meet these purchase volumes or be
able to buy out any remaining purchase requirements, there can be no assurance
that the Company will retain ownership of this formula. If the Company were to
lose ownership of this formula and lose its relationships with Bariatrix and
Nellson, it could have a material adverse effect on the Company's business,
results of operations, and financial condition.
Managing and Maintaining Growth. The Company is currently experiencing a
period of rapid growth and expansion that has placed, and could continue to
place, a significant strain on the Company's management, customer and consumer
service and support, operations, sales and administrative personnel, and other
resources. To serve the needs of its existing and future customers and
consumers, the Company has substantially increased and will continue to
increase its work force, which requires the Company to attract, train,
motivate, and manage a substantially larger number of qualified employees.
Additionally, to effectively manage currently anticipated levels of future
demand, the Company may be required to continue to expand its existing, or
implement new, operating, management, information, and financial systems, all
of which may significantly increase its operating expenses. There can be no
assurance that the Company will be able to achieve its growth as planned,
increase its work force, or implement new systems to manage its anticipated
growth, and any failure to do so could have a material adverse effect on the
Company's business, results of operations, and financial condition. See
"Business--Growth Strategy."
Possible Acquisitions. To date, the Company has not had significant
discussions about or evaluated the potential acquisition of companies due
largely to inadequate financial resources. In the future, the Company may
consider making an investment in or acquiring companies or product lines that
complement its existing business. The Company is not able to predict when a
prospective acquisition candidate might become available, if ever, the terms
of the financing of any transaction or when any transaction might be closed.
Future acquisitions by the Company may result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities, and amortization expenses related to goodwill and other
intangible assets, which could materially adversely affect Company
profitability. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, products, and employees of
the acquired companies, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience, and the potential loss of key employees of
the acquired company. If any such acquisition occurs, there can be no
assurance as to the effect thereof on the Company's business, results of
operations, and financial condition. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Availability and Cost of Raw Materials. Most of the key ingredients used in
the Company's products are obtained by its contract manufacturers from third
party suppliers. As with most food products, the availability and cost of raw
materials used in the Company's products can be affected by a number of
factors beyond its control, such as general economic conditions affecting
growing decisions, weather conditions such as frosts,
9
<PAGE>
drought, and floods, and plant diseases, pests, and other acts of nature.
Because the Company does not control the production of raw materials, it is
also subject to delays caused by interruption in production of materials based
on conditions not within its control. Such conditions include job actions or
strikes by employees of suppliers, weather, crop conditions, transportation
interruptions, natural disasters or other catastrophic events. There can be no
assurance that the Company's contract manufacturers will be able to obtain
alternative sources of raw materials at favorable prices, or at all, if either
of them experience supply shortages. The inability of the Company's contract
manufacturers to obtain adequate supplies of raw materials for its products at
favorable prices, or at all, as a result of any of the foregoing factors or
otherwise could cause an increase in the Company's cost of sales and a
corresponding decrease in gross margin and could have a material adverse
effect on the Company's business, results of operations, and financial
condition.
Dependence on Key Personnel. The success of the Company is significantly
dependent on the personal efforts, performance, abilities, and continued
service of a small number of key managerial and marketing personnel. The loss
of service of any such key personnel could have a material adverse effect on
the Company's business, results of operations, and financial condition. In
addition, the future success of the Company depends upon its ability to
attract and retain highly qualified personnel in the future. Competition for
such personnel is intense and there can be no assurance that the Company will
be able to attract and retain such qualified personnel. A failure to do so
could have a material adverse effect on the Company's business, results of
operations, and financial condition. See "Management."
Government Regulation. The manufacturing, packaging, labeling, advertising,
distribution, and sale of the Company's products are subject to regulation by
various governmental agencies, principally the Food and Drug Administration
(the "FDA"). The FDA regulates the Company's products under the Federal Food,
Drug, and Cosmetic Act (the "FDCA"), and related regulations. The Company's
products are also subject to regulation by the Federal Trade Commission (the
"FTC"), as well as various agencies of the states, localities, and foreign
countries to which the Company distributes its products and in which the
Company's products are sold. The Company believes that it presently complies
in all material respects with the foregoing laws and regulations. There can be
no assurance that future compliance with such laws or regulations, or failure
to comply, will not have a material adverse effect on the Company's business,
results of operations, and financial condition. See "Business--Government
Regulation."
In September 1996, pursuant to a complaint related to a product liability
lawsuit concerning Balance bars and at the FDA's request, the Company
voluntarily, withheld product shipments temporarily. Upon completion of
government inspection of facilities of the Company and one of its contract
manufacturers, and sampling and testing of products, product shipments were
resumed. However, there can be no assurance that the FDA will not again
request that the Company cease product shipment due to any future regulatory
matter, causing a loss of sales and potentially severe damage to the Company's
reputation. Any withholding of product could have a material adverse effect on
the Company's business, results of operations, and financial condition.
The Company might be subject to additional laws or regulations administered
by the FDA or other federal, state or foreign regulatory authorities or more
stringent interpretations of current laws or regulations from time to time in
the future. The Company is unable to predict the nature of such future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products to meet new standards, the
recall or discontinuance of certain products that cannot be reformulated,
imposition of additional record-keeping requirements, expanded documentation
of the properties of certain products, expanded or different labeling, and
scientific substantiation. Any or all of such requirements could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales might prevent or delay entry into the market or
prevent or delay the introduction, or require the reformulation, of certain of
the Company's products. Compliance with such foreign governmental regulations
10
<PAGE>
is generally controlled by the Company's distributors for those countries.
These distributors are independent contractors over which the Company has
limited control. See "Business--Government Regulation."
Risks Associated with Advertising. The Company's advertising of its products
is subject to regulation by the FTC under the Federal Trade Commission Act,
which prohibits unfair or deceptive trade practices, including dissemination
of false or misleading advertising. In addition, the National Advertising
Division of the Council of Better Business Bureaus, Inc. ("NAD") administers a
self-regulatory program by the advertising industry to ensure truth and
accuracy in national advertising. NAD both monitors national advertising and
entertains inquiries and challenges from competing companies and consumers.
Certain advertising claims made by the Company have been challenged by two of
the Company's competitors through NAD in the past. The Company has addressed
such challenges by either providing support for its claims or changing its
advertisements. Although the Company does not believe that such changes have
affected its marketing success, any future changes to the Company's
advertising resulting from compliance with an adverse NAD determination or FTC
action or fines or penalties assessed in connection therewith could adversely
affect the Company's product marketing efforts, and there can be no assurance
that such required changes in advertising would not have a material adverse
effect on the Company's business, results of operations, and financial
condition. See "Business--Government Regulation."
Television advertising is relatively expensive compared to other forms of
advertising in terms of dollar outlays, and the Company's increased emphasis
and reliance on this medium could adversely affect its business, results of
operation and financial condition if its advertisements are not successful.
See "Business--Marketing."
Risks Associated with International Markets. In 1997, 2.9% of the Company's
sales were in markets outside of the United States. Although the Company
intends to continue to focus primarily on the domestic market in the near
term, it also intends to continue to test its products in foreign markets. The
Company might experience difficulty entering new international markets due to
greater regulatory barriers, the necessity of adapting to new regulatory
systems, and problems related to entering new markets with different dietary
habits, cultural bases, and political systems. In addition, the Company has
been and will be required to re-formulate its products to comply with foreign
regulatory standards. Operating in international markets exposes the Company
to certain risks, including, among other things: (i) changes in or
interpretations of foreign regulations that might limit the Company's ability
to sell certain products or repatriate profits to the United States; (ii)
exposure to currency fluctuations; (iii) the potential imposition of trade or
foreign exchange restrictions or increased taxes or tariffs; and (iv)
political instability. As the Company continues to expand its international
operations, these and other risks associated with international operations
will increase. See "Business--Growth Strategy" and "--Government Regulation."
No Prior Public Market; Possible Volatility of Stock Price. Before the
offering, there has been no public market for the Common Stock of the Company,
and there can be no assurance that an active trading market will develop as a
result of the offering or, if a trading market does develop, that it will be
sustained or that the shares of Common Stock can be resold at or above the
initial public offering price. The initial public offering price of the Common
Stock offered hereby will be determined through negotiations between the
Company and the several Underwriters based on factors described in this
Prospectus under "Underwriting" and may not be indicative of the price at
which the Common Stock will actually trade after the offering. The Company has
applied to have the Common Stock approved for quotation on the Nasdaq National
Market, which has experienced, and is likely to continue to experience,
significant price and volume fluctuations which could adversely effect the
market price of the Common Stock without regard to the operating performance
of the Company. In addition, the market price for shares of common stock
issued in initial public offerings have historically been volatile as have
shares of natural food companies. The market price of the Common Stock could
be subject to significant variation due to fluctuations in the Company's
operating results, changes in earnings estimates by securities analysts, the
degree of success the Company achieves in implementing its business strategy,
changes in business or regulatory conditions affecting the Company, its
customers, or its competitors, and other factors.
11
<PAGE>
Control by Principal Stockholders. Following completion of the offering, the
Chairman of the Company will beneficially own approximately % of the
outstanding shares of the Company's Common Stock, and he, together with other
management, will control % of the shares of the Company's Common Stock.
Accordingly, the Chairman, together with management, will have % of the
voting power of the Company and will be able to elect all of the directors and
exercise significant control over the business, policies, and affairs of the
Company and determine the disposition of practically all matters submitted to
a vote of the Company's stockholders, including mergers, going private
transactions and other extraordinary corporate transactions and the terms
thereof. Further, these stockholders will be in a position to prevent a
takeover of the Company by one or more third parties, or sell or otherwise
transfer their stock to a third party, which could deprive the Company's
stockholders of a control premium that might otherwise be realized by them in
connection with an acquisition of the Company. See "Principal and Selling
Stockholders."
Possible Anti-Takeover Effect of Certain Charter Provisions. Upon completion
of the offering, the Company's Certificate of Incorporation and Bylaws will
require that stockholders give advance notice to the Company's Secretary of
any nominations of directors made or other business to be brought by
stockholders at any stockholders' meeting. The Certificate of Incorporation
will also require the approval of 75% of the Company's voting stock to amend
certain of its provisions. The Company's Board of Directors will have the
authority to issue shares of Preferred Stock in one or more series and to
determine the price, rights, preferences, and privileges of those shares
without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of Preferred Stock that may be issued in the future.
The concentration of ownership by the Board of Directors and management, the
issuance of Preferred Stock, and other charter provisions may discourage
certain types of transactions involving an actual or potential change in
control of the Company, including transactions in which the stockholders might
otherwise receive a premium for their shares over then current market prices,
and may limit the ability of the stockholders to approve transactions that
they may deem to be in their best interests. See "Description of Capital
Stock."
In addition, the Company's Board of Directors is divided into three classes
of directors serving staggered terms. One class of directors will be elected
at each annual meeting of stockholders for a three-year term. At least two
annual meetings of stockholders, instead of one, generally will be required to
change the majority of the Company's Board of Directors, so it is more
difficult for the stockholders of the Company to change the management of the
Company than if the Board of Directors were not classified. In addition, the
presence of a classified Board of Directors could make it more difficult for a
third party to acquire, or could discourage a third party from attempting to
acquire, control of the Company and, therefore, may limit the price that
certain investors might be willing to pay in the future for shares of Common
Stock. See "Description of Capital Stock--Possible Anti-Takeover Effect of
Certain Charter Provisions."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market after the offering or the anticipation of such
sales could have a material adverse effect on then-prevailing market prices.
All of the [ ] shares offered hereby may be resold immediately in the
public market. Beginning 180 days after the date of this Prospectus, upon
expiration of lock-up agreements between the representatives of the
Underwriters and officers, directors and certain stockholders of the Company,
approximately [ ] additional shares will be eligible for sale without
restriction under Rule 144(k) under the Securities Act of 1933, as amended
(the "Securities Act") and [300,000] additional shares (as well as an
additional 438,091 shares issuable upon exercise of outstanding options) will
be eligible for sale subject to compliance with the restrictions of Rule 144.
Any early release of the lock-up agreement by the Underwriters, which, if
granted, could permit sales of a substantial number of shares and could
adversely affect the trading price of the Company's shares, may not be
accompanied by an advance public announcement by the Company. In addition, the
Company intends to file a registration statement on Form S-8 under the
Securities Act approximately 30 days after the date of this Prospectus to
register approximately [300,000] shares of Common Stock reserved for issuance
under the Company's 1998 Performance Award Plan and 370,973 shares subject to
outstanding options.
12
<PAGE>
Immediate and Substantial Dilution. Investors participating in this offering
will incur immediate and substantial dilution of [$ ] per share based on a
public offering price of [$ ] per share and pro forma net book value before
this offering of [$ ] per share. To the extent outstanding options to
purchase Common Stock are exercised, there will be further dilution. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, in less than three years, computer systems and software used by many
companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists concerning the potential effects
associated with such compliance. The Company is currently implementing a new
sales, inventory and accounting system that the software vendor has
represented to be Year 2000 compliant. Any Year 2000 compliance problem of
either the Company or its customers could result in a material adverse effect
on the Company's business, operating results, and financial condition.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered by the Company hereby at an assumed initial public
offering price of $ per share are estimated to be $ ($ if
the underwriters' over-allotment option is exercised in full). The Company
will not receive any proceeds from the sale of Common Stock by the Selling
Stockholders.
The Company intends to use the net proceeds to retire a revolving line of
credit in the amount of $3.3 million and a term loan in the amount of $293,000
(at February 28, 1998), for general corporate purposes, including working
capital to increase marketing and advertising, and to add personnel and other
resources to accommodate its anticipated growth. The Company may also use the
net proceeds from this offering to acquire companies or product lines that
complement the Company's existing product lines. To date, however, the Company
has not had significant discussions about or evaluated the potential
acquisition of any such companies or product lines. At February 28, 1998, the
line of credit and the term loan each bore interest at prime plus 1%. In March
1998, the interest rate on the line of credit was reduced to prime plus 3/4%.
The line of credit matures in April 2000 and the term loan matures in
installments through 2001.
DIVIDEND POLICY
The Company has neither declared nor paid any cash dividends on its capital
stock. The Company intends to retain its earnings for use in its business and
does not plan to pay any cash dividends in the foreseeable future.
Furthermore, the Company's line of credit contains certain covenants that,
among other things, preclude the payment of cash dividends by the Company.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 (i) on an actual basis, and (ii) as adjusted to give effect
to the sale by the Company of the shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $ per
share, and the application of the estimated net proceeds therefrom. This table
should be read in conjunction with the Financial Statements of the Company and
Notes thereto, together with Management's Discussion and Analysis of Financial
Condition and Results of Operations, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 85 $ 3
Short-term borrowings....................................... 1,100 --
Long-term debt, less current portion........................ 228 10
------ ------
Shareholders' equity:
Convertible Preferred Stock, $0.01 par value, 2,000,000
shares authorized; issued and outstanding--634,485....... 6
Common Stock, $0.01 par value, 4,000,000 shares
authorized, 923,008 shares issued and outstanding and
shares issued and outstanding pro forma (1).... 9
Additional paid-in capital................................ 2,502
Retained earnings......................................... 1,587 1,587
------ ------
Total shareholders' equity.............................. 4,104
------ ------
Total capitalization................................... $5,517 $
====== ======
</TABLE>
- --------
(1) Excludes (i) shares of Common Stock reserved for issuance under
the Company's 1998 Plan, of which no shares were subject to outstanding
options as of February 28, 1998, and (ii) 438,091 shares of Common Stock
issuable upon exercise of options outstanding at February 28, 1998 at a
weighted average exercise price of $4.39 per share. See "Management--Stock
Options and Stock Plans" and Note 8 of Notes to Financial Statements.
15
<PAGE>
DILUTION
As of December 31, 1997, the Company had a net tangible book value of
approximately $3,780,000 or $2.43 per share of Common Stock. Net tangible book
value represents the amount of total tangible assets less total liabilities
divided by the number of shares of Common and Preferred Stock outstanding.
Without taking into account any other changes in the net tangible book value
after December 31, 1997, other than to give effect to the receipt by the
Company of the net proceeds from the sale of the shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $ per share, the pro forma net tangible book value of the
Company as of December 31, 1997 would have been approximately $
or $ per share. This represents an immediate increase in net tangible
book value of $ per share to existing stockholders and an immediate
dilution of $ per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share................ $
Net tangible book value per share before the offering........ $2.43
Increase per share attributable to new investors.............
Pro forma net tangible book value per share after the offering.
Dilution per share to new investors............................ $
========
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1997, the differences between existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
----------------- ------------------ AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- ------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1)..................... 1,557,493 % $2,517,000 % $1.62
New investors (1)........
------ ------
Total................... 100.0% $ 100.0%
========= ====== ========== ======
</TABLE>
Other than as noted above, the foregoing computations assume the exercise of
no stock options after February 28, 1998. As of February 28, 1998, options to
purchase 438,091 shares of Common Stock were outstanding, with a weighted
average exercise price of $4.39 per share. To the extent these options are
exercised, there will be further dilution to new investors. See "Management--
Stock Plans" and Note 8 of Notes to Financial Statements.
- --------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares of Common Stock held by existing stockholders to or
approximately % ( shares or approximately % if the
Underwriters' over-allotment option is exercised in full) and will
increase the number of shares held by new investors to or
approximately % ( shares or approximately % if the
Underwriters' over-allotment option is exercised in full) of the total
number of shares of Common Stock outstanding after this offering. See
"Principal and Selling Stockholders."
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected statements of operations data for each of the three
years in the period ended December 31, 1997, and the balance sheet data as of
December 31, 1996 and 1997, are derived from the financial statements and
notes thereto included elsewhere herein audited by Arthur Andersen LLP,
independent public accountants, as set forth in their report also included
elsewhere herein. The balance sheet data as of December 31, 1995, are derived
from financial statements audited by Arthur Andersen LLP not included herein.
The selected statements of operations data for the years ended May 31, 1993
and 1994 and the seven months ended December 31, 1994, and the balance sheet
data as of May 31, 1993 and 1994 and as of December 31, 1994, are derived from
unaudited financial statements of the Company, not included herein, prepared
on the same basis as the audited financial statements and, in the opinion of
management, include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position and results of operations. The results of operations for any interim
period are not necessarily indicative of results to be expected for a full
year. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements of the Company and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS YEAR ENDED
MAY 31, ENDED DECEMBER 31,
--------------- DECEMBER 31, -----------------------
1993 1994 1994 1995 1996 1997
------- ------ ------------ ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Sales................... $ 481 $ 692 $ 576 $1,262 $10,544 $39,634
Cost of Sales........... 141 217 219 593 5,272 19,801
------- ------ ----- ------ ------- -------
Gross profit........... 340 475 357 669 5,272 19,833
------- ------ ----- ------ ------- -------
Expenses:
Advertising............ 134 47 87 157 1,083 7,481
Selling and marketing.. 587 295 109 355 1,536 7,204
General and
administrative........ 881 444 154 237 797 2,299
Interest (income)
expense............... -- 1 -- 4 16 (27)
------- ------ ----- ------ ------- -------
Total expenses....... 1,602 787 350 753 3,432 16,957
------- ------ ----- ------ ------- -------
Income (loss) before
income taxes.......... (1,262) (312) 7 (84) 1,840 2,876
Income Taxes............ 1 1 1 1 225 1,216
------- ------ ----- ------ ------- -------
Net income (loss)...... $(1,263) $ (313) $ 6 $ (85) $ 1,615 $ 1,660
======= ====== ===== ====== ======= =======
Earnings (loss) per
share:
Basic.................. $ (1.30) $(0.24) -- $(0.07) $ 1.15 $ 1.07
======= ====== ===== ====== ======= =======
Diluted................ $ (1.30) $(0.24) -- $(0.07) $ 1.04 $ 0.90
======= ====== ===== ====== ======= =======
Weighted average number
of shares outstanding:
Basic.................. 971 1,278 1,286 1,300 1,402 1,550
======= ====== ===== ====== ======= =======
Diluted................ 971 1,278 1,286 1,300 1,557 1,841
======= ====== ===== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
--------- --------------------------
1993 1994 1994 1995 1996 1997
---- ---- ---- ---- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................................... $238 $ 11 $ 12 $ 34 $1,119 $ 89
Working capital (deficit)............... 107 (44) (50) (39) 2,087 2,974
Total assets............................ 453 161 139 185 3,374 10,796
Long-term debt, net of current portion.. 5 9 5 -- -- 228
Total shareholders' equity.............. 265 35 16 3 2,162 4,104
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. Except for the historical
information contained herein, the discussion in this Prospectus contains
certain forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
These statements can be identified by the use of forward-looking terminology
such as "believes," "expects," "intends," "plans," "may," "will," "should," or
"anticipation" or the negative thereof or other variations thereon or
comparable terminology. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein.
OVERVIEW
Balance Bar Company develops and markets branded food and beverage products
in convenient, good-tasting, balanced nutritional formulations. The Company's
current and planned product lines are targeted to a broad consumer base in the
healthy food and beverage market. The Company markets its products to
consumers for a wide variety of uses, including snacking, meal replacement,
fitness, weight management and diabetic nutrition. The Company sells its
products in natural foods, mass merchandise, club, grocery, convenience,
health and fitness, and drug stores. The Company's existing product lines, the
Balance bar and the 40-30-30 Balance powdered drink mix, accounted for
approximately 92% and 8%, respectively, of the Company's 1997 sales. The
United States accounted for approximately 97% of 1997 sales. The Company
currently sells ten flavors of Balance bars (in two sizes) and five flavors of
powdered drinks (in canisters and single serving envelopes).
The Company was founded in 1992 to market a 40-30-30 nutrition bar to the
weight loss and sports performance market. From 1992 to 1995, the Company
relied heavily on direct sales to consumers through network marketing and
direct response advertising. In July 1995, the Balance bar won the People's
Choice Award presented by the National Nutritional Foods Association at the
annual natural foods trade show. Shortly thereafter, the Company obtained its
first major wholesale customer, Tree of Life, a national natural foods
distributor. By the end of 1996, the Company had developed a nationwide
network of natural foods brokers and distributors and was selling its
products, through distributors and direct to retailers, to a broad consumer
base. In 1997 and 1998, as a result of a strategic decision to broaden
distribution, the Company expanded its broker network and distribution into
mass merchandise, club, grocery, convenience, health and fitness, and drug
stores.
According to SPINS(/1/) data from Spence Information Services, the Balance
bar was the number one selling nutrition bar in the natural foods channel
achieving a 31.0% market share in 1997. In addition, the Balance Bar accounted
for five of the top ten selling nutrition bar flavors in the natural foods
channel in the November/December 1997 reporting period.
According to ACNielsen ScanTrack: SPINS Natural Track(/2/), the Balance bar
market share of natural products in the energy bars category in grocery stores
increased from 1% in the November/December 1996 reporting period to 14% in the
November/December 1997 reporting period. In addition, during the same time
period the top two selling nutrition bar flavors per point of
distribution(/3/) in grocery stores were Balance bars.
- --------
(1) SPINS data is based on actual sales from seven significant natural foods
distributor warehouses (primarily United Natural Foods warehouses), but
does not include sales from one of the Company's significant natural foods
distributors, Tree of Life.
(2) ACNielsen Scan Track: SPINS Natural Track data is based on actual sales in
two-month reporting periods from a sample of grocery stores across the
United States.
(3) Sales per point of distribution means dollar sales per grocery store
selling a particular flavor.
18
<PAGE>
The leading Balance bar flavor outsold the nearest competitor flavor per point
of distribution in grocery stores by 56.6% in December 1997.
In 1997, the natural foods channel accounted for approximately 69% of the
Company's sales. The Company expects this percentage to decline in 1998 as the
Company expands sales at mass merchandise, club, grocery, convenience, and
drug stores. By December 31, 1997, the Company had up to four of its ten
Balance bar flavors in approximately 40% of mass merchandise stores, 20% of
club stores, 13% of grocery stores, 10% of convenience stores (represents
penetration of honey peanut flavor only), and 9% of drug stores in the United
States.(/1/) The Company's goal is to continue to expand its nationwide
distribution by increasing the number of Balance bar flavors in each store and
further penetrating each distribution channel.
Sales increased 736% in 1996 and 276% in 1997. The Company believes that its
rapid sales growth is the result of a number of factors, including increased
consumer awareness and trial of Balance products and increased consumer
awareness of the role a healthy diet plays in their lives, expanded
distribution channels, increased advertising, marketing and promotional
efforts, improved packaging graphics, the products' good taste and broad
consumer appeal, introduction of new products and product line extensions, and
the rapid growth of the nutrition bar category. As awareness of the Company's
brand has increased, the Company has continued to add major customers across a
number of distribution channels. The following is a list of selected retailers
and distributor customers who now carry the Company's products and the year
they became customers.
<TABLE>
<CAPTION>
1998
1995 1996 1997 (THROUGH FEBRUARY)
------------ ----------------------- ----------- ------------------
<S> <C> <C> <C>
Tree of Life GNC Albertson's Sam's Club
Fred Meyer Circle-K Walgreens
Stow Mills Kroger American Stores
(United Natural Foods) Costco
Trader Joe's Ralph's
Whole Foods Safeway
Wild Oats 7-Eleven
Vons
Wal-Mart
</TABLE>
The Company believes that increasing consumer awareness and trial of Balance
products will continue to be a major factor in its ability to grow.
Accordingly, the Company has increased selling, marketing, and advertising
expenditures significantly in each year since 1995. The Company anticipates
that its 1998 advertising and marketing expenditures will increase
significantly over 1997 advertising and marketing expenditures.
COMPONENTS OF SALES AND EXPENSES
Sales consists of invoiced sales less promotional discounts and estimated
returns and allowances. The Company sells its products both directly to retail
customers and to distributors who then resell the products to retailers. The
Company uses commissioned brokers to provide sales support at customer
headquarters and at retail locations. Backlog is not significant as the
Company ships its products against binding purchase orders that are filled
within a short period after the order.
Cost of sales consists of product costs and freight and are recognized as
the related revenues are recorded. The Company does not own or operate any
manufacturing facilities, and sources its products through third-party
contract manufacturers. The Company believes that outsourcing allows the
Company to enhance production flexibility and capacity, while substantially
reducing capital expenditures and avoiding the
- --------
(1) The mass merchandise, grocery, convenience, and drug store data was
provided by Information Resources, Inc., and is based on actual sales from
a sample of mass merchandise, grocery, convenience, and drug stores. The
club store data is estimated by the Company.
19
<PAGE>
costs of managing a production work force. Outsourcing also enables the
Company to leverage working capital, transfer risk and focus resources on
advertising, marketing, and sales. However, because the Company uses third
party contract manufacturers, the Company does not expect to benefit from the
economies of scale typically experienced by manufacturers.
Expenses consist of advertising costs, selling and marketing costs, general
and administrative costs, and interest income and expense. Advertising costs
consist of television, radio and print expenses and are recognized when the
advertising takes place. Selling and marketing costs consist of payroll
expenses, brokers' commissions, slotting allowances, public relations costs,
special events, product sampling costs and other promotional items. Special
events and product sampling costs are recognized when promotional events are
held and promotional materials are distributed. General and administrative
costs consist of payroll expenses, facility rentals, stock option and common
stock expense and other overhead costs. Stock option and common stock expense
consists of the excess of the fair market value over the issue price of stock
options and common stock. This expense is recognized over the period stock
options vest or in the period the common stock was issued.
The Company has experienced, and will continue to experience, period-to-
period fluctuations in its operating results as a result of a variety of
factors, including: (i) fluctuations in promotional, advertising, and
marketing expenditures; (ii) the introduction of new products or delays in
such introductions; (iii) the introduction or announcement of new products by
the Company's competitors; (iv) customer acceptance of new products; (v)
shipment delays; (vi) consumer perceptions of the Company's products and
operations, including the 40-30-30 nutritional concept; (vii) competitive
pricing pressures; (viii) the adverse effect of distributors', suppliers', or
the Company's failure, and allegations of their failure, to comply with
applicable regulations; (ix) the availability and cost of raw materials; (x)
economic conditions in general and in the food industry in particular; (xi)
the negative effect of changes in or interpretations of regulations that may
limit or restrict the sale of certain of the Company's products; (xii) the
expansion of its operations into new markets, (xiii) the introduction of its
products into each such market; and (xiv) unanticipated changes in the timing
of customer promotions, any of which could have a material adverse effect on
the Company's business, results of operations, and financial condition.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's statements of operation to
sales:
<TABLE>
<CAPTION>
AS A PERCENTAGE
OF SALES
--------------------
YEAR ENDED
DECEMBER 31,
--------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Sales.................................................. 100.0% 100.0% 100.0%
Cost of Sales.......................................... 47.0 50.0 50.0
----- ----- -----
Gross profit.......................................... 53.0 50.0 50.0
Expenses:
Advertising.......................................... 12.5 10.3 18.9
Selling and marketing................................ 28.1 14.6 18.1
General and administrative........................... 18.8 7.5 5.8
Interest (income) expense............................ 0.3 0.1 (0.1)
----- ----- -----
Total expenses..................................... 59.7 32.5 42.7
----- ----- -----
Income (loss) before income taxes..................... (6.7) 17.5 7.3
Income Taxes........................................... -- 2.2 3.1
----- ----- -----
Net income (loss)..................................... (6.7)% 15.3% 4.2%
===== ===== =====
</TABLE>
20
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997
Sales. Sales increased 276% from $10.5 million in 1996 to $39.6 million in
1997. The increase was primarily attributable to increased sales at natural
foods and mass merchandise stores and to a lesser extent at club and grocery
stores. Sales also increased in 1997 as the Company gained more retail shelf
space and increased the number of flavors sold to existing customers. In
addition, the introduction of a powdered nutritional drink in 1997 accounted
for approximately $2.6 million of the increase. The addition of three new
Balance bar flavors in December 1997 did not have a significant effect on
sales in 1997.
Gross Profit. Gross profit dollars increased from $5.3 million in 1996 to
$19.8 million in 1997. Gross profit margin was 50.0% in both 1996 and 1997,
and, therefore, gross profit dollars increased as sales increased.
Advertising. Advertising expenses increased from $1.1 million in 1996 to
$7.5 million in 1997. This increase was due to the Company's strategic
decision to build brand awareness and increase sales through substantial
increases in radio and print advertising and the introduction of television
advertising.
Selling and Marketing. Selling and marketing expenses increased from
$1.5 million in 1996 to $7.2 million in 1997. The increase was due to higher
personnel-related costs as the Company built its sales organization, higher
broker commissions related to increased sales and additional expenditures for
slotting allowances as products were introduced to grocery stores. The
increase was also due to increases in special events and product sampling to
build customer awareness of the Company's products. Selling and marketing
expenses as a percentage of sales increased from 14.6% of sales in 1996 to
18.1% in 1997.
General and Administrative. General and administrative expenses increased
from $797,000 in 1996 to $2.3 million in 1997. As a percentage of sales,
general and administrative expenses decreased to 5.8% in 1997 from 7.5% in
1996. The dollar increase in 1997 was due to higher personnel-related costs
and facility rentals to support the increased sales.
Provision for Income Taxes. The Company's effective tax rate in 1996 was
12.2% due to the utilization of net operating loss carryforwards incurred from
1992 to 1995. As of December 31, 1996 the Company had fully utilized its net
operating loss carryforwards. In 1997, the Company's effective tax rate was
42.3%.
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1996
Sales. Sales increased 736% from $1.3 million in 1995 to $10.5 million in
1996, due primarily to a change in marketing strategy to nationwide retail
distribution from that of network marketing and direct response marketing. The
addition of several major natural foods customers including Trader Joe's in
late 1996 and Tree of Life beginning in late 1995 accounted for most of the
increase.
Gross Profit. Gross profit dollars increased from $669,000 in 1995 to $5.3
million in 1996. Gross profit margin decreased from 53.0% in 1995 to 50.0% in
1996. This decrease in gross profit margin was primarily attributable to the
change in marketing strategy to that of retail distribution through
distributors and direct to retail customers requiring wholesale pricing and
promotional discounts.
Advertising. Advertising expenses increased from $157,000 in 1995 to $1.1
million in 1996. This increase was due to efforts to build brand awareness and
increase sales through substantially higher levels of radio and print
advertising. Advertising expenses decreased from 12.5% of sales in 1995 to
10.3% in 1996.
Selling and Marketing. Selling and marketing expenses increased from
$355,000 in 1995 to $1.5 million in 1996. The increase was due to higher
personnel-related costs as the Company built its sales organization and higher
broker commissions related to increased sales. The increase was also due to
increases in special events and product sampling to build customer awareness
of the Company's products. As a percentage of sales, selling and marketing
expenses decreased from 28.1% in 1995 to 14.6% in 1996.
21
<PAGE>
General and Administrative. General and administrative expenses increased
from $237,000 in 1995 to $797,000 in 1996. As a percentage of sales, general
and administrative expenses decreased to 7.5% in 1996 from 18.8% in 1995. The
dollar increase in 1996 was due primarily to $342,000 of additional stock
option and common stock expense and increased payroll costs as additional
personnel were hired to support expanded operations.
Provision for Income Taxes. Because of the Company's loss in 1995, the
provision for income taxes consisted solely of the California minimum tax. The
effective tax rate in 1996 was 12.2% due to the utilization of net operating
loss carryforwards created from 1992 to 1995.
The Company believes that inflation has not had a significant effect on the
Company's results of operations in 1995, 1996 or 1997.
22
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following table presents selected financial information for the last
eight quarters. This information has been derived from unaudited quarterly
financial statements that, in the opinion of management, reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
fairly present this information and is presented on the same basis as the
audited financial statements appearing elsewhere herein. This information
should be read in conjunction with the financial statements and notes thereto
appearing elsewhere in this Prospectus. The results of operations in any
quarter are not necessarily indicative of results to be expected in any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................... $ 692 $1,813 $2,346 $5,693 $6,136 $11,095 $10,134 $12,269
Cost of Sales........... 317 901 1,126 2,928 2,970 5,499 5,180 6,152
------ ------ ------ ------ ------ ------- ------- -------
Gross profit........... 375 912 1,220 2,765 3,166 5,596 4,954 6,117
------ ------ ------ ------ ------ ------- ------- -------
Expenses:
Advertising............ 97 158 273 555 849 1,627 2,650 2,355
Selling and marketing.. 177 342 423 594 1,130 1,906 2,052 2,116
General and
administrative........ 108 109 270 310 417 554 596 732
Interest (income)
expense............... 4 4 5 3 (5) (9) (17) 4
------ ------ ------ ------ ------ ------- ------- -------
Total expenses....... 386 613 971 1,462 2,391 4,078 5,281 5,207
------ ------ ------ ------ ------ ------- ------- -------
Income (loss) before
income taxes.......... (11) 299 249 1,303 775 1,518 (327) 910
Income Taxes............ 1 37 30 157 328 641 (138) 385
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss)...... $ (12) $ 262 $ 219 $1,146 $ 447 $ 877 $ (189) $ 525
====== ====== ====== ====== ====== ======= ======= =======
Earnings (Loss) Per
Share:
Basic.................. $(0.01) $ 0.19 $ 0.16 $ 0.82 $ 0.29 $ 0.57 $ (0.12) $ 0.34
====== ====== ====== ====== ====== ======= ======= =======
Diluted................ $(0.01) $ 0.18 $ 0.13 $ 0.65 $ 0.23 $ 0.45 $ (0.12) $ 0.27
====== ====== ====== ====== ====== ======= ======= =======
Weighted average number
of shares outstanding:
Basic.................. 1,395 1,402 1,403 1,406 1,545 1,549 1,551 1,557
====== ====== ====== ====== ====== ======= ======= =======
Diluted................ 1,395 1,429 1,635 1,763 1,906 1,943 1,551 1,962
====== ====== ====== ====== ====== ======= ======= =======
<CAPTION>
AS A PERCENTAGE OF SALES
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0%
Cost of Sales........... 45.8 49.7 48.0 51.4 48.4 49.6 51.1 50.1
------ ------ ------ ------ ------ ------- ------- -------
Gross profit........... 54.2 50.3 52.0 48.6 51.6 50.4 48.9 49.9
------ ------ ------ ------ ------ ------- ------- -------
Expenses:
Advertising............ 14.0 8.7 11.7 9.8 13.9 14.6 26.2 19.2
Selling and marketing.. 25.6 18.9 18.0 10.4 18.4 17.2 20.2 17.3
General and
administrative........ 15.6 6.0 11.5 5.4 6.8 5.0 5.9 6.0
Interest (income)
expense............... 0.6 0.2 0.2 0.1 (0.1) (0.1) (0.2) --
------ ------ ------ ------ ------ ------- ------- -------
Total expenses....... 55.8 33.8 41.4 25.7 39.0 36.7 52.1 42.5
------ ------ ------ ------ ------ ------- ------- -------
Income (loss) before
income taxes.......... (1.6) 16.5 10.6 22.9 12.6 13.7 (3.2) 7.4
Income Taxes............ 0.1 2.0 1.3 2.8 5.3 5.8 (1.3) 3.1
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss)...... (1.7)% 14.5 % 9.3 % 20.1 % 7.3 % 7.9 % (1.9)% 4.3 %
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
23
<PAGE>
Sales. Sales increased sequentially each quarter of 1996 and 1997, except
for the third quarter of 1997. The decline in the third quarter of 1997 was
caused by unusually high sales to two significant natural foods customers near
the end of the second quarter of 1997. Reduced sales to these two customers in
the third quarter of 1997 were partially offset by a significant increase in
sales to one mass merchandise customer. In addition, sales increased in the
fourth quarter due to a significant increase in sales to another mass
merchandise customer.
The Company has not observed seasonality in sales in 1995, 1996 or 1997 due
to the significant expansion of distribution and resulting sales increases
during this period. The Company believes that there may be some seasonally
reduced sales in the fourth quarter due to retailers' emphasis on holiday
merchandise in that quarter.
Expenses. Expenses increased as sales increased in each quarter of 1996 and
1997, except for the fourth quarter of 1997. Advertising expenses were reduced
in the fourth quarter of 1997 to bring them in line with annual objectives.
Advertising and selling and marketing expenses as a percentage of sales were
higher in the third quarter of 1997 than other quarters due to the
unanticipated decline in sales from the second to the third quarter of 1997.
Advertising and selling and marketing expenses as a percentage of sales
fluctuate from quarter to quarter because substantially all advertising
expenses and a significant part of marketing expenses are not directly related
to the level of sales in the current quarter. These expenses have fluctuated
and are expected to continue to fluctuate depending on the level of
investments that are made each quarter to build customer awareness of the
Company's products and increase future sales.
Future purchase commitments of certain advertising and marketing expenses
are made based on expectations about future sales levels. If actual sales vary
from expectations then the percentage relationship of these expenses to sales
will vary and the period to period variances could be material. See "Risk
Factors--Potential Sales and Earnings Volatility."
LIQUIDITY AND CAPITAL RESOURCES
Prior to this offering, the Company's operations and capital requirements
were financed through private sales of common and preferred stock and
convertible bonds, internally generated funds, and borrowings under various
credit agreements.
Since late 1995, the Company has experienced substantial growth. Prior to
1995, the Company had insignificant amounts of working capital and cash. Since
1995, the Company's operations have improved significantly and the Company has
achieved substantial increases in net income. In 1996, cash generated from
operations was largely used to fund increases in accounts receivable,
inventory and prepaid advertising expenses. In 1997, cash generated from
operations was not sufficient to fund increases in accounts receivable and
inventory, prepaid advertising expenses and the purchase of property and
equipment. The Company entered into two credit agreements in 1997 that were
used to finance working capital and capital investment needs.
The increase in inventory and receivables in 1996 of $1.9 million was offset
by an increase in accounts payable of $505,000. The increase in accounts
receivable, inventory and prepaid advertising expenses of $6.2 million in 1997
was offset by increased accounts payable of $3.6 million. Cash flow from (used
in) operating activities was $(41,000) in 1995, $935,000 in 1996 and $(1.2)
million in 1997.
Cash used in investing activities was for the purchase of property and
equipment. Purchases of property and equipment in 1995, 1996 and 1997 were,
$3,000, $51,000 and $1.1 million, respectively. The higher level of
expenditures in 1997 reflects the Company's 1997 facility and personnel
expansion to support higher sales volume. The 1997 capital investments were
for computer hardware and software, office furniture and equipment, warehouse
leasehold improvements and packaging design plates and drums. The Company
expects to continue to make significant capital investments in the first
quarter of 1998 to complete the leasehold improvements to its Santa Barbara
County warehouse and office, and add furniture and fixtures and computer
hardware and software as new personnel are hired.
24
<PAGE>
Cash provided by financing activities was $66,000, $201,000 and $1.3 million
for 1995, 1996 and 1997, respectively. The primary source of funds in all
three periods was borrowings by the Company. The 1995 and 1996 financing
sources were from the issuance of convertible bonds. These bonds were
converted to common stock in the year they were sold. The 1997 sources were
from a line of credit and term loan (each described below) under which a total
of $1.4 million was borrowed, net of $159,000 of costs related to the
Company's initial public offering. The Company expects to need to continue
borrowing through the closing of this offering to fund increases in accounts
receivable, inventory, prepaid advertising expenses and to purchase property
and equipment.
As of February 28, 1998, the Company had a $3.5 million revolving line of
credit all of which was available (based upon 75 percent of the Company's
eligible accounts receivable), and $3.3 million of which was outstanding. The
line of credit is secured by all of the Company's assets. At February 28,
1998, the line of credit, expiring in June 1998, bore interest at the bank's
prime rate (8.5% at February 28, 1998) plus 1%. The Company increased the
amount available under the revolving line of credit in March 1998 to $9.0
million and extended the maturity to April 2000. The interest rate on the line
of credit was reduced to the bank's prime rate plus 3/4%. The Company also has
a $300,000 three year term loan of which $293,000 was outstanding at February
28, 1998. The term loan is secured by all of the Company's assets and bears
interest at the bank's prime rate plus 1.0%. The term loan is due in the
following installments: $82,000 in 1998, $99,000 in 1999, $109,000 in 2000 and
$10,000 in 2001.
To date, the Company has not had significant discussions about or evaluated
the potential acquisition of companies due largely to inadequate financial
resources. In the future, the Company may consider making an investment in or
acquiring companies or product lines that complement the Company's existing
product lines. The Company is not able to predict when a prospective
acquisition candidate might become available, the terms of the financing, or
when any transaction might be closed or the effect of any acquisition on the
Company's business, results of operation or financial condition. See "Risk
Factors--Possible Acquisitions."
The Company believes that following the consummation of the offering, the
Company will have adequate capital resources and liquidity to meet anticipated
cash needs for working capital and capital expenditures for at least the next
12 months.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income" (SFAS 130) and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 130 and SFAS 131 are
effective in 1998. The Company does not have any items of other comprehensive
income and, accordingly, SFAS 130 does not have any effect on the Company's
financial reporting. The adoption of SFAS 131 in 1998 is not expected to have
a material effect on the Company's financial reporting.
EXPENSES ASSOCIATED WITH YEAR 2000 COMPLIANCE
The Company is currently implementing a new sales, inventory and accounting
system that the software vendor has represented to be Year 2000 compliant. The
Company does not anticipate any significant expenses associated with Year 2000
compliance problems. See "Risk Factors--Year 2000 Compliance."
25
<PAGE>
BUSINESS
COMPANY OVERVIEW
Balance Bar Company develops and markets branded food and beverage products
in convenient, good-tasting, balanced nutritional formulations. The Company's
current and planned product lines are targeted to a broad consumer base in the
healthy food and beverage market. The Company markets its products to consumers
for a wide variety of uses, including snacking, meal replacement, fitness,
weight management and diabetic nutrition. The Company sells its products in
natural foods, mass merchandise, club, grocery, convenience, health and
fitness, and drug stores. The Company's existing product lines, the Balance bar
and the 40-30-30 Balance powdered drink mix, are based on balanced proportions
of 40% carbohydrates, 30% protein and 30% dietary fat, a formulation designed
to sustain energy and satisfy hunger. The Company currently sells ten flavors
of Balance bars (in two sizes) and five flavors of powdered drinks (in
canisters and single serving envelopes).
The Balance bar has significantly penetrated the natural foods channel, and
approximately 69% of the Company's 1997 total sales were to this channel.
According to SPINS data from Spence Information Services, the Balance bar was
the number one selling brand of nutrition bar in the natural foods channel,
achieving a 31.0% share in 1997. In 1997 and the first quarter 1998, the
Company expanded its strategic focus to the mass market and expanded its broker
network and distribution into mass merchandise, club, grocery, convenience,
health and fitness, and drug stores. For the November/December 1997 reporting
period, the top two selling nutrition bar flavors per point of distribution in
grocery stores were Balance bars. In addition, the leading Balance bar flavor
outsold the nearest competitor flavor per point of distribution in grocery
stores by 56.6% in December 1997.
The Company's sales have grown from $1.3 million in 1995 to $10.4 million in
1996 and $39.6 million in 1997. Sales of the Company's Balance bar and 40-30-30
powdered drink mix represented approximately 92% and 8%, respectively, of 1997
sales.
CONSUMER TRENDS
Consumers have become increasingly health conscious over the last decade, as
reflected in the surge of activities aimed at maintaining and improving health,
including exercising, dieting, and quitting smoking. Consumers have also become
more aware of the nutritional content of foods they eat. A 1997 study by the
Food Marketing Institute indicated that 54% of grocery shoppers "almost always
read the nutrition label before buying a product for the first time." Next to
taste, nutrition is the second most important reason a shopper selects food
products. In addition, a 1997 survey indicated that 79% of Americans believe
nutrition affects their health and 34% of Americans report that they were
careful in selecting the foods they ate to achieve a balanced diet. The Company
believes that this consumer interest has resulted in significant changes in the
food industry and is the cause of the substantial growth of the healthy food
and beverage market. The Company also believes that as members of the Baby Boom
generation age, their increased interest in prolonging life and improving their
quality of life is resulting in growth in consumer knowledge of nutrition and
interest in healthy foods and beverages.
Despite this concern for health and nutrition, today's consumers find
themselves with less time for three nutritious meals a day. A 1997 survey found
that the number of people who skip a meal "very often" or "quite a bit"
increased from 21% in 1995 to 28% in 1997, and that 21% of Americans view time
as a major barrier to achieving a healthful eating style. The Company believes
that today's lifestyle demands have led to an increasing need for convenient,
nutritious snacks and meal replacements that can be consumed by consumers at
any time or place.
26
<PAGE>
INDUSTRY OVERVIEW
Because of their many uses, Balance products compete with a diverse group of
food products across a number of sizable markets, some of which overlap,
including natural foods, healthy foods, nutraceuticals and snacks in general.
According to Nutrition Business Journal, retail sales of natural foods to
natural food stores, health chains and mass merchandise stores reached $6.9
billion in 1996 and were projected to grow annually at a rate of 8-12% from
1997 to 2000. A recent market report by Packaged Facts projects retail sales
of certain processed healthy foods, defined to include granola and grain based
snacks, fruit snacks, and nutrition bars, to reach approximately $3.8 billion
in 1998. The snack and meal replacement segment of the nutraceutical market,
which includes products that contain health promoting ingredients or omit
unhealthy ingredients, totaled $49 billion in 1997. The Company believes that
these markets for natural and healthy foods will continue to grow as more
health conscious consumers seek nutritious snacks and meal replacements. In
addition, the Company believes that the traditional snack market represents a
substantial opportunity for penetration by healthy snacks. In 1996, consumers
spent more than $60 billion on salted snacks, baked snacks, candy and other
specialty snacks, and approximately 5% of total dollars spent by consumers in
U.S. grocery stores was spent on snacks.
As consumers have become increasingly more health conscious, new food and
beverage products have been introduced to satisfy the demand for more
nutritious snacks and meal replacements. For example, reduced fat and salt
versions of existing products have been introduced, including low- or no-fat,
lower sodium and lower cholesterol cookies and crackers, potato chips and
candy bars. New types of granola and grain-based snacks, rice cakes, and
nutrition bars have also been introduced, as have new powdered drinks and
ready-to-drink beverages. These beverage products are typically formulated
based on consumer dietary or nutritional requirements such as weight
management. The Company believes that demand for healthy snack and meal
replacement products will continue to increase, and the Company and other
companies will continue to introduce new products to satisfy growing consumer
demand.
Initially, healthy foods and beverages were sold primarily in natural food
stores and certain specialty retailers such as GNC. The Company believes that
the continued growth in consumer demand for convenient, healthy foods has
resulted in the introduction of these products, which include energy bars,
into mass merchandise, club, grocery, convenience and drug stores. According
to ACNielsen ScanTrack: SPINS Natural Track data, the energy bars category at
grocery stores was the fastest growing food category with growth of
approximately 43% from September to December 1997. Data from Information
Resources, Inc., indicates that dollar sales of nutrition bars by mass
merchandise, grocery and drug stores increased approximately 252%, 43% and
50%, respectively, from 1996 to 1997. The Company believes that the consumer
trends towards health and nutrition will continue to drive the broad
distribution of convenient, healthy snacks and meal replacements.
BALANCE BAR ADVANTAGE
Balance Bar Company develops and markets branded food and beverage products
in convenient, good-tasting, balanced nutritional formulations that appeal to
a broad consumer base. The Company has targeted its products at the healthy
snack and meal replacement market and believes that by marketing its products
as "nutritious snacks that taste great," it is highlighting their benefits
over typical snacks and meal replacements. In addition, the Company has
targeted other markets consisting of consumers with specific dietary or
nutritional requirements, including the fitness, weight management and
diabetic markets. In order to make its products available wherever people
shop, the Company sells its products through multiple distribution channels,
including natural foods, mass merchandise, club, grocery, convenience, health
and fitness, and drug stores.
The Company has differentiated its brand from other meal replacement and
snack products by offering products based on balanced proportions of 40%
carbohydrates, 30% protein, and 30% dietary fat. This concept, which has been
promoted by recent articles and books, such as the best selling book The Zone,
is based on the theory that the rise in blood sugar after a 40-30-30 snack or
meal can be moderated by the presence of balanced proportions of dietary fat
and protein, resulting in sustained energy and hunger
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satisfaction. A 1997 Company consumer survey shows that, although consumers
that are familiar with the 40-30-30 concept are an important component of the
Company's current consumer base, the popularity of its products extends to a
much broader market.
The Balance bar has made a significant penetration into the natural foods
channel and approximately 69% of the Company's 1997 sales were to that
channel. According to SPINS data from Spence Information Services, the Balance
bar was the number one selling brand of nutrition bar in the natural foods
channel, achieving a 31.0% share in 1997. In addition, the Balance bar
accounted for five of the ten top selling nutrition bar flavors in the natural
foods market in 1997.
The Company expects sales in 1998 outside of the natural foods channel to
increase as a percentage of the Company's total sales. Higher sales to mass
merchandise, club, grocery, convenience and drug stores are expected to
account for the increase. By December 31, 1997, the Company had one to four of
its ten Balance bar flavors in approximately 40% of mass merchandise stores,
20% of club stores, 13% of grocery stores, 10% of convenience stores
(represents penetration of honey peanut flavor only), and 9% of drug stores in
the United States. The Company's goal is to continue to expand nationwide
distribution by increasing the number of Balance bar flavors in each store and
further penetrating each distribution channel. According to ACNielsen Scan
Track: SPINS Natural Track, the Balance bar market share of natural products
in the energy bars category in grocery stores increased from 1% in
November/December 1996 reporting period to 14% in the November/December 1997
reporting period.
GROWTH STRATEGY
The Company's goal is to become a recognized leader in providing nutritious,
good tasting and convenient snack and meal replacement products for a wide
variety of consumer needs. Its growth strategy is to:
Position Balance Products as Good Tasting, Nutritious Snacks and Meal
Replacements. The Company's products are already well known among natural
foods consumers for balanced nutrition, convenience, and good taste. To
further penetrate the much larger snack and meal replacement market, the
Company is positioning its products as the "nutritious snack that tastes
great," highlighting their differences from typical snacks and meal
replacements. This message is being communicated to a broad audience of health
conscious consumers of all ages through advertising, marketing and product
sampling.
Expand Consumer Base and Brand Awareness Through Increased Advertising and
Promotional Activities. The Company intends to further increase consumer
awareness of and demand for its products by increasing its advertising and
promotional activities in conjunction with the Company's further penetration
of new distribution channels. The Company anticipates that its 1998
advertising and marketing expenditures will significantly increase over 1997
expenditures, primarily due to the Company's increased emphasis on television
advertising. In addition, the Company believes that one of its most effective
marketing tools is product sampling combined with the dissemination of
educational information explaining the nutritional qualities of its products.
Accordingly, the Company intends to increase its sponsorship of sporting
events and tours, and its participation in musical events, festivals, health
fairs, and charitable events.
Expand Distribution. The Company's goal is to increase the number of Balance
bar flavors in each store and further penetrate each distribution channel. To
make its products available wherever people shop, the Company expects to also
expand into new channels of distribution, such as vending and food service.
Although the Company intends to continue to focus primarily on the domestic
market in the near term, it also intends to continue to test its products in
foreign markets by establishing relationships with leading overseas
distributors.
Focus on In-store Promotion and Marketing. The Company, through its brokers
and internal sales force, works with each distributor and retail customer to
ensure that the Company's products are effectively promoted. The Company
employs periodic in-store promotions that can include informational materials
about
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its products, sale pricing, product sampling, store advertising and special
product displays to generate consumer interest in its products. The Company
also works to ensure that enough product is available on each retailer's shelf
and that the presentation is attractive to customers.
Continue to Promote the Nutritional Qualities of Balance Products. The
nutritional qualities of Balance products are important to significant
consumer segments including the fitness, weight management and diabetic
markets. The Company intends to continue to advertise in health and fitness
magazines, in American Diabetes Association publications and in various other
magazines with wider circulation to promote consumer interest within these
markets. The Company will continue to distribute educational materials that
promote interest in the Company's brand, its products and the 40-30-30
nutritional concept.
Introduce New Products and Product Line Extensions. The Company initially
focused on nutrition bars, followed by its introduction of powdered drink
mixes in 1997. The Company intends to introduce further extensions of its most
popular bar and drink products, such as its recently introduced new Balance
bar flavors Almond Butter Crunch, Chocolate Raspberry Fudge and Yogurt Honey
Peanut and its new Balance mini-bars. The Company also intends to introduce
related new products.
Acquire Complimentary Companies or Product Lines. To grow sales outside of
existing product lines and related products, the Company will consider
strategic acquisitions. The Company intends to focus on acquisitions of
product lines or companies with product lines that are marketed to the natural
foods or broader healthy food and beverage markets. The Company may also
consider possible acquisitions of or investments in manufacturers of healthy
foods and beverages.
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<PAGE>
PRODUCTS
The Company's current products, each based on the 40-30-30 balanced
nutrition concept, are vitamin and mineral fortified and are made of high
quality ingredients and contain no artificial colors, flavors or
preservatives. The Company develops its nutritional bar and beverage flavors
in conjunction with its contract manufacturers. The Company from time to time
hires outside consultants and intends to hire in-house product development
personnel to develop future products.
BALANCE BAR COMPANY BRANDED PRODUCTS
<TABLE>
<CAPTION>
ESTIMATED RETAIL
PRODUCT FLAVORS DESCRIPTION PRICE RANGE (1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BARS
Balance Bar Honey Peanut, 1.76 ounces; sold both $.99 to
Chocolate, Yogurt individually and in $1.99 per
Honey Peanut, 15 bar packs bar
Almond Brownie,
Toasted Crunch,
Chocolate Raspberry
Fudge, Almond
Butter Crunch, Mocha,
Banana Coconut and
Cranberry
Balance Mini-Bar Honey Peanut, Half the size of a $.59 to
Chocolate, and Balance Bar; designed $1.19 per
Almond Brownie as a snack or child's bar
serving; sold both
individually and in
15 bar packs
Club Store Honey Peanut and 15 bars in a shrink- $12.99 for
Display Chocolate wrapped pack 15 bar
Pack Balance Bars pack
DRINKS
Canister of Chocolate, Strawberry, 15 serving canisters of $10.95 to
40-30-30 Vanilla, Banana powdered drink mix to $19.95
Balance Powdered Coconut and Mocha be blended with milk or per canister
Drink Mix water
Single Serving Chocolate, Strawberry, Single serving; $1.29 to
Envelope of Vanilla and Banana sold in individual envelopes $1.69 per
40-30-30 Coconut and six pack box envelope,
Balance Powdered $5.79 to
Drink Mix $11.99 per
box
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) The retail price varies depending on the nature of the retail outlet
selling the product.
In addition to its branded products, the Company sells full size bars under
a private label to one of its significant customers.
The recommended maximum shelf life of Balance bars is eight months, although
factors such as exposure to heat during transportation or storage can cause a
deterioration in the taste or quality of the Balance bars. To date, the
Company has not experienced any significant complaints with respect to product
quality or shelf life.
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SALES AND DISTRIBUTION
The Company sells its products directly to certain large retail customers
and to distributors who then resell the products to retailers. The Company
uses commissioned brokers to provide sales support at customer headquarters
and at retail locations. As of February 28, 1998, the Company had 11 brokers
in the natural foods channel and had added 29 brokers to support its expansion
into new distribution channels. These 40 brokers have approximately 60 offices
across the United States.
As of February 28, 1998, the Company's internal sales force and sales
support staff consisted of 18 employees responsible for direct selling efforts
to its retail customers and for supervising and assisting its commissioned
brokers and distributors in sales activities. The Company plans to increase
its sales force and sales support staff to continue to support its strategy of
expanding distribution.
Natural Foods Channel. In July 1995, the Balance bar won the People's Choice
Award presented by the National Nutritional Foods Association at the annual
natural foods trade show. Shortly thereafter, the Company obtained its first
major customer, Tree of Life, a national natural foods distributor. According
to SPINS data, in the natural foods channel, the Balance bar was the number
one selling nutrition bar, achieving a 31.0% share in 1997. In addition, the
Balance bar accounted for five of the top ten selling nutrition bar flavors in
the natural food channel in 1997. In 1997, the Company increased its sales to
this channel by increasing the number of natural food stores carrying its
products, gaining more retail shelf space, and adding additional flavors of
its products.
The Company's primary direct natural foods customers are Trader Joe's, Tree
of Life, GNC and United Natural Foods. Trader Joe's accounted for
approximately 25% of the Company's sales in 1997 and was the only retail
customer that accounted for more than 10% of sales in that period. In February
1998, the Company entered into a two-year exclusive supply agreement with
Trader Joe's. The agreement guarantees product pricing and supply availability
for the term of the agreement. Whole Foods and Wild Oats, important natural
foods retailers of the Company's products, purchase the Company's products
through distributors. The Company's two largest natural foods distributors in
1997 were United Natural Foods and Tree of Life, which accounted for
approximately 14% and 9%, respectively, of the Company's 1997 sales. See "Risk
Factors--Dependence on Significant Retail Customers and Distributors."
New Distribution Channels. In 1997 and 1998, as part of an aggressive
strategy to broaden its markets, the Company began entering new distribution
channels, including mass merchandise, club, grocery, convenience, health and
fitness, and drug stores. The Company's principal customers within these new
distribution channels include grocery stores (Fred Meyer, Albertson's, and
Kroger), mass merchandisers and club stores (Costco, Sam's Club, and Wal-Mart)
and convenience stores (Circle-K and 7-Eleven). See "Risk Factors--Trade and
Consumer Acceptance in New Distribution Channels."
According to ACNielsen ScanTrack: SPINS Natural Track, the Balance bar
market share of natural products in the energy bars category in mainstream
grocery stores increased from 1% in the November/December 1996 reporting
period to 14% in the November/December 1997 reporting period. In addition, in
the same time period the top two selling nutrition bar flavors per point of
distribution in grocery stores were Balance bars. The leading Balance bar
flavor outsold the nearest competitor flavor per point of distribution in
grocery stores by 56.6% in December 1997.
THE COMPANY'S TARGET CONSUMER
The Company targets people of all ages who seek a meal replacement for
breakfast, lunch, or dinner, a convenient, nutritious snack, an energy
enhancement before or after exercise, or a convenient means of helping to
manage their weight.
The following tables, based on Company surveys, demonstrate the broad usage
patterns for Balance bars.
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<PAGE>
[PIE CHART DEPICTING THE WAYS IN WHICH CONSUMERS USE THE BARS AND BAR GRAPH
DEPICTING THE TIMES WHEN CONSUMERS EAT THE BAR]
- -----------------
(1) Based on responses to a 1997 Company survey of approximately 1,100 heads
of household who either sent in wrappers for a rebate or requested a
sample pack.
(2) Consumers could respond more than once to the survey question regarding
the time they eat Balance bars.
32
<PAGE>
MARKETING
The Company markets its products as "nutritious snacks that taste great."
Its primary marketing and advertising efforts are designed to increase
consumer awareness of and demand for its products. The Company's marketing
strategy has the following three main components.
Advertising. The Company intends to increase significantly its 1998
advertising expenditures to create greater awareness of the convenience,
taste, and nutritional attributes of its products. The Company plans to use a
combination of television, print, and radio advertising, with primary emphasis
on television to reach a larger number of target consumers. However, the
Company will continue to spend a significant portion of its advertising budget
on print advertising as print ads enable the Company to reach target audiences
in a cost-effective manner. In addition to advertising in magazines with wide
circulation, the Company also places advertisements in special interest
publications targeted to groups such as health food consumers, athletes and
diabetics. The Company intends to use radio advertising primarily to support
its event marketing. The Company has advertised on television programs such as
Baywatch, CNN Headline News, ESPN SportsCenter, and Entertainment Tonight, in
magazines such as Prevention, Readers' Digest, People, Sports Illustrated,
U.S. News & World Report and Glamour, and on radio shows such as The Howard
Stern Show. See "Risk Factors--Risks Associated with Advertising."
Promotions and Sponsorships. The Company believes that one of its most
effective marketing tools is product sampling combined with the on-site
dissemination of information explaining the nutritional attributes of its
products. The Company participates in numerous trade shows targeted at buyers
in the health and fitness, food, and sports markets, in addition to consumer
health fairs. The Company also purchases sponsorships and samples its products
at sporting events and tours, musical events, health conferences, festivals,
and charitable events. The Company has been a sponsor of golf and tennis
tournaments, including the Nuveen senior men's tennis tour, and will be the
presenting sponsor for the 1998 Los Angeles Open Tennis Tournament. It also
sponsors the Associated Volleyball Players tour. In addition, the Company
utilizes endorsements of its products from highly visible sports and
entertainment personalities and actively markets to their personal fitness
trainers and professional sports teams.
Customer and Consumer Service. The Company is committed to providing
superior service to its customers and consumers. Its sales and marketing team
continually gathers information and feedback from consumers and retailers to
enable the Company to better tailor its consumer support to meet changing
consumer needs. The Company provides access to nutritionists and consumer
service representatives through its toll free number to answer questions and
educate consumers on balanced nutrition, new products and developments. In
addition, the Company maintains an informational web site.
CONTRACT MANUFACTURERS AND QUALITY ASSURANCE
Contract Manufacturers. The Company does not own or operate any
manufacturing facilities, and sources its products through third-party
contract manufacturers. Outsourcing is designed to allow the Company to
enhance production flexibility and capacity while substantially reducing
capital expenditures and avoiding the costs of managing a production work
force, and to leverage working capital, transfer risk, and focus its energy
and resources on marketing and sales. Because the Company has two third-party
contract manufacturers, one on each coast of North America, the Company can
deliver its products quickly with lower freight costs.
Bariatrix supplies the Company with Balance bars and 40-30-30 Balance
powdered drink mixes from a facility in Quebec, Canada. Bariatrix produces the
Company's products under formulations that the Company owns. Bariatrix may not
produce products for any other customers using these formulas. In addition,
Bariatrix is contractually prohibited from producing products based on the 40-
30-30 concept for any other customer, with limited exceptions for two existing
customers and Canadian medical centers. The Company's contract with Bariatrix
expires December 31, 2002, subject to automatic annual extensions during each
year the contract remains in effect. Most Balance bars produced by Bariatrix
are shipped to locations east of the Mississippi River while drinks are
distributed nationwide.
33
<PAGE>
Nellson supplies the Company with Balance bars from a facility in Irwindale,
California. Nellson uses formulations owned by the Company, subject to
reversion to Nellson at any time before January 1, 2001, if the Company fails
to meet certain minimum volume purchase requirements that are significantly
below current purchase levels. If the Company fails to meet the purchase
requirements, it has an option to buy out any remaining requirements to
maintain ownership of the formulations. A reversion of ownership of the
formulations would not change Nellson's obligations to produce 40-30-30 bars
exclusively for the Company subject to an exception for one small customer.
Nellson is contractually prohibited from producing products based on the 40-
30-30 concept for any other customer through December 31, 2002. The contract
with Nellson expires December 31, 2002 subject to automatic annual extensions
during each year the contract remains in effect. Most of the Balance bars
produced by Nellson are shipped to locations west of the Mississippi River.
See "Risk Factors--Intellectual Property Protection."
The Company's manufacturers supply the Company's products at a fixed price
per unit. The prices are subject to increase upon 75 days notice by Nellson
and 90 days notice by Bariatrix if raw material prices, labor rates or
exchange rates rise. The Company provides no raw materials, but provides all
packaging materials. Under each contract, the Company is indemnified against
product liability relating to the manufacture and shipment of the products and
has indemnified the manufacturer against product liability arising from the
labeling and packaging of the products and from the use of the formulas. In
both contracts, the manufacturers are required to comply with all legal
requirements applicable to the production of food products. See "Risk
Factors--Government Regulation" and "--Product Liability."
The Company believes that its contract manufacturers have the capacity to
fulfill the Company's planned production needs for at least the next nine
months. In addition, the Company believes that these manufacturers are willing
to increase capacity to meet the Company's additional production needs. If the
Company's growth exceeds the production capacity of its contract
manufacturers, or if either of them was unable or unwilling to continue
production, the Company believes it could locate and qualify other contract
manufacturers to meet its production needs. However, a limited number of
contract manufacturers have the ability to produce a high volume of the
Company's products, and it could take a significant period of time to locate
and qualify such alternative production sources. See "Risk Factors--Dependence
on Third Party Manufacturers."
Quality Assurance. The Company's contract manufacturers produce and package
the Company's products in accordance with the Standard Operating Procedures
for Good Manufacturing Practice by the FDA. All raw materials are purchased
from approved suppliers and inspected by the contract manufacturer as they are
received into the production facilities. Raw materials are then labeled to
indicate their source of supply, lot number, and date of receipt, and samples
of the raw materials are kept for two years from the date received. The
ingredients are mixed into batches under the supervision of two quality
assurance contract manufacturer employees to verify adherence to the Company's
formulations and ensure taste consistency. The finished products are passed
through metal detectors, weighed, wrapped, and date coded. After each
production run, samples are analyzed to test the product for micro-impurities
and to ensure accurate labeling.
COMPETITION
Although the Company competes across a number of markets with a variety of
competitors, it competes primarily with other makers of nutritional bars and
beverages. The Company's principal competitors in the nutrition bar category
are PowerBar, Inc., ClifBar, Inc., Met-Rx, and M&M Mars (VO2 Max), none of
which currently produces products formulated on a 40-30-30 basis, as well as
PR Nutrition, which produces two products on a 40-30-30 basis. The Company
believes that it is differentiated from its nutrition bar competitors by the
broad consumer appeal of its products and by its commitment to brand building
through strategic, consumer-focused marketing.
The Company's drink products also compete with a wide variety of other
powdered and ready-to-drink beverages. The Company's principal competitors in
the nutritional drink market are Met-Rx, Slim Fast
34
<PAGE>
Nutritional Foods International (Slim Fast), and Abbot Laboratories Ross
Products Division (Ensure), none of which currently produce products
formulated on a 40-30-30 basis. The success of another nutrition bar or
beverage based on the 40-30-30 concept could create significant additional
competition in the Company's existing and target markets.
The Company's products also compete with many other snacks and meal
substitutes, including salty snacks, candy, fruits, and fast food. For
instance, candy and snack manufacturers are placing greater emphasis on
marketing low calorie and low fat products as healthy snacks.
Competition in the diverse consumer markets in which the Company competes is
based on a wide variety of factors, including taste, perceived nutritional
benefits, convenience, quality, brand recognition, and price. Many of the
Company's competitors are large, multinational companies with well
established, branded products, and significantly greater financial,
distribution, and marketing resources than the Company, including large
advertising and promotion budgets. These competitors may also have a
significantly greater ability to influence or control product placement in
retail stores. In each retail outlet, many products compete for limited shelf
space. The Company's continued success will depend in part upon its ability to
provide competitive promotional discounts, slotting allowances, and point-of-
purchase displays, as well as the quality of its packaging. See "Risk
Factors--Competition."
PROPRIETARY RIGHTS
The Company's primary intellectual property rights are its trademarks, trade
names, and formulas for the Balance bar and 40-30-30 powdered drink mix.
Trademarks and TradeNames. The names of the Company's current products are
"Balance--The Complete Nutritional Food" bar, and "40-30-30 Balance" powdered
drink mix. As of February 28, the Company held one federally registered
trademark "Balance--The Complete Nutritional Food" and had 18 trademark
applications pending at the United States Patent and Trademark Office. In
addition, the Company has trademark registrations and pending applications in
certain foreign countries. The Company intends to vigorously protect its
trademarks against infringement through cease and desist letters and, if
necessary, litigation. Such litigation, even if the Company is successful,
could be costly and could significantly divert the time and efforts of the
Company's management.
The Company does not have any proprietary rights in either the "balance"
name or "40-30-30" name alone, although the Company has filed for various
trademarks using each of these words in combination with other words. There
can be no assurance that the Company will be able to obtain trademark rights
using "balance" or "40-30-30" for any new products or product lines it may
introduce.
The Company and its largest distributor, Tree of Life, have agreed to limit
their use of the term "balance," "balanced" and variations thereof. Under the
contract, both the Company and Tree of Life may continue to use the current
names for their respective products. However, the Company may not use the
trademark or tradename "balanced" in connection with any goods or services or
the term "balance" at the beginning of any name of a nutritional drink product
or certain processed foods and meals produced by Tree of Life. Tree of Life
may not use the trademark or tradename "balance" in connection with any goods
or services or the term "balanced" in connection with nutritional bar
products. These restrictions could adversely affect the Company's ability to
successfully expand into new product categories or strengthen its brand name.
Formulas. The Company, working with its contract manufacturers, developed a
proprietary formula for Balance bars and a proprietary formula for the 40-30-
30 Balance powdered drink mix. The Company owns the Nellson formula subject to
reversion to Nellson at any time before January 1, 2001, if the Company fails
to meet certain minimum volume purchase requirements that are significantly
below current production levels. The Company considers its formulas as
proprietary trade secrets. In its efforts to maintain the
35
<PAGE>
confidentiality and ownership of trade secrets, the Company requires its
manufacturers, employees, brokers and consultants to execute confidentiality
agreements. However, there can be no assurance that these agreements will
provide meaningful protection for the Company's trade secrets in the event of
an unauthorized use or disclosure of such information or that a third party
will not independently develop a similarly tasting product using a similar
formula. See "Risk Factors--Intellectual Property Protection."
MIS SYSTEMS
The Company is committed to using technology to enhance its efficiency,
productivity, and competitive position. The Company implemented an electronic
data interchange ("EDI") system for key customers in the first quarter of
1998. The EDI system will enable distributors and certain high volume
retailers who purchase directly from the Company to place purchase orders
electronically through a value added network. Additionally, the Company has
recently installed a fully integrated sales, inventory and accounting system
which the Company expects to be integrated with its EDI system by the second
quarter of 1998.
EMPLOYEES
As of February 28, 1998, the Company had a total of 59 employees, including
11 who are temporary-to- hire staff. None of the Company's employees is
covered by a collective bargaining agreement, and the Company believes that
its relationship with its employees is good.
FACILITIES
The Company is headquartered in Santa Barbara County, California, where it
leases an aggregate of approximately 30,000 square feet of space in two
buildings. These leases expire on January 31, 2000 and January 31, 2001,
respectively. However, the Company may extend each lease to January 31, 2002.
The Company believes that its current space adequately meets its needs in the
near term and it does not expect difficulties in obtaining additional space on
reasonable terms as the need arises. The Company uses independent contract
warehousing services for the storage of its products pending shipment to
retailers or distributors.
LEGAL PROCEEDINGS
The Company does not manufacture any products, and is contractually
indemnified by its contract manufacturers for product liability arising from
the manufacture of its products. However, the Company faces the risk that it
will be the subject of lawsuits based on the use of its products and formulas,
the labeling and packaging of its products (for which it has indemnified its
contract manufacturers), and the risk that its contract manufacturers will not
maintain sufficient insurance or have the financial ability to pay their
contractual indemnification obligations.
The Company has inspection rights and quality assurance programs with its
contract manufacturers. With respect to product liability claims in the United
States, the Company maintains $1.0 million per occurrence and $2.0 million in
aggregate product liability insurance as well as $8.0 million of excess
umbrella liability insurance. In addition, the Company requires its contact
manufacturers to include the Company as a named insured on their product
liability policies. Nellson maintains $12.0 million of product liability
coverage and Bariatrix maintains $C 10.0 million ($7.1 million U.S.) of
product liability coverage. However, there can be no assurance that such
insurance will continue to be available, or if available, will be adequate to
cover potential liabilities.
The Company, together with one of its contract manufacturers and a retailer
of its products, was named in a lawsuit, filed on August 12, 1997, but not
served on the Company, seeking compensatory and punitive damages in an
unspecified amount for a death allegedly resulting from the ingestion of a
Balance Bar that allegedly contained nuts. The Company does not believe that
this suit, even if adversely determined, will have a material adverse effect
on the Company's business, results of operations, or financial condition.
However, there can be no assurance that such lawsuit will not be served on the
Company or that, if served, it would not
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<PAGE>
have a material adverse effect on the Company's business, results of
operation, and financial condition. See "Risk Factors--Product Liability."
In October 1997, the Company received a letter, prompted by two of the
Company's competitors, from NAD, a self-regulatory program by the advertising
industry, questioning certain claims made in the Company's advertisements. The
Company has addressed such challenges by either providing support for its
claims or changing its advertisements. There can be no assurance that future
inquiries or changes in advertising would not have a material adverse effect
on the Company's business, results of operations, and financial condition. See
"Risk Factors--Government Regulation," "Risk Factors--Risks Associated with
Advertising," and "--Government Regulation."
GOVERNMENT REGULATION
The manufacturing, packaging, labeling, advertising, distribution, and sale
of the Company's products are subject to the regulation of various government
agencies, principally the FDA. The FDA regulates the Company's products
pursuant to the Federal Food, Drug, and Cosmetic Act ("FDCA") and the Fair
Packaging and Labeling Act ("FPLA") and regulations thereunder. The FDCA is
intended, among other things, to assure consumers that foods are wholesome,
safe to eat, and produced under sanitary conditions, and that food labeling is
truthful and not deceptive. The FPLA provides requirements for the contents
and placement of information required on consumer packages to ensure that
labeling is useful and informative. The Company's products are generally
classified and regulated as food under the FDCA, and are, therefore, not
subject to premarket approval by the FDA. However, the Company's products are
subject to the comprehensive labeling and safety regulations of the FDA, the
violation of which could result in product seizure and condemnation,
injunction of business activities, or criminal or civil penalties.
Furthermore, if the FDA determines, on the basis of labeling, promotional
claims, or marketing by the Company, that the intended use of any of the
Company's products is for the diagnosis, cure, mitigation, treatment, or
prevention of disease, it could regulate those products as drugs and require,
among other things, premarket approval for safety and efficacy. The Company
believes that it presently complies in all material respects with the
foregoing laws and regulations. However, there can be no assurance that future
compliance with such laws or regulations will not have a material adverse
effect on the Company's business, results of operations or financial
condition.
In September 1996, pursuant to a complaint related to a product liability
lawsuit concerning Balance bars, and at the FDA's request, the Company
voluntarily, temporarily withheld product shipments. Upon completion of
government inspection of facilities of the Company and one of its contract
manufacturers, and sampling and testing of products, the product shipments
were resumed. However, there can be no assurance that the FDA will not again
request that the Company cease any product shipment due to any future
regulatory matter. Any withholding of product could have a material adverse
effect on the Company's business, results of operations, and financial
condition. See "--Legal Proceedings."
The Company's advertising is subject to regulation by the FTC, pursuant to
the Federal Trade Commission Act ("FTCA") which prohibits unfair or deceptive
acts or practices including the dissemination of false or misleading
advertising. Violations of the FTCA may result in a cease and desist order,
injunction, or civil or criminal penalties. The FTC monitors advertising and
entertains inquiries and complaints from competing companies and consumers. It
also reviews referrals from industry self-regulatory organizations, including
the NAD. The NAD of the Council of Better Business Bureaus, Inc. administers a
voluntary self-regulatory, alternative dispute resolution process that is
supported by the advertising industry and serves the business community and
the public by fostering truthful and accurate advertising. Certain advertising
claims made by the Company have been challenged through the NAD in the past.
The Company has addressed such challenges by either providing support for its
claims or changing its advertisements. Although the Company does not believe
that such changes have affected its marketing success, any future NAD
inquiries or FTC actions that result in modifications to the Company's
advertising or the imposition of fines or penalties could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Risk Factors--Risks Associated With Advertising."
37
<PAGE>
The Company's activities are also regulated by various agencies of the
states, localities, and foreign countries in which the Company's products are
sold. In addition, the Company has been and will be required to re-formulate
its products to comply with foreign regulatory standards. The Company believes
that it presently complies in all material respects with the foregoing laws
and regulations. There can be no assurance, however, that future compliance
with such laws or regulations will not have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company may be subject to additional laws or regulations administered by
the FDA or other federal, state, or foreign regulatory authorities, the repeal
of laws or regulations, or more stringent interpretations of current laws or
regulations, from time to time in the future. The Company cannot predict the
nature of such future laws, regulations, interpretations, or applications, nor
can it predict what affect additional government regulations or administrative
orders, when and if promulgated, would have on its business in the future.
Such laws could, however, require the reformulation of products, the recall,
withholding or discontinuance of products, the imposition of additional
recordkeeping requirements, the revision of labeling, advertising, or other
promotional materials, and changes in the level of scientific substantiation
needed to support claims. Any or all such government actions could have a
material adverse effect on the Company's business, results of operation and
financial condition.
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, AND KEY EMPLOYEES
Executive officers, directors, and key employees of the Company and their
ages as of February 28, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas R. David-
son(2)(3).............. 58 Chairman of the Board of Directors
James A. Wolfe(3)....... 56 President, Chief Executive Officer and Director
Richard G. Lamb......... 51 Executive Vice President, Secretary and Director
Thomas J. Flahie........ 40 Senior Vice President of Finance and Administration
Patrick J. Lee.......... 31 Senior Vice President of Sales
Kristina M. Eriksen..... 39 Vice President of Finance
Lara Jackle............. 28 Vice President of Marketing
Mark Fox................ 45 Vice President of Event Marketing
Michael Sanchez......... 38 Vice President of Western Sales
Adelle M. Demko(1)(3)... 51 Director
Barry D. Goss(2)........ 58 Director
John Hale(2)............ 48 Director
Dennis Ryan McCar-
thy(1)(2).............. 47 Director
George F. Raymond(1)(3). 61 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Corporate Development Committee.
Thomas R. Davidson co-founded the Company in February 1992 and has served as
Chairman since that time. He served as Chief Executive Officer from February
1992 until January 1994 and as Secretary from February 1992 to July 1997. He
co-founded (1968) and serves as Chairman of Datatel, Inc.; co-founded (1979)
and served as a Director of National Information Systems until its sale in
1994; co-founded (1980) and served as a Director of V-Mark; and co-founded and
served as Chairman of Envision Medical Corporation from 1991 until its sale in
1996.
James A. Wolfe joined the Board of Directors in May 1993. He has served as
Chief Executive Officer since December 1995 and as President since November
1997. From December 1995 to December 1996, he was a consultant to the Company.
From January 1985 to December 1995, he was a self-employed business consultant
with clients such as Cadbury Schweppes, Welch's, Quaker Oats and Celestial
Seasonings. Prior to that time, he was an executive with 7-Up Foods, Coca-Cola
USA and Welch's.
Richard G. Lamb co-founded the Company in February 1992 and has served as a
Director since that time, as Executive Vice President since November 1997, and
as Secretary since July 1997. He served as Executive Vice President and Chief
Operating Officer from February 1992 until January 1994, and as President from
January 1994 to November 1997. Prior to joining the Company, Mr. Lamb was the
co-founder and President of Windsurfing Hawaii, Inc., a sporting goods
manufacturing company and prior to that served as Vice President,
International Operations, for Windsurfing International, Inc., a sporting
goods manufacturing company.
Thomas J. Flahie joined the Company in February 1998 and has served as
Senior Vice President of Finance and Administration since that time. From
December 1978 to February 1998, he held various positions with Andersen
Worldwide, an international accounting and consulting firm. He was a partner
with Andersen Worldwide for the last seven years.
Patrick J. Lee joined the Company in January 1997 and has served as Senior
Vice President of Sales since that time. From October 1995 to December 1996,
he was the Western Division Manager of PowerBar, Inc.
39
<PAGE>
(formerly Power Food, Inc.) where he directed sales and marketing activities
for the Western United States. From 1988 to 1994, he worked for Dial
Corporation where he served as District Sales Manager in 1994, Trade Marketing
Manager from 1993 to 1994 and as Key Account Executive from 1990 to 1993.
Kristina M. Eriksen joined the Company in January 1997 and has served as
Vice President of Finance since that time. She also served as Chief Financial
Officer from January 1997 to February 1998. From November 1991 until January
1997 she was the Chief Financial Officer and Corporate Controller for Envision
Medical Corporation, a medical device company. From 1983 to 1990, she worked
for General Motors/Electronic Data Systems.
Lara Jackle joined the Company in September 1997 and has served as Vice
President of Marketing since that time. From August 1994 until September 1997,
Ms. Jackle was a project manager with Reckitt & Colman, an U.K. consumer
products marketing company. From 1992 to 1994 Ms. Jackle was a student at
Cornell University where she earned her M.B.A.
Mark Fox joined the Company in January 1997 and has served as Vice President
of Event Marketing since December 1997. From 1992 until January 1997, Mr. Fox
was owner and founder of Mark Edward Promotional Design, a promotional and
event marketing firm. From 1990 to 1992 Mr. Fox was in the residential real
estate business.
Michael Sanchez joined the Company in June 1992 and has served as Vice
President of Western Sales since January 1997. He also served as Vice
President of Sales from January 1994 to January 1997 and held several sales
executive positions from June 1992 to January 1994. From February 1989 to June
1992, he served as a store manager for Circuit City, an electronics appliance
retailer.
Adelle M. Demko joined the Board of Directors in April 1997. From 1994 to
the present, Ms. Demko has been a management consultant and board advisor to
various companies. In July 1992 she joined Earthshell Container Corporation
and served as its President and Chief Operating Officer. In September 1989 she
founded Demko Baer & Associates, a financial consulting and database firm, and
served as principal from 1989 to 1992. From 1986 to 1989 she was as an
investment banker at Wedbush Morgan Securities and a Limited Partner of
Wedbush Capital Partners, an equity buyout fund. Prior to that she was a
financial and strategy consultant at Xerox Corporation and a corporate and
business attorney in New York City. Ms. Demko serves as a director of Planet
Earth Science and as a member of the Advisory Board of Beam Technologies.
Barry D. Goss joined the Board of Directors in April 1993. He has been the
President and Chief Executive Officer of Intelligent Solutions Inc. since
1995. From 1989 to September 1994 Mr. Goss was the Vice President and Chief
Information Officer at Applied Magnetics Corporation, a manufacturer of
magnetic recording heads for the computer industry.
John Hale joined the Board of Directors in April 1997. Since November 1997,
Mr. Hale has been Executive Vice President and Chief Operating Officer for
Doctors' Choice, LLC a subsidiary of Age Wave, LLC, a health and nutrition
solutions business targeted to the mature adult population. From May 1992 to
November 1997, he was Senior Vice President of Operations at Celestial
Seasonings, Inc., the leading specialty tea company in the United States.
Prior to that, he has held various executive positions at Frito Lay, Inc. from
June 1987 through May 1992 and The Quaker Oats Company from November 1973
through June 1987.
Dennis Ryan McCarthy joined the Board of Directors in 1993. From February
1993 to May 1994 he served as Vice President of Finance of the Company. From
1982 to the present, Mr. McCarthy has served as a consultant on financial, and
investment banking valuation issues for various companies. Prior to that, he
was the Secretary-Treasurer of the Newhall Land and Farming Company, a
publicly held company.
40
<PAGE>
George F. Raymond, a Certified Public Accountant, joined the Board of
Directors in April 1997. Mr. Raymond founded Automatic Business Centers, a
payroll processing service in 1972 and served as its President and Chairman
from 1972 until 1989. Since 1987, Mr. Raymond served as a director of BMC
Software, a publicly held computer software company. Mr. Raymond also serves
as a director of DocuCorp International, a publicly held data imaging software
company.
All directors hold office until the next annual meeting of stockholders and
until their successors have been elected and qualified. The officers of the
Company are appointed annually and serve at the discretion of the Board of
Directors, subject, in the case of Mr. Wolfe, to rights under the employment
agreement described below.
BOARD OF DIRECTORS COMMITTEES
The Audit Committee was established in July 1996 by the Board of Directors
to make recommendations concerning the engagement of independent public
accountants, review the plans and results of the audit engagement with the
independent public accountants, approve professional services provided by the
independent public accountants, review the independence of the independent
public accountants, consider the range of audit and non-audit fees, and review
the adequacy of the Company's internal accounting controls. The Audit
Committee is currently comprised of Adelle Demko (Chairperson), George
Raymond, and Dennis McCarthy.
The Compensation Committee was established in May 1993 by the Board of
Directors to review and approve the compensation and benefits for the
Company's executive officers and administer the Company's stock incentive
plans, and the Company's management incentive plans, described below. The
Compensation Committee is currently comprised of John Hale (Chairperson),
Thomas Davidson, Barry Goss, and Dennis McCarthy.
The Corporate Development Committee was established in July 1997 by the
Board of Directors to create a strategic plan for the Company's corporate
growth and development, review financing alternatives, consider potential
acquisitions of companies, and make recommendations concerning the corporate
structure of the Company. The Corporate Development Committee is currently
comprised of Thomas Davidson (Chairperson), Adelle Demko, George Raymond, and
James Wolfe.
DIRECTOR COMPENSATION
The Company does not pay and does not expect to pay its directors who are
employees of the Company for their services as directors. For services
rendered between January 1, 1994 and October 1997, non-employee directors of
the Company received fully vested options to purchase 200 shares of Common
Stock per meeting and, from October 1997 through the consummation of the
offering, cash compensation of $1,500 per meeting. In addition, each non-
employee director who joined the Board in 1997 received an option to purchase
1,000 shares of Common Stock that vests in April 1998. Upon consummation of
the offering, the Company expects to pay its non-employee directors reasonable
cash compensation consistent with compensation paid by other publicly held
companies, but the Company has not yet set the specific amount of such
compensation. The Company also expects to make automatic, annual stock option
grants under the 1998 Plan. See "Management--Stock Options and Stock Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee was an officer or employee of the
Company during 1997. No member of the Compensation Committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of the Company's Board
of Directors or Compensation Committee.
41
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded to, earned by,
or paid to the Company's Chief Executive Officer and to the Company's other
executive officers whose total cash compensation exceeded $100,000 during the
year ended December 31, 1997 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- ------------------
OTHER SECURITIES
NAME AND PRINCIPAL ANNUAL UNDERLYING OPTIONS
POSITION SALARY $ BONUS $(1) COMPENSATION $(2) (#)(3)
------------------ -------- ---------- ----------------- ------------------
<S> <C> <C> <C> <C>
James A. Wolfe, Chief
Executive Officer and
President.............. $124,333 $49,733 $11,077 --
Richard G. Lamb, Execu-
tive Vice President.... 107,500 37,625 10,274 --
Patrick Lee, Senior Vice
President of Sales..... 91,750 27,525 9,550 --
</TABLE>
- -----------------
(1) Bonuses for 1997 were determined in accordance with the 1997 Management
Incentive Plan.
(2) Consists of $6,250 of auto allowance and Company match of employee 401(k)
plan contributions.
(3) See "--1993 and 1997 Stock Incentive Plans."
BONUS PROGRAMS
In January 1998, the Compensation Committee adopted the Company's 1998
Employee Incentive Program for all employees. Under the program, cash bonuses
will be awarded based upon individual and Company target sales and profit
goals set for 1998 ("1998 Goals"). For all sales personnel other than the
Senior Vice President of Sales, 1998 Goals include both regional and overall
Company targets. For all other employees, 1998 Goals include only overall
Company targets. To be eligible, the employee must be employed by July 1, 1998
and must also be an employee on December 31, 1998. The Company has set target
bonuses for each level of employee at a specified percentage of an eligible
employee's salary (the "Target Bonus"). Target Bonuses range from 5% to 40% of
an employee's salary, depending upon level of seniority. If 108% of 1998 Goals
are achieved, 100% of Target Bonuses will be paid. To the extent the Company
exceeds 108% of its 1998 Goals, each eligible employee will receive an
increasing percentage of their Target Bonus up to 200% of such bonus.
The Company's 1997 Employee Incentive Program was identical to the 1998
Employee Incentive Program except that (i) management and outside sales
managers received bonuses based upon overall Company target sales and profit
goals set by the Compensation Committee for 1997, (ii) if 100% of 1997 goals
were achieved, 33% of 1997 target bonuses would be paid, and (iii) for every
percentage point above the 1997 goals, eligible employees would receive an
increasing percentage of their 1997 target bonus up to 100% of such bonus.
401(k) PLAN
The Company adopted a retirement savings plan (the "401(k) Plan") in 1997
that permits participation by all employees over age 21 with at least 3 months
of service. Employees can elect to contribute up to 15% of total eligible
compensation into the 401(k) Plan. Contributions were limited to $9,500 in
1997. The 401(k) Plan provides that the Company may make matching
contributions up to 100% of the first 5% of elective contributions.
STOCK OPTIONS AND STOCK PLANS
No stock options were granted to the Named Executive Officers during the
year ended December 31, 1997.
42
<PAGE>
The following table sets forth information with respect to the ownership and
value of stock options as of December 31, 1997 held by the Named Executive
Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 1997
AND OPTION VALUES AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER
DECEMBER 31, 1997 31, 1997(1)
--------------------------------- ---------------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($)(1) EXERCISABLE (#) UNEXERCISABLE (#) EXERCISABLE ($) UNEXERCISABLE ($)
- ---- --------------- --------------- --------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
James A. Wolfe......... -- -- 115,774 33,333 $3,707,320 $1,066,656
Richard G. Lamb........ -- -- 107,905 33,333 3,457,960 1,066,656
Patrick Lee............ 650 $19,825 9,350 10,000 285,175 305,000
</TABLE>
- -------
(1) There was no public trading market for the Company's Common Stock at
December 31, 1997. These values were calculated based on the difference
between the $33.00 fair market value of the Common Stock, as determined by
the Company's Board of Directors, and the stock option exercise price.
1998 PERFORMANCE AWARD PLAN
Immediately prior to the offering, the Company will establish the 1998
Performance Award Plan (the "1998 Plan") to provide a means to attract, reward
and retain talented and experienced officers, non-employee directors, other
key employees and certain other eligible persons (collectively, "Eligible
Persons") who may be granted awards from time to time by the Company's Board
of Directors or, if authorized, the Compensation Committee, or, for non-
employee directors, under a formula provided in the 1998 Plan. The maximum
number of shares reserved for issuance is 300,000 subject to adjustment for
certain changes in the Company's capital structure and other extraordinary
events. Shares subject to awards that are not paid for or exercised before
they expire or are terminated are available for other grants under the 1998
Plan.
Awards under the 1998 Plan may be in the form of nonqualified stock options,
incentive stock options, stock appreciation rights ("SAR's"), limited SAR's,
restricted stock, performance shares, stock bonuses, or cash bonuses based on
performance. Awards may be granted singly or in combination with other awards.
Any cash bonuses under the 1998 Plan will depend upon the extent to which
performance goals set by the Board of Directors or the Compensation Committee
are met during the performance period. Awards under the 1998 Plan generally
will be nontransferable by the holder of the award (a "Holder") (other than by
will or the laws of descent and distribution) and rights thereunder generally
will be exercisable, during the Holder's lifetime, only by the Holder, subject
to such exceptions as may be authorized by the Compensation Committee. No
incentive stock option may be granted at a price that is less than the fair
market value of the Common Stock (less than 110% of fair market value of the
Common Stock on the date of grant for certain participants) on the date of
grant. Nonqualified stock options and other awards may be granted at prices
below the fair market value of the Common Stock on the date of grant, though
the Company currently has no intention to do so.
Administration. The 1998 Plan will be administered by the Compensation
Committee. The Compensation Committee will have broad authority to (i)
designate recipients of discretionary awards, (ii) determine or modify the
terms and provisions of awards, including the price, vesting provisions, terms
of exercise and expiration dates, (iii) approve the form of award agreements,
and (iv) construe and interpret the 1998 Plan. The Compensation Committee will
have the discretion to accelerate and extend the exercisability or term and
establish the events of termination or reversion of outstanding awards.
Change in Control. Upon a Change in Control Event, each option and SAR will
become immediately exercisable; restricted stock will immediately vest free of
restrictions; and the number of shares, cash or other property covered by each
performance share award will be issued to the Holder, unless the Compensation
Committee determines to the contrary. A "Change in Control Event" is defined
generally to include (i) certain
43
<PAGE>
changes in a majority of the membership of the Board of Directors over a
period of two years or less, (ii) the acquisition of more than 50% of the
outstanding voting securities of the Company by any person other than Thomas
Davidson, James Wolfe, Richard Lamb, and Michael Sanchez, or one of their
affiliates, successors, heirs, relatives or certain donees, or (iii)
stockholder approval of a transfer of substantially all of the Company's
assets, the dissolution or liquidation of the Company, or a merger,
consolidation or reorganization (other than with an affiliate) whereby
stockholders immediately prior to such event own less than 50% of the
outstanding voting securities of the surviving entity after such event.
Plan Amendment; Termination and Term. The Company's Board of Directors has
the authority to amend, suspend or discontinue the 1998 Plan at any time, but
no such action will affect any outstanding award in any manner materially
adverse to a participant without the consent of the participant. The 1998 Plan
may be amended by the Board of Directors without stockholder approval unless
such approval is required by applicable law.
The 1998 Plan will remain in existence as to all outstanding awards until
such awards are exercised or terminated. The maximum term of options, SAR's
and other rights to acquire Common Stock under the 1998 Plan is ten years
after the initial date of award, subject to provisions for further deferred
payment in certain circumstances. No award can be made after ,
2007.
Automatic Grants to Non-Employee Directors. Under the 1998 Plan, each
director who is not an officer or employee (each a "Non-Employee Director")
will be granted a nonqualified stock option to purchase 1,000 shares of Common
Stock upon becoming a Non-Employee Director at an exercise price equal to the
market price of the Common Stock at the close of trading on that date. In
addition, on the day of the annual stockholders meeting in each calendar year
beginning in 1998 and continuing for each subsequent year during the term of
the 1998 Plan, each then-continuing Non-Employee Director will be granted a
nonqualified stock option to purchase 1,000 shares of Common Stock at an
exercise price equal to the market price of the Common Stock at the close of
trading on that date. Non-Employee Directors may also be granted discretionary
awards. No Non-Employee Director may receive options to purchase more than
4,000 shares of Common Stock under the 1998 Plan in any one year. All Non-
Employee Director stock options will have a 10-year term and will become
exercisable in equal annual installments over a five-year period commencing on
the first anniversary of the grant date. If a Non-Employee Director's services
are terminated for any reason other than the Non-Employee Director's death,
disability or retirement, any stock options held by such Non-Employee Director
that are exercisable will remain exercisable for six months after such
termination of service or until the expiration of the option term, whichever
occurs first. If the Non-Employee Director dies, becomes disabled or retires,
stock options held by such Non-Employee Director will, as of the date of such
death, disability or retirement, become fully exercisable for all of the
shares of Common Stock at the time subject to the option and will remain
exercisable for two years after the date of such termination of services. Upon
a Change in Control Event, each automatic option grant to a Non-Employee
Director will become immediately exercisable for all of the shares at the time
subject to that option and remain exercisable to the extent provided above,
subject to the adjustment and termination provisions of the 1998 Plan. Any
outstanding automatic option grant that is not exercised prior to a Change in
Control Event in which the Company is not to survive will terminate, unless
such option is assumed or replaced by the surviving corporation.
Payment for Shares. The exercise price of options and other awards may be
paid in cash or (subject to certain restrictions) shares of Common Stock. The
Company may finance the exercise or purchase and (subject to any applicable
legal limits) offset shares to cover the exercise or purchase price and
withholding taxes.
Federal Tax Consequences. The current federal income tax consequences of
awards authorized under the 1998 Plan follow certain basic patterns.
Generally, awards under the 1998 Plan that are includable in income of the
recipient at the time of award or exercise (such as nonqualified stock
options, SARs, restricted stock and performance awards) are deductible by the
Company, and awards that are not required to be included in income of the
recipient at such times (such as incentive stock options) are not deductible
by the Company.
44
<PAGE>
1993 AND 1997 STOCK INCENTIVE PLANS AND OTHER STOCK OPTION GRANTS
The Company established the 1993 Stock Incentive Plan (the "1993 Plan") and
1997 Stock Incentive Plan (the "1997 Plan") to provide incentive to, and
encourage stock ownership by, selected employees, officers, directors, and
consultants. Awards consisted of grants of options to purchase shares of the
Company's authorized but unissued Common or Preferred Stock. As of February
28, 1998, a total of 426,721 options were granted pursuant to both plans, of
which 55,748 options were exercised and 370,973 options remain outstanding.
All options granted were options for the purchase of Common Stock. The Company
intends to grant approximately 51,500 additional options under the 1997 Plan.
In addition to the 1993 Plan and the 1997 Plan, as of February 28, 1998, a
total of 78,118 options were granted outside such plans, of which 11,000
options were exercised and 67,118 options remain outstanding.
EMPLOYMENT AGREEMENT
As of , 1998, the Company entered into a [ ]-year employment
agreement with James Wolfe. During the term of Mr. Wolfe's employment
agreement, his compensation will consist of a minimum annual base salary of
$[ ], participation in the Company's management incentive bonus plans and
stock incentive plans, and fringe benefits similar to those of other senior
executives of the Company. [If Mr. Wolfe's employment is terminated, he will
be subject to a [ ]-year restriction on competition with the Company.]
45
<PAGE>
CERTAIN TRANSACTIONS
On January 15, 1997, Tom Davidson, co-founder and Chairman of the Board of
the Company, was issued 100,000 shares of Common Stock for consideration of
$150,000. The shares were issued in connection with the conversion of
convertible bonds purchased by Mr. Davidson in July 1995.
On December 5, 1995, the Company entered into a consulting agreement with
James Wolfe to serve as the Company's acting Chief Executive Officer. Mr.
Wolfe also has been a director of the Company since May 10, 1993. Pursuant to
his consulting agreement, Mr. Wolfe received approximately $116,000 in
consideration of his services to the Company in 1996. The consulting agreement
was terminated on December 31, 1996 when Mr. Wolfe became the Chief Executive
Officer of the Company.
During 1997, the Company paid $43,551 to Adelle Demko, a director of the
Company, in connection with special consulting services related to this
offering.
46
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information about the beneficial
ownership of the Company's Common Stock as of February 28, 1998, and as
adjusted to reflect the sale of the Common Stock offered hereby, by (i) each
director and each Named Executive Officer of the Company, (ii) all directors
and executive officers of the Company as a group, (iii) each person (or group
of affiliated persons) known by the Company to own beneficially more than five
percent of the Company's outstanding voting securities not otherwise listed;
and (iv) each Selling Stockholder not otherwise listed. The address of each
person listed is in care of the Company, 1015 Mark Avenue, Carpinteria,
California 93013, unless otherwise indicated.
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING THE OFFERING
----------------------- SHARES -----------------------
NUMBER(1) PERCENT(1)(2) OFFERED NUMBER(1) PERCENT(1)(2)
--------- ------------- -------- --------- -------------
<S> <C> <C> <C> <C> <C>
Thomas R. Davidson(3)... 801,267 49.7% -- 801,267 %
James A. Wolfe(4)....... 116,317 6.9 -- 116,317
Richard G. Lamb(5)...... 234,753 13.7 40,000 194,753
Patrick Lee(6).......... 10,000 * -- 10,000 *
Thomas J. Flahie........ -- -- --
Adelle M. Demko(7)...... 1,600 * -- 1,600 *
Barry D. Goss(8)........ 36,640 2.3 16,522 20,118
John Hale(9)............ 1,600 * -- 1,600 *
Dennis Ryan McCar-
thy(10)................ 15,696 * -- 15,696 *
George F. Raymond(11)... 1,600 * -- 1,600 *
All directors and execu-
tive officers as a
group (10 persons)..... 1,219,473 66.8 56,522 1,162,951
OTHER SELLING STOCKHOLDERS:
Tucker Anthony, Inc..... 25,566 1.6 25,566 --
Jennifer Fisher Barner.. 2,600 * 2,350 250 *
Brian Bayly............. 13,044 * 13,044 --
Susan Bayly............. 3,334 * 3,334 --
Susan Block............. 4,000 * 4,000 --
Donald Breidenbach,
Sr. ................... 13,044 * 2,500 10,544 *
Donald Breidenbach,
Jr.(12)................ 29,566 1.8 2,500 27,066
Gene & Joyce Daoust..... 62,444 3.9 10,000 52,444
John Deardourff......... 44,711 2.8 3,500 41,211
John Douglas............ 13,044 * 2,609 10,435 *
John H. Douglas Trust... 13,044 * 2,609 10,435 *
Marcus Elliott-Woody.... 4,000 * 200 3,800 *
Giles Gunn.............. 21,740 1.4 2,200 19,540
Charles P. Gunn......... 14,348 * 2,500 11,848 *
John Heron.............. 32,500 2.0 32,500 --
PZL Limited(13)......... 28,587 1.8 8,000 20,587
Graham Major............ 100 * 100 --
Bruce McFadden(14)...... 10,494 * 8,694 1,800
John Montgomery......... 13,044 * 756 12,288 *
John Nadolski........... 26,087 1.6 10,000 16,087 *
Trustees for B. Nash.... 6,500 * 3,250 3,250 *
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING THE OFFERING
----------------------- SHARES -----------------------
NUMBER(1) PERCENT(1)(2) OFFERED NUMBER(1) PERCENT(1)(2)
--------- ------------- ------- --------- -------------
<S> <C> <C> <C> <C> <C>
Nicole Nash............. 3,250 * 3,250 --
Paul Nash............... 3,250 * 3,250 --
J. Michael Nolan, Jr. .. 26,088 1.6 26,088 --
Danny Robertson......... 10,000 * 10,000 --
The Roy Family Trust.... 12,525 * 2,500 10,025 *
Michael Sanchez(15)..... 80,414 4.9 10,000 70,414
Jackie Shanks........... 1,087 * 200 887
Michael Shor............ 8,700 * 8,500 200 *
Joseph Skenderian(16)... 9,372 * 2,172 7,200 *
Terry Staples........... 19,500 1.2 1,000 18,500
Robert Warfield......... 30,435 1.9 5,400 25,035
John & Brenda Yeaton.... 50,000 3.1 10,000 40,000
</TABLE>
- --------
*Less than 1% of outstanding shares.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
issuable on conversion of Preferred Stock or exercise of stock options
within 60 days of February 28, 1998, are deemed beneficially owned and
outstanding for computing only the percentage of the person or the entity
holding such securities. Except as indicated by footnote, and subject to
community property laws where applicable, the persons and entities named
in the table have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them.
(2) Percentage of ownership is based on 1,607,993 shares of Common Stock
outstanding before the offering and shares of Common Stock
outstanding after the offering.
(3) Includes 2,600 shares of Common Stock that are issuable upon exercise of
stock options. Includes 420,000 shares of Common Stock held by the
Davidson Family Limited Partnership. Mr. Davidson disclaims beneficial
ownership of 315,000 of these shares, reflecting the limited partner
interests held by his children in the limited partnership.
(4) Includes 65,774 shares of Common Stock that are issuable upon exercise of
stock options.
(5) Includes 107,905 shares of Common Stock that are issuable upon exercise
of stock options.
(6) Includes 9,350 shares of Common Stock that are issuable upon exercise of
stock options.
(7) Includes 1,600 shares of Common Stock that are issuable upon exercise of
stock options.
(8) Includes 19,248 shares of Common Stock that are issuable upon exercise of
stock options. Includes 6,522 shares of Common Stock held by the Goss
Joint Venture. Mr. Goss disclaims beneficial ownership of 4,443 of these
shares, reflecting the joint venture interests held by Mr. Goss' father
and two sisters. Of the shares offered, 6,522 are owned by the Goss Joint
Venture and 10,000 are owned by Mr. Goss.
(9) Includes 1,600 shares of Common Stock that are issuable upon exercise of
stock options.
(10) Includes 7,000 shares of Common Stock that are issuable upon exercise of
stock options.
(11) Includes 1,600 shares of Common Stock that are issuable upon exercise of
stock options.
(12) Includes 10,000 shares of Common Stock that are issuable upon exercise of
stock options.
(13) PZL Limited is owned by David and Patricia Lamb. David Lamb is Richard
Lamb's brother.
(14) Includes 1,800 shares of Common Stock that are issuable upon exercise of
stock options. Mr. McFadden was a director of the Company from May 1993
to February 1997.
(15) Includes 46,500 shares of Common Stock that are issuable upon exercise of
stock options. Mr. Sanchez is Vice President of Western Sales for the
Company.
(16) Includes 7,200 shares of Common Stock that are issuable upon exercise of
stock options. Mr. Skenderian was a director of the Company from January
1994 to October 1997.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of 4,000,000
shares of Common Stock, par value $0.01 per share and 2,000,000 shares of
Preferred Stock, par value $.01 per share. Immediately following the
completion of the offering, the Company estimates that approximately
shares of Common Stock will be issued and outstanding (assuming no exercise of
the Underwriters' over-allotment option). No shares of Preferred Stock will be
issued and outstanding. The Company anticipates that immediately prior to the
consummation of this offering there will be holders of Common Stock.
Immediately before the offering, the Company will effect the Stock Split.
The following description of the Company's capital stock is a summary of the
material terms of such stock. It does not purport to be complete and is
subject in all respects to applicable Delaware law and to the provisions of
the Company's Restated Certificate of Incorporation to be restated immediately
prior to the consummation of this offering (the "Certificate of
Incorporation") and Amended and Restated Bylaws (the "Bylaws"), copies of
which will be filed as exhibits to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
Upon the completion of this offering, the Common Stock will be publicly
traded on the Nasdaq National Market under the symbol "BBAR." The holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. There are no cumulative
voting rights, the absence of which will, in effect, allow the holders of a
majority of the outstanding shares of Common Stock to elect all the directors
then standing for election. The absence of cumulative voting rights could have
the effect of delaying, deterring or preventing a change of control of the
Company. Subject to preferential rights of outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
See "Dividend Policy." If the Company liquidates, dissolves, or winds up, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and satisfaction of preferential rights of any
outstanding shares of Preferred Stock. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. The outstanding shares
of Common Stock are, and the shares of Common Stock to be issued upon
completion of this offering will be, fully paid and non-assessable.
PREFERRED STOCK
As of February 28, 1998, 634,485 shares of the Company's Series A Preferred
Stock were outstanding. All holders of the Company's Series A Preferred Stock
have agreed to convert each share of the Series A Preferred Stock into one
share of Common Stock immediately prior to the Stock Split (the "Preferred
Stock Conversion"), resulting in the issuance of an aggregate of 634,485
shares of Common Stock [after giving effect to the Stock Split.] Unless
otherwise indicated, all information in this Prospectus gives effect to the
Preferred Stock Conversion. The holders of Series A Preferred Stock presently
outstanding are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. Holders of Series A Preferred
Stock presently outstanding are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." Each share of Series A Preferred Stock
presently outstanding is convertible into one share of Common Stock. If the
Company liquidates, dissolves, or winds up, the holders of Series A Preferred
Stock are entitled to receive payment in cash of $2.30 per share before any
amount can be paid to holders of Common Stock.
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors is authorized to issue Preferred Stock in one or more series and to
fix by resolution the rights, preferences, privileges, and restrictions
thereof, including voting rights, dividend rights, dividend rates, conversion
rights, terms of redemption, redemption prices, liquidation preferences, and
the number of shares constituting any series or
49
<PAGE>
the designation of such series, without further vote or action by the
stockholders. The issuance of Preferred Stock could have the effect of
delaying, deterring or preventing a change in control of the Company without
further action of the stockholders. The issuance of Preferred Stock with
voting and conversion rights could adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. See
"Risk Factors--Possible Anti-Takeover Effect of Certain Charter Provisions."
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Company's Certificate of Incorporation and Bylaws require that
stockholders give advance notice to the Company's Secretary of any
directorship nominations or other business to be brought by stockholders at
any stockholders' meeting. The Certificate of Incorporation also requires the
approval of 75% of the Company's voting stock to amend certain provisions of
the Certificate of Incorporation. The existence of authorized but unissued and
unreserved Common Stock and Preferred Stock may enable the Board of Directors
to issue shares to persons friendly to current management which could render
more difficult or discourage an attempt to obtain control of the Company by
means of a proxy contest, tender offer, merger, or otherwise, and thereby
protect the continuity of the Company's management. These provisions may have
the effect of precluding some stockholders from bringing matters before the
stockholders and of deterring hostile takeovers or delaying changes in control
or management of the Company. See "Risk Factors--Possible Anti-Takeover Effect
of Certain Charter Provisions."
The Company's Board of Directors is divided into three classes of directors
serving staggered three-year terms. See "Management." At least two annual
meetings of stockholders, instead of one, generally will be required to change
the majority of the Company's Board of Directors, so it is more difficult for
the stockholders of the Company to change the management of the Company than
if the Board of Directors were not classified. In addition, the presence of a
classified Board of Directors could make it more difficult for a third party
to acquire, or could discourage a third party from attempting to acquire,
control of the Company and, therefore, may limit the price that certain
investors might be willing to pay in the future for shares of Common Stock.
Under the Delaware General Corporation's Law, as amended from time to time
(the "DGCL") in the case of a corporation having a classified board and not
having a provision in its Certificate to the contrary (as is the case with the
Company), stockholders may remove a director only for cause.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and, upon consummation of this
offering, will be subject to Section 203 of the DGCL. In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined therein) with a Delaware corporation for
three years following the date such person became an interested stockholder
unless (i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination, (ii) upon consummation of the transaction that resulted in the
interested stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding shares owned by
persons who are both officers and directors of the corporation and shares held
by certain employee stock ownership plans) or (iii) on or following the
transaction in which such person became an interested stockholder, the
business combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders by the affirmative vote of the
holders of at least two-thirds of the outstanding voting stock of the
corporation not owned by the interested stockholder.
LIMITATION OF LIABILITY AND INDEMNIFICATION AGREEMENTS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by the DGCL, a director of the Company will not be liable to
the Company or its stockholders for monetary damages for
50
<PAGE>
breach of fiduciary duty as a director. Under the DGCL, liability of a
director cannot be limited (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock
redemptions or repurchases, or (iv) for any transaction from which the
director derives an improper personal benefit. The effect of the provisions of
the Company's Certificate of Incorporation is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
the fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior), except in the situations described
in clauses (i) through (iv) above. This provision does not limit or eliminate
the rights of the Company or any stockholder to seek nonmonetary relief such
as an injunction or rescission if a director breaches his or her duty of care.
In addition, the Company's Certificate of Incorporation and Bylaws provide
that the Company will indemnify its directors, officers, employees, and agents
against losses incurred by any such person by reason of the fact that such
person was acting in such capacity.
The Company has entered into contracts with each of the directors and
executive officers of the Company under which the Company must indemnify them
from claims, liabilities, damages, expenses, losses, costs, penalties or
amounts paid in settlement incurred by them in or arising out of their work
for or on behalf of the Company, to the maximum extent provided by applicable
law. In addition, such parties are entitled to an advance of expenses in such
matters, to the maximum extent authorized or permitted by law.
CERTAIN ANTI-TAKEOVER EFFECTS
The provisions of the Certificate of Incorporation and the Bylaws of the
Company summarized above could be deemed to have anti-takeover effects and
could delay, defer, or prevent a tender offer or takeover attempt that a
stockholder might consider to be in such stockholder's best interest,
including attempts that might result in a premium over the market price for
the shares held by stockholders. See "Risk Factors--Possible Anti-Takeover
Effect of Certain Charter Provisions."
TRANSFER AGENT OR REGISTRAR
The Transfer Agent and Registrar for the Common Stock is .
LISTING
Before this offering, there has not been a public trading market for the
Common Stock. The Company has applied for listing of the Common Stock on the
NASDAQ National Market, upon notice of issuance, under the symbol "BBAR."
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the offering, the Company will have outstanding [ ]
shares of Common Stock, assuming no exercise of options after February 28,
1998. All of the [ ] shares offered hereby may be resold immediately in
the public market. Beginning 180 days after the date of this Prospectus, upon
expiration of lock-up agreements between the representatives of the
Underwriters and officers, directors and certain stockholders of the Company,
approximately [ ] additional shares will be eligible for sale without
restriction under Rule 144(k) under the Securities Act of 1933, as amended
(the "Securities Act") and [ ] additional shares (as well as an additional
438,091 shares issuable upon exercise of outstanding options) will be eligible
for sale subject to compliance with the restrictions of Rule 144. Any early
release of the lock-up agreement by the Underwriters, which, if granted, could
permit sales of a substantial number of shares and could adversely affect the
trading price of the Company's shares, may not be accompanied by an advance
public announcement by the Company. In addition, the Company intends to file a
registration statement on Form S-8 under the Securities Act approximately 30
days after the date of this Prospectus to register approximately 300,000
shares of Common Stock reserved for issuance under the Company's 1998
Performance Award Plan and 370,973 shares subject to outstanding options. See
"Risk Factors--Shares Eligible for Future Sale."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year, will be entitled to sell in any three-month period a number
of shares that does not exceed the greater of (i) one percent of the number of
shares of Common Stock then outstanding (approximately [ ] shares immediately
after the offering) or (ii) the average weekly trading volume of the Company's
Common Stock as reported through the Nasdaq National Market during the four
calendar weeks immediately preceding the filing of a Form 144 for such sale
with the Securities and Exchange Commission (the "Commission"). Sales under
Rule 144 are also subject to certain requirements relating to manner of sale,
notice, and availability of current public information about the Company. A
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who has beneficially owned Restricted Shares for at
least two years is entitled to sell such shares under Rule 144(k) without
regard to the requirements described above.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC
and Adams, Harkness & Hill, Inc. have severally agreed to purchase from the
Company and the Selling Stockholders the following respective numbers of
shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- -----------
<S> <C>
Hambrecht & Quist LLC..........................................
Adams, Harkness & Hill, Inc....................................
-----------
Total..........................................................
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other
dealers. After the offering, the offering price and other selling terms can be
changed by the Representatives. The Representatives have informed the Company
that the Underwriters do not intend to confirm discretionary sales in excess
of five percent of the shares of Common Stock hereby.
The Company has granted to the Underwriters an option exercisable no later
than 30 days after the date of this Prospectus, to purchase up to
additional shares of Common Stock at the offering price, less the underwriting
discount set forth on the cover page of this Prospectus. To the extent the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the above
table bears to the total number of shares of Common Stock offered hereby. The
Company will be obligated, pursuant to the option, to sell such shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The officers and directors and substantially all of the other stockholders
of the Company, who will beneficially own in the aggregate shares of
Common Stock after the offering, have agreed, subject to certain exceptions,
that they will not, without the prior written consent of Hambrecht & Quist
LLC, offer,
53
<PAGE>
sell or otherwise dispose of any shares of Common Stock, options or warrants
to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock owned by them during the 180-day
period following the date of this Prospectus. The Company has agreed that it
will not, without the prior written consent of Hambrecht & Quist LLC, offer,
sell or otherwise dispose of any shares of Common Stock, options or warrants
to acquire shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock during the 180-day period following
the date of this Prospectus, except that the Company may issue shares upon the
exercise of options granted prior to the date hereof, and may grant additional
options under its stock incentive plans, provided that, without the prior
written consent of Hambrecht & Quist LLC, such additional options shall not be
exercisable during such period.
The Underwriters have reserved for sale, at the initial public offering
price, shares of Common Stock for certain employees, directors, vendors, and
affiliates of the Company who have expressed an interest in purchasing shares
of Common Stock. These employees, directors, and other persons are expected to
purchase, in the aggregate, not more than five percent of the Common Stock
offered in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered to the general public on the same basis as the other shares offered
hereby.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be
determined by negotiations between the Company, the Selling Stockholders, and
the Representatives. Among the factors to be considered in determining the
initial public offering price are prevailing market and economic conditions,
revenues and earnings of the Company, market valuations of other companies
engaged in activities similar to the Company, estimates of the business
potential and prospects of the Company, the present state of the Company's
business operations, the Company's management, and other factors deemed
relevant. The estimated initial public offering price set forth on the cover
of this preliminary prospectus is subject to change as a result of market
conditions and other factors.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or the effecting of any purchase, for the purpose of
pegging, fixing or maintaining the price of the Common Stock. A syndicate
covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the offering. A penalty bid means an
arrangement that permits the Underwriters to reclaim a selling concession from
a syndicate member in connection with the offering when shares of Common Stock
sold by the syndicate member are purchased in syndicate covering transactions.
Such transactions may be effected on the Nasdaq National Market, in the over-
the-counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by O'Melveny & Myers LLP, Los Angeles, California. Certain legal
matters in connection with the offering will be passed upon for the
Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California.
EXPERTS
The audited financial statements and schedule included in this Prospectus
and elsewhere in the Registration Statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority
of said firm as experts in giving said reports.
54
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits to it. Certain items are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits filed as a
part of it. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete and,
in each instance, if such contract or document is filed as an exhibit to the
Registration Statement, reference is made to the copy of such contract or
document filed as an exhibit, each such statement being qualified in all
respects by such reference to such exhibit. The Registration Statement,
including the exhibits, as well as the reports and other information filed by
the Company with the Commission, can be inspected without charge at the public
reference facilities maintained by the Commission in Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, 13th Floor, New York, NY 10048, and
copies of all or any part thereof can be obtained from such office after
payment of fees prescribed by the Commission. The Commission maintains a Web
site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. In addition, after being approved for
listing on the Nasdaq National Market, upon notice of issuance, the Common
Stock, reports and other information concerning the Company can be inspected
at the offices of Nasdaq.
55
<PAGE>
BALANCE BAR COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Balance Sheets as of December 31, 1996 and 1997........................... F-3
Statements of Operations for the years ended December 31, 1995, 1996 and
1997..................................................................... F-4
Statements of Shareholders' Equity for the years ended December 31, 1995,
1996 and 1997............................................................ F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997 .................................................................... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Balance Bar Company:
We have audited the accompanying balance sheets of Balance Bar Company (a
Delaware corporation) as of December 31, 1996 and 1997, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Balance Bar Company, as of
December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 20, 1998
F-2
<PAGE>
BALANCE BAR COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ -------
(AMOUNTS IN
000'S,
ASSETS EXCEPT PAR
------ VALUE)
<S> <C> <C>
CURRENT ASSETS:
Cash.............................................................. $1,119 $ 89
Accounts receivable, net of allowance for doubtful accounts of $22
in 1996 and $46 in 1997.......................................... 1,435 3,444
Income taxes receivable........................................... -- 374
Inventories....................................................... 583 3,806
Prepaids and other................................................ 23 1,381
Deferred taxes.................................................... 139 344
------ -------
Total current assets.......................................... 3,299 9,438
------ -------
PROPERTY AND EQUIPMENT, net......................................... 56 1,011
OTHER ASSETS........................................................ 19 347
------ -------
$3,374 $10,796
====== =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt................................. $ -- $ 85
Short-term borrowings............................................. -- 1,100
Accounts payable.................................................. 606 4,201
Accrued commissions............................................... 97 121
Other accrued expenses............................................ 146 957
Income taxes payable.............................................. 363 --
------ -------
Total current liabilities..................................... 1,212 6,464
------ -------
LONG-TERM DEBT, net of current portion.............................. -- 228
------ -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value
Authorized--2,000 shares
Issued and outstanding--634 shares in 1996 and 1997............. 6 6
Common stock, $.01 par value
Authorized--4,000 shares
Issued and outstanding--910 shares in 1996 and 923 shares in
1997........................................................... 9 9
Additional paid-in capital........................................ 2,220 2,502
Retained earnings (deficit)....................................... (73) 1,587
------ -------
2,162 4,104
------ -------
$3,374 $10,796
====== =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
BALANCE BAR COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1995 1996 1997
------ ------- -------
(AMOUNTS IN 000'S,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
SALES.................................................. $1,262 $10,544 $39,634
COST OF SALES.......................................... 593 5,272 19,801
------ ------- -------
Gross profit....................................... 669 5,272 19,833
------ ------- -------
EXPENSES:
Advertising.......................................... 157 1,083 7,481
Selling and marketing................................ 355 1,536 7,204
General and administrative........................... 237 797 2,299
Interest (income) expense............................ 4 16 (27)
------ ------- -------
Total expenses..................................... 753 3,432 16,957
------ ------- -------
Income (loss) before income taxes.................. (84) 1,840 2,876
INCOME TAXES........................................... 1 225 1,216
------ ------- -------
Net income (loss).................................. $ (85) $ 1,615 $ 1,660
====== ======= =======
EARNINGS (LOSS) PER SHARE:
Basic.............................................. $(0.07) $ 1.15 $ 1.07
====== ======= =======
Diluted............................................ $(0.07) $ 1.04 $ 0.90
====== ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic.............................................. 1,300 1,402 1,550
====== ======= =======
Diluted............................................ 1,300 1,557 1,841
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
BALANCE BAR COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
PREFERRED
STOCK COMMON STOCK ADDITIONAL RETAINED
------------- ------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------ ------ ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1994................... 634 $ 6 651 $ 7 $1,606 $(1,603) $ 16
Exercise of stock
options.............. -- -- 4 -- -- -- --
Issuance of common
stock as compensation
for services......... -- -- 15 -- 1 -- 1
Conversion of
convertible bonds.... -- -- 71 1 70 -- 71
Net loss.............. -- -- -- -- -- (85) (85)
--- --- --- --- ------ ------- ------
BALANCE, December 31,
1995................... 634 6 741 8 1,677 (1,688) 3
Exercise of stock
options.............. -- -- 2 -- -- -- --
Issuance of common
stock as compensation
for services......... -- -- 33 -- 67 -- 67
Conversion of
convertible bonds.... -- -- 134 1 200 -- 201
Compensation expense
in connection with
issuance of stock
options.............. -- -- -- -- 276 -- 276
Net income............ -- -- -- -- -- 1,615 1,615
--- --- --- --- ------ ------- ------
BALANCE, December 31,
1996................... 634 6 910 9 2,220 (73) 2,162
Exercise of stock
options.............. -- -- 10 -- 13 -- 13
Issuance of common
stock as compensation
for services......... -- -- 3 -- 60 -- 60
Compensation expense
in connection with
issuance of stock
options.............. -- -- -- -- 209 -- 209
Net income............ -- -- -- -- -- 1,660 1,660
--- --- --- --- ------ ------- ------
BALANCE, December 31,
1997................... 634 $ 6 923 $ 9 $2,502 $ 1,587 $4,104
=== === === === ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
BALANCE BAR COMPANY
STATEMENTS OF CASH FLOWS
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1995 1996 1997
---- ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $(85) $1,615 $1,660
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 12 17 175
Compensation expense in connection with issuance of
common stock and stock options..................... 1 343 269
Other............................................... -- 11 --
Changes in operating assets and liabilities:
Accounts receivable................................ (24) (1,385) (2,009)
Income tax receivable.............................. -- -- (374)
Inventories........................................ (24) (558) (3,223)
Prepaids and other................................. 5 (17) (1,371)
Deferred taxes..................................... -- (139) (205)
Accounts payable................................... 42 505 3,595
Accrued expenses................................... 32 180 679
Income taxes payable............................... -- 363 (363)
---- ------ ------
Net cash provided by (used in) operating
activities....................................... (41) 935 (1,167)
---- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchases of property and equipment..................... (3) (51) (1,114)
---- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings....................... -- -- 1,100
Proceeds from long-term debt............................ -- -- 300
Payments of capital lease obligations................... (5) -- (3)
Proceeds from issuance of convertible bonds............. 71 201 --
Proceeds from exercise of stock options................. -- -- 13
Initial public offering costs........................... -- -- (159)
---- ------ ------
Net cash provided by financing activities......... 66 201 1,251
---- ------ ------
NET INCREASE (DECREASE) IN CASH.......................... 22 1,085 (1,030)
CASH, beginning of year.................................. 12 34 1,119
---- ------ ------
CASH, end of year........................................ $ 34 $1,119 $ 89
==== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
BALANCE BAR COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. THE COMPANY
Balance Bar Company, a Delaware corporation, (the Company) develops and
markets branded food products in convenient, good tasting, balanced
nutritional formulations. The Company's name was changed from Bio-Engineered
Foods, Inc. in 1997. The Company's current products, the "BALANCE--THE
COMPLETE NUTRITIONAL FOOD" bar and the "40-30-30 BALANCE" powdered drink mix,
are based on caloric proportions of 40% carbohydrates, 30% protein and 30%
dietary fat. During all periods presented, in excess of 90% the Company
revenue was derived from sales of its Balance bar (in multiple flavors and two
sizes).
2. CONCENTRATIONS OF RISK
Accounts receivable are unsecured and the Company is at risk to the extent
such amounts become uncollectable. As of December 31, 1996, two customers
comprised 31% and 19% of accounts receivable. As of December 31, 1997, two
customers comprised 18% and 17% of accounts receivable, respectively.
During the year ended December 31, 1995, the Company did not have sales to
any customer that represented greater than 10% of sales. During the year ended
December 31, 1996, the Company had sales to two customers that represented
approximately 26% and 14%, respectively, of sales. During the year ended
December 31, 1997, the Company had sales to one customer that represented
approximately 25% of sales. In February 1998, the Company entered into a two
year exclusive sales agreement with this customer. The Company's customers are
comprised primarily of distributors and retailers and are located primarily
throughout the United States, and to a lesser extent Canada and Japan. Sales
to customers outside the United States were less than 10 percent of sales for
all periods presented.
The Company has no internal capacity to produce its products and relies on
two contract manufacturers to produce its products. One manufacturer is
located in California and the other in Eastern Canada. The partial or total
loss of supply from either of these contract manufacturers would adversely
affect the Company's ability to fulfill orders and make timely delivery of
products. The Company has entered into long-term supply contracts with the two
contract manufacturers that require the Company to purchase minimum numbers of
bars per year and the contract manufacturers to supply specified numbers of
bars per year. If the production capacity of the two contract manufacturers is
insufficient to fill sales orders, the Company will attempt to use other
contract manufacturers. The Company may not be able to establish additional
production sources at acceptable prices that meet quality and capacity
requirements at other contract manufacturers, if necessary.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. 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
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-7
<PAGE>
b. Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market and consist of the following at December 31, 1996 and 1997 (in
000's):
<TABLE>
<CAPTION>
DECEMBER
31,
-----------
1996 1997
---- ------
<S> <C> <C>
Balance bars.................................................... $278 $2,074
Powdered drink mix.............................................. -- 473
Packaging material and other.................................... 305 1,259
---- ------
$583 $3,806
==== ======
</TABLE>
c. Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over each assets useful life
ranging from one to seven years.
The Company capitalizes expenditures that materially increase asset lives
and charges ordinary repairs and maintenance to operations as incurred.
When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation or amortization are removed from the accounts and
any resulting gain or loss is included in operations.
d. Deferred Offering Costs
In connection with its proposed public offering of common stock, the
Company has capitalized $315,000 of related costs as of December 31, 1997.
These costs are included in long-term other assets in the accompanying
balance sheets and will be charged to common stock upon completion of the
offering or otherwise to operations.
e. Coupons
The Company provides for coupon redemption costs at the time of coupon
distribution. As of December 31, 1996 and 1997, costs related to the
redemption of distributed but unredeemed coupons were not material.
f. Revenue Recognition
The Company recognizes revenue at the time of shipment. The Company
provides for estimated returns and allowances at the time of shipment.
g. Advertising and Marketing
The costs of advertising and marketing are expensed as the advertising
takes place, as free samples and promotional materials are distributed and
as promotional events are held. At December 31, 1997, prepaids and other
current assets in the accompanying balance sheets includes $1,015,000 of
prepaid advertising.
h. Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less
to be cash equivalents.
Cash payments for interest were $4,000, $23,000 and $24,000 for the years
ended December 31, 1995, 1996 and 1997, respectively. Cash payments for
taxes were $1,000, $1,000 and $2,159,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
F-8
<PAGE>
Non-cash transactions excluded from the statements of cash flows consist
of the conversion into common stock of $71,000 in 1995 and $201,000 in 1996
of convertible bonds.
i. Earnings (Loss) Per Share
Earnings (loss) per share is computed in accordance with Financial
Accounting Standards (SFAS) No. 128, "Earnings per share." Earnings (loss)
per share for the years ended December 31, 1996 and 1997 are based on the
weighted average number of common and preferred shares outstanding plus the
dilutive effects of stock options. For the year ended December 31, 1995,
stock options were not included as their effect would be anti-dilutive. In
connection with the Company's initial public offering, the Company has
obtained commitments from all of the holders of convertible preferred stock
to convert the preferred stock to common stock (see Note 11). As such, the
preferred shares have been included in the calculation of weighted average
number of shares for basic earnings (loss) per share in the accompanying
statements of operations.
The weighted average number of common and preferred shares outstanding
for the years ended December 31, 1995, 1996 and 1997 was 1,300,000,
1,402,000 and 1,550,000, respectively. The dilutive effect of stock options
for the years ended December 31, 1996 and 1997 was 155,000 and 291,000,
respectively.
j. Fair Value of Financial Instruments
Based on borrowing rates currently available for bank loans, the fair
value of short-term borrowings and long-term debt approximates carrying
values. The fair value of other financial instruments, consisting of cash,
and short-term trade receivables and payables also approximate carrying
values.
k. New Authoritative Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" (SFAS 130) and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 130 and SFAS 131 are effective in 1998. The Company does not
have any items or other comprehensive income and, accordingly, SFAS 130
does not have any effect on the Company's financial reporting. Management
does not expect the adoption of SFAS 131 to have a material impact on the
Company's financial reporting.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1996 and
1997 (in 000's):
<TABLE>
<CAPTION>
DECEMBER
31,
------------
1996 1997
---- ------
<S> <C> <C>
Furniture and fixtures........................................ $16 $ 264
Machinery and equipment....................................... 95 835
Leasehold improvements........................................ -- 142
--- ------
111 1,241
Less: Accumulated depreciation and amortization............... (55) (230)
--- ------
$56 $1,011
=== ======
</TABLE>
F-9
<PAGE>
5. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
In 1997, the Company obtained a line-of-credit with a bank that expires on
June 1, 1998. The line-of-credit provides the Company with maximum borrowings
of $3,500,000. Advances are limited to 75 percent of eligible accounts
receivable and are secured by all of the company's assets. Interest accrues at
the bank's prime rate (8.5 percent at December 31, 1997) plus one percent. As
of December 31, 1997, there was $1,100,000 outstanding under this agreement.
Selected information regarding short-term borrowings for the year ended
December 31, 1997 is as follows (dollars in 000's):
<TABLE>
<S> <C>
Average amount outstanding........................................ $ 208
Maximum amount outstanding........................................ $1,100
Weighted average interest rate during period...................... 9.50%
</TABLE>
In December 1997, the Company obtained a $300,000 three year loan from a
bank. The loan is secured by all of the Company's assets. Interest accrues at
the bank's prime rate (8.5 percent at December 31, 1997) plus one percent. The
principal balance is due $82,000 in 1998, $99,000 in 1999, $109,000 in 2000
and $10,000 in 2001.
6. INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred income tax assets
or liabilities are computed based on the temporary difference between the
financial statement and income tax bases of assets and liabilities using the
current marginal income tax rate. Deferred income tax expenses or credits are
based on the changes in deferred income tax assets or liabilities from period
to period.
The provisions for income taxes for the years ended December 31, 1995, 1996
and 1997 are as follows (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
CURRENT:
Federal.............................................. $-- $227 $1,116
State................................................ 1 137 305
--- ---- ------
1 364 1,421
--- ---- ------
DEFERRED............................................... -- (139) (205)
--- ---- ------
Provision for income taxes........................... $ 1 $225 $1,216
=== ==== ======
</TABLE>
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended December 31, 1996 and
1997 are as follows (dollars in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C> <C> <C>
Income tax at statutory federal rate............ $626 34.0% $ 978 34.0%
State income taxes, net of federal benefit...... 80 4.3 187 6.5
Effect of permanent differences................. 92 5.0 60 2.1
Net operating loss carryforwards................ (547) (29.7) -- --
Other items, net................................ (26) (1.4) (9) (0.3)
---- ----- ------ ----
$225 12.2% $1,216 42.3%
==== ===== ====== ====
</TABLE>
F-10
<PAGE>
Under SFAS No. 109, deferred tax assets are recognized for temporary
differences that will result in deductible amounts in future periods. The
components of the deferred income tax assets (liabilities) at December 31,
1996 and 1997 are as follows (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
State taxes............................................... $ 45 $ 109
Allowance for doubtful accounts........................... 9 68
Inventory reserves........................................ -- 23
Depreciation.............................................. (3) (15)
Accrued liabilities....................................... 46 76
Other..................................................... 42 83
------ ------
$ 139 $ 344
====== ======
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain property and equipment under
long-term operating leases expiring at various dates through January 2001.
Total rental expense for the years ended December 31, 1995, 1996 and 1997 was
$22,000, $29,000 and $131,000, respectively.
Future minimum lease payments under operating leases are as follows (in
000's):
<TABLE>
<S> <C>
Years ending December 31,
1998................................................................. $245
1999................................................................. 245
2000................................................................. 164
2001................................................................. 13
----
$667
====
</TABLE>
Included in property and equipment is approximately $16,000 of equipment
that is leased under a lease accounted for as a capital lease that expires
December 31, 2001.
The Company has been named as a defendant in various lawsuits arising out of
the normal course of business. Management believes the final outcome of such
claims will not have a material impact on the Company's financial position or
results of operations.
8. SHAREHOLDERS' EQUITY
In 1997, the Company adopted SFAS No. 129 "Disclosure of Information About
Capital Structure." Holders of the Company's common stock and convertible
preferred stock are entitled to voting rights at the rate of one vote per
share. Preferred stockholders are entitled to a liquidation preference of
$2.30 per share. Preferred stock may be converted to common stock, at the rate
of one share for one share, at any time. No dividend has ever been declared on
the Company's common or convertible preferred stock.
In 1995 and 1996, the Company issued $71,000 and $201,000 of 12 percent
convertible bonds, respectively. These bonds were converted into common stock
at the rate of $1 per share and $1.50 per share, respectively in the years the
bonds were issued.
The Company has two stock option plans, under which the Company is
authorized to issue incentive and non-qualified stock options to its
directors, officers, key employees and consultants totaling up to 430,000
shares of common stock. The Company has issued 77,918 stock options outside of
these two stock option
F-11
<PAGE>
plans. At December 31, 1997, 63,279 shares are available for future grant
under these two plans. Options are generally granted at exercise prices not
less than the fair market value on the date of grant and expire 10 years after
the date of grant. Options granted under these plans vest over various periods
up to three years.
The Company adopted SFAS No. 123, "Accounting for Stock Based Compensation"
(SFAS 123) in 1996. As allowed by SFAS 123, the Company has elected to
continue to measure compensation cost under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and comply
with the pro forma disclosure requirements of the new standard.
A summary of the Company's outstanding options and activity follows for the
years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING,
beginning of year....... 39,068 $1.01 46,418 $0.53 434,887 $ 1.02
Granted................ 22,600 0.50 390,969 1.08 7,800 2.29
Canceled............... (11,250) 2.30 -- -- (4,348) 0.01
Exercised.............. (4,000) 0.01 (2,500) 2.30 (9,748) 0.78
------- ------- -------
OPTIONS OUTSTANDING, end
of year................. 46,418 0.53 434,887 1.02 428,591 1.05
======= ======= =======
Options exercisable at
end of year............. 46,418 $0.53 254,356 $ .88 337,776 $ 1.00
======= ======= =======
Weighted average fair
value of of options
granted during the year. $0.50 $2.30 $19.74
===== ===== ======
</TABLE>
The following table summarizes information about the options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE REMAINING
PRICES NUMBER OUTSTANDING CONTRACTUAL LIFE NUMBER EXERCISABLE
-------- ------------------ ---------------- ------------------
<S> <C> <C> <C>
$0.01 6,522 .5 years 6,522
$0.50 32,150 7.3 years 32,150
$1.00 359,371 8.2 years 280,704
$2.50 30,548 9.0 years 14,400
------- -------
428,591 337,776
======= =======
</TABLE>
As permitted by SFAS 123, the Company continues to apply the accounting
rules of APB 25 governing the recognition of compensation expense from its
stock option plans. Such accounting rules measure compensation expense on the
first date at which both the number of shares and the exercise price are
known. Under the Company's plans, this would typically be the grant date. To
the extent that the exercise price equals or exceeds the market value of the
stock on the grant date, no expense is recognized. Compensation expense is
recognized for options where the market value of the stock on the grant date
exceeds the exercise price. The compensation expense is recognized immediately
if vesting is at issuance or ratably over the vesting period if the options
vest over time.
Under the provisions of SFAS 123, equity instruments granted to non-
employees are excluded from the pro forma disclosure requirements and are
recorded as compensation expense at fair value in the accompanying statements
of operations.
During the years ended December 31, 1995, 1996 and 1997, the Company
recorded compensation expense of $1,000, $313,000 and $209,000, respectively,
in connection with stock option and common stock
F-12
<PAGE>
grants to employees at exercise prices less than fair market value on the date
of grant. During the years ended December 31, 1996 and 1997, the Company
recorded compensation expense of $30,000 and $60,000, respectively, in
connection with common stock grants to non-employees.
Had the Company applied the fair value based method of accounting, which is
not required, to all grants of stock options, under SFAS 123, the Company
would have recorded additional compensation expense and computed pro forma net
income (loss) and earnings (loss) per share amounts as follows for the years
ended December 31, 1995, 1996 and 1997 (amounts in 000's except for per share
data):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996 1997
----- ------ ------
<S> <C> <C> <C>
Additional compensation expense........................ $ 3 $ 64 $ 37
Pro forma net income (loss)............................ $ (88) $1,555 $1,635
Pro forma earnings (loss) per share:
Basic................................................ (0.07) 1.11 1.05
Diluted.............................................. (0.07) 1.00 0.89
</TABLE>
These pro forma amounts were determined by estimating the fair value of each
option on its grant date using the Black-Scholes option-pricing model.
Assumptions of 6.30 percent for risk free interest rate, 6 years for expected
life, zero volatility and no expected dividends were applied to all grants in
1995 and 1996. Assumptions of 6.54 percent for risk free interest rate, 6
years for expected life, zero volatility and no expected dividends were
applied to all grants in 1997.
9. RELATED PARTY TRANSACTIONS
In December 1995, the Company entered into a management consulting agreement
with a member of the board of directors. In 1996, the Company recorded
$116,000 of expense in connection with this agreement.
During 1997, the Company paid $44,000 to one member of the board of
directors in connection with special services related to the Company's initial
public offering.
10. 401(k) PLAN
In 1997, the Company adopted a 401(k) Plan (the Plan). All employees are
eligible to participate in the Plan after 3 months of service. The Company
matches up to a percent of employee contributions made during the year. The
total Company 401(k) matching contribution recognized for the year ended
December 31, 1997 was $42,000.
11. INITIAL PUBLIC OFFERING
The Company intends to have an initial public offering of its common stock
in 1998. In connection with the Company's initial public offering, the Company
has obtained commitments from all of the holders of convertible preferred
stock to convert the preferred stock to common stock if the proposed initial
offering is completed. This commitment expires in June 1998.
F-13
<PAGE>
[PICTURE SHOWING PEOPLE ENGAGING IN VARIOUS ACTIVITIES AND A LARGE BALANCE BAR]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR
OTHER PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY
SELLING STOCKHOLDER OR THE
UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF
AN OFFER TO BUY TO ANY PERSON IN
ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE
UNLAWFUL OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR
ANY OFFER OR SALE MADE HERE-
UNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE
COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................................... 3
Risk Factors............................................................ 5
Use of Proceeds......................................................... 14
Dividend Policy......................................................... 14
Capitalization.......................................................... 15
Dilution................................................................ 16
Selected Financial Data................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 18
Business................................................................ 26
Management.............................................................. 39
Certain Transactions.................................................... 46
Principal and Selling Stockholders...................................... 47
Description of Capital Stock............................................ 49
Shares Eligible for Future Sale......................................... 52
Underwriting............................................................ 53
Legal Matters........................................................... 54
Experts................................................................. 54
Additional Information.................................................. 55
Index to Financial Statements........................................... F-1
</TABLE>
-----------
UNTIL , 1998 (25 DAYS
AFTER THE DATE OF THIS PROSPEC-
TUS), ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PRO-
SPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
BALANCE BAR
COMPANY
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
ADAMS, HARKNESS & HILL, INC.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the SEC registration fee, the NASD fee and the National Market System
application fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC registration fee............................................... $10,397
NASD fee........................................................... 4,024
Application fee--National Market System............................ *
Printing and engraving expenses.................................... *
Legal fees and expenses............................................ *
Accounting fees and expenses....................................... *
Blue Sky qualification fees and expenses........................... *
Transfer Agent and Registrar fees.................................. *
D&O Insurance...................................................... *
Miscellaneous fees and expenses.................................... *
-------
Total............................................................ $
=======
</TABLE>
- --------
* To be provided by Amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by the DGCL, a director of the Company will not be liable to
the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director. Under the DGCL, liability of a director may not be limited
(i) for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases, and
(iv) for any transaction from which the director derives an improper personal
benefit. The effect of the provisions of the Company's Certificate of
Incorporation is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care
as a director (including breaches resulting from negligent or grossly
negligent behavior), except in the situations described in clauses (i) through
(iv) above. This provision does not limit or eliminate the rights of the
Company or any stockholder to seek nonmonetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care. In addition,
the Company's Certificate of Incorporation provides that the Company will
indemnify its directors, officers, employees, and agents against losses
incurred by any such person by reason of the fact that such person was acting
in such capacity.
The Company has entered into contracts with each of the directors and
executive officers of the Company under which the Company must indemnify them
from claims, liabilities, damages, expenses, losses, costs, penalties or
amounts paid in settlement incurred by them in or arising out of their work
for or on behalf of the Company, to the maximum extent provided by applicable
law. In addition, such parties are entitled to an advance of expenses is such
matters, to the maximum extent authorized or permitted by law.
To the extent that the Board of Directors or the stockholders of the Company
wish to limit or repeal the ability of the Company to provide indemnification
as set forth in the Company's Certificate of Incorporation, such repeal or
limitation may not be effective as to directors and officers who are parties
to the
II-1
<PAGE>
Indemnification Agreements, because their rights to full protection would be
contractually assured by the Indemnification Agreements. It is anticipated
that similar contracts may be entered into, from time to time, with future
directors of the Company.
The Form of Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its directors and officers for certain liabilities arising under the
Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities by
the Company during the past three years that were not registered under the
Securities Act. The Company believes that each of such transactions was exempt
from registration under either Section 4(2) or Rule 701 of the Securities Act.
(a) On February 1, 1995, an aggregate of 1,000 shares of the Company's
Common Stock were issued to 6 employees for no consideration. The shares
were issued as gifts to these employees.
(b) On February 9, 1995, 14,000 shares of the Company's Common Stock were
issued to a vendor for consideration of $14,000. The shares were issued in
connection with the release of a debt owed by the Company for past
accounting services.
(c) On October 16, 1995, 4,000 shares of the Company's Common Stock were
issued to an employee for consideration of $40. The shares were issued in
connection with the exercise of stock options by this employee.
(d) On January 20, 1996, 15,000 shares of the Company's Common Stock were
issued to Richard Lamb and 10,000 shares of Common Stock were granted to
one other employee for consideration of past services.
(e) On January 22, 1996, and April 16, 1996, an aggregate of 71,000
shares of the Company's Common Stock were issued to various investors and
Thomas Davidson for an aggregate consideration of $71,000. The shares were
issued in connection with the conversion of convertible bonds purchased by
these investors and Mr. Davidson from July 1995 to January 1996.
(f) On April 24, 1996, 2,500 shares of the Company's Common Stock were
issued to one employee in consideration for past services.
(g) On December 16, 1996, 3,000 shares of the Company's Common Stock were
issued to a professional fitness trainer for consideration of past
services.
(h) On December 17, 1996, 2,172 shares of the Company's Common Stock were
issued to James Wolfe in consideration for past services.
(i) On December 17, 1996, 2,500 shares of Common Stock were issued to a
former employee for consideration of $5,750. The shares were issued in
connection with the exercise of this former employee's stock options.
(j) On January 15, 1997, 134,001 shares of Common Stock were issued to
various investors and Thomas Davidson for aggregate consideration of
$201,000. The shares were issued in connection with the conversion of
convertible bonds purchased from July 1995 to January 1996.
(k) On April 1, 1997, 3,000 shares of the Company's Common Stock were
issued to a professional fitness trainer for consideration of past
services.
(l) On May 9, 1997, an aggregate of 2,250 shares of the Company's Common
Stock were issued to an former employee for aggregate consideration of
$270. The shares were issued in connection with the exercise of stock
options by this former employee.
II-2
<PAGE>
(m) On August 25, 1997, 2,500 shares of the Company's Common Stock were
issued to Thomas Davidson for consideration of $5,750. The shares were
issued in connection with the exercise of stock options by Mr. Davidson.
(n) On October 6, 1997, 4,348 shares of Common Stock were issued to
Dennis McCarthy for $43. These shares were issued in connection with the
exercise of stock options held by Mr. McCarthy.
(o) On December 31, 1997, 650 shares of the Company's Common Stock were
issued to Patrick Lee for $1,625. These shares were issued in connection
with the exercise of stock options held by Mr. Lee.
(p) On January 16, 1998, 50,000 shares of the Company's Common Stock were
issued to James Wolfe for $50,000. These shares were issued in connection
with the exercise of stock options held by Mr. Wolfe.
(q) On January 23, 1998, 500 shares of the Company's Common Stock were
issued to an employee for $500. These shares were issued in connection with
the exercise of stock options held by this employee.
(r) On March 20, 1998, 1,800 shares of the Company's Common Stock were
issued to a former Company director. These shares were issued in connection
with the exercise of stock options granted to the former director.
(s) On March 30, 1998, 2,174 shares of the Company's Common Stock were
issued to James Wolfe. These shares were issued in connection with the
exercise of stock options granted to Mr. Wolfe.
(t) On March 30, 1998, 2,000 shares of the Company's Common Stock were
issued to two employees. These shares were issued in connection with the
exercise of stock options granted to these employees.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits Number
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Restated Certificate of Incorporation of the Company
3.2* Amended and Restated Bylaws of the Company
4.1* Specimen of Common Stock Certificate
5.1* Opinion of O'Melveny & Myers LLP
10.1 Form of Indemnification Agreement between the Company and each of
its executive officers and directors
10.2(1) Production Agreement between the Company and Bariatrix
International, Inc.
10.3(1) Production Agreement between the Company and Nellson Candies, Inc.
10.4 1993 Stock Incentive Plan
10.5 1997 Stock Incentive Plan
10.6* 1998 Stock Incentive Plan
10.7* Employment Agreement between the Company and James A. Wolfe
10.8.1 Credit Agreement between the Company and Santa Barbara Bank & Trust
for the Revolving Line of Credit
10.8.2 Security Agreement between the Company and Santa Barbara Bank &
Trust
10.8.3 Promissory Note by the Company in favor of Santa Barbara Bank &
Trust
10.8.4 Security Agreement between the Company and Santa Barbara Bank &
Trust
10.8.5 Promissory Note from the Company in favor of Santa Barbara Bank &
Trust
10.9(1) Letter Agreement between the Company and Trader Joe's
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.10(1) Agreement Between the Company and Tree of Life
10.11 Form of Employee Option Agreement under 1993 Stock Incentive Plan
10.12 Form of Employee Option Agreement under 1997 Stock Incentive Plan
10.13* Form of Employee Option Agreement under 1998 Performance Award Plan
11.1 Statement of Computation of Per Share Earnings
23.1 Consent of Independent Auditors
23.2* Consent of O'Melveny & Myers LLP (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by Amendment.
(1) The Company has requested confidential treatment for portions of these
agreements.
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Commission are provided in the Notes to the Financial
Statements included elsewhere in this Registration Statement or are not
required under the applicable instructions or are inapplicable and therefore
have been omitted.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) 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 provisions described in Item 14 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. If 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 hereunder, 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.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
Rule 497(h) under the Securities Act will be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus will
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time will be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Carpinteria, State of California on this seventh day of April, 1998.
BALANCE BAR COMPANY
/s/ James A. Wolfe
By: _________________________________
James A. Wolfe
Its: President and Chief Executive
Officer
II-5
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints James A. Wolfe, Richard G. Lamb, and
Thomas J. Flahie, and each of them acting individually, as such person's
attorney in fact, each with full power of substitution, for such person in any
and all capacities, to sign any and all amendments to this Registration
Statements (including post-effective amendments), and to file the same, with
exhibits and other documents in connection therewith, with the Commission.
Each such signatory hereby ratifies and confirms our signatures as they may be
signed by said attorney-in-fact to any and all amendments to said Registration
Statement, or any related registration statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Thomas R. Davidson Chairman of the Board of April 7, 1998
____________________________________ Directors
Thomas R. Davidson
/s/ James A. Wolfe Chief Executive Officer April 7, 1998
____________________________________ (Principal Executive
James A. Wolfe Officer) and Director
/s/ Thomas J. Flahie Senior Vice President of April 7, 1998
____________________________________ Finance and Administration
Thomas J. Flahie (Principal Financial and
Accounting Officer)
/s/ Adelle M. Demko Director April 7, 1998
____________________________________
Adelle M. Demko
/s/ Barry D. Goss Director April 7, 1998
____________________________________
Barry D. Goss
/s/ John Hale Director April 7, 1998
____________________________________
John Hale
/s/ Richard G. Lamb Director April 7, 1998
____________________________________
Richard G. Lamb
/s/ Dennis Ryan McCarthy Director April 7, 1998
____________________________________
Dennis Ryan McCarthy
/s/ George F. Raymond Director April 7, 1998
____________________________________
George F. Raymond
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Restated Certificate of Incorporation of the Company
3.2* Amended and Restated Bylaws of the Company
4.1* Specimen of Common Stock Certificate
5.1* Opinion of O'Melveny & Myers LLP
10.1 Form of Indemnification Agreement between the Company and each of its
executive officers and directors
10.2(1) Production Agreement between the Company and Bariatrix International,
Inc.
10.3(1) Production Agreement between the Company and Nellson Candies, Inc.
10.4 1993 Stock Incentive Plan
10.5 1997 Stock Incentive Plan
10.6* 1998 Performance Award Plan
10.7* Employment Agreement between the Company and James A. Wolfe
10.8.1 Credit Agreement between the Company and Santa Barbara Bank & Trust
for the Revolving Line of Credit
10.8.2 Security Agreement between the Company and Santa Barbara Bank & Trust
10.8.3 Promissory Note by the Company in favor of Santa Barbara Bank & Trust
10.8.4 Security Agreement between the Company and Santa Barbara Bank & Trust
10.8.5 Promissory Note from the Company in favor of Santa Barbara Bank &
Trust
10.9(1) Letter Agreement between the Company and Trader Joe's
10.10(1) Agreement Between the Company and Tree of Life
10.11 Form of Employee Option Agreement under 1993 Stock Incentive Plan
10.12 Form of Employee Option Agreement under 1997 Stock Incentive Plan
10.13* Form of Employee Option Agreement under 1998 Performance Award Plan
11.1 Statement of Computation of Per Share Earnings
23.1 Consent of Independent Auditors
23.2* Consent of O'Melveny & Myers LLP (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-6)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by Amendment.
(1) The Company has requested confidential treatment for portions of these
agreements.
<PAGE>
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
-------------------------
This INDEMNIFICATION AGREEMENT ("Agreement") is made on ,
--------------
1997, between BALANCE BAR COMPANY, a Delaware corporation (the "Company"), and
("Indemnitee"), an officer and/or member of the Board of
- -----------------
Directors of the Company.
RECITALS
--------
A. The Company desires the benefits of having Indemnitee serve as an
officer and/or director secure in the knowledge that expenses, liabilities and
losses incurred by Indemnitee in Indemnitee's good faith service to the Company
will be borne by the Company or its successors and assigns in accordance with
applicable law; and
B. The Company desires that Indemnitee resist and defend against what
Indemnitee may consider to be unjustified investigations, claims, actions, suits
and proceedings which have arisen or may arise in the future as a result of
Indemnitee's service to the Company notwithstanding that conditions in the
insurance markets may make directors' and officers' liability insurance coverage
unavailable or available only at premium levels which the Company may deem
inappropriate to pay; and
C. The parties believe it appropriate to memorialize and reaffirm the
Company's indemnification obligations to Indemnitee and, in addition, set forth
the indemnification agreements contained herein;
NOW, THEREFORE, in consideration of the mutual agreements herein contained,
the parties agree as follows:
AGREEMENT
---------
1. INDEMNIFICATION.
---------------
Indemnitee shall be indemnified and held harmless by the Company to the
fullest extent permitted by its Certificate of Incorporation, Bylaws and
applicable law, as the same exists or may hereafter be amended, against all
expenses, liabilities and loss (including attorneys' fees, judgments, fines, and
amounts paid or to be paid in any settlement approved in advance by the Company,
such approval not to be unreasonably withheld) (collectively, "Indemnifiable
Expenses") actually and reasonably incurred or suffered by Indemnitee in
connection with any present or future threatened,
<PAGE>
pending or contemplated investigation, claim, action, suit or proceeding,
whether civil, criminal, administrative or investigative (collectively,
"Indemnifiable Litigation"), (i) to which Indemnitee is or was a party or is
threatened to be made a party by reason of any action or inaction in
Indemnitee's capacity as a director or officer of the Company, or (ii) with
respect to which Indemnitee is otherwise involved by reason of the fact that
Indemnitee is or was serving as a director, officer, employee or agent of the
Company, or of any subsidiary or division, or is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. Notwithstanding the
foregoing, Indemnitee shall have no right to indemnification for expenses and
the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended.
2. NOTICE OF CLAIMS
----------------
Indemnitee shall, as a condition precedent to Indemnitee's right to be
indemnified under this Agreement, give the Company notice in writing as soon as
practicable of any claim made against Indemnitee for which indemnification will
or could be sought under this Agreement. Notice to the Company shall be directed
to the Chief Executive Officer of the Company at the address set forth in
Section 11 hereof (or such other address as the Company shall designate in
writing to Indemnitee). A delay on the part of the Indemnitee in so notifying
the Company shall not relieve the Company from any obligation hereunder unless
(and then solely to the extent) the Company thereby is prejudiced. Any
indemnification provided for in Section 1 shall be made no later than forty-five
(45) days after receipt of the written request of Indemnitee.
3. INTERIM EXPENSES.
----------------
The Company agrees to pay Indemnifiable Expenses incurred by Indemnitee in
connection with any Indemnifiable Litigation in advance of the final disposition
thereof, provided that the Company has received an undertaking by or on behalf
of Indemnitee, substantially in the form attached hereto as Exhibit A, to repay
the amount so advanced to the extent that it is ultimately determined that
Indemnitee is not entitled to be indemnified by the Company under this Agreement
or otherwise. The advances to be made hereunder shall be paid by the Company to
Indemnitee within twenty (20) days following delivery of a written request
therefor by Indemnitee to the Company.
4. FAILURE TO INDEMNIFY
--------------------
4.1 If a claim under this Agreement, or any statute, or under any
provision of the Company's Amended and Restated Certificate of Incorporation or
Bylaws providing for indemnification, is not paid in full by the Company, within
forty-five (45) days after a written request for payment thereof has been
received by the Company, Indemnitee may, but need not, at any time thereafter
bring an action against the Company to recover the unpaid amount of the claim
and, subject to Section 12 of this Agreement, if
<PAGE>
successful in whole or in part, Indemnitee shall also be entitled to be paid for
the expense (including attorneys' fees) of bringing such action.
4.2 It shall be a defense to such action (other than an action brought to
enforce a claim for expenses incurred in connection with any action, suit or
proceeding in advance of its final disposition) that Indemnitee has not met the
standards of conduct which make it permissible under applicable law for the
Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company and Indemnitee shall be entitled to
receive interim payments of interim expenses pursuant to Section 3 hereof unless
and until such defense may be finally adjudicated by court order or judgment
from which no further right of appeal exists. It is the parties' intention that
if the Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its board of directors,
independent legal counsel, or its stockholders) to have made a determination
that indemnification of Indemnitee is proper in the circumstances because
Indemnitee has met the applicable standard of conduct required by applicable
law, nor an actual determination by the Company (including its board of
directors, any committee or subgroup of the board of directors, independent
legal counsel, or its stockholders) that Indemnitee has not met such applicable
standard of conduct, shall create a presumption that Indemnitee has or has not
met the applicable standard of conduct.
5. NOTICE TO INSURERS.
------------------
If, at the time of the receipt of a notice of a claim pursuant to Section 2
hereof, the Company has director and/or officer liability insurance in effect,
the Company shall give prompt notice of the commencement of such proceeding to
the insurers in accordance with the procedures set forth in the respective
policies. The Company shall thereafter take all necessary or desirable action to
cause such insurers to pay, on behalf of the indemnitee, all amounts payable as
a result of such proceeding in accordance with the terms of such policies.
6. RETENTION OF COUNSEL
--------------------
In the event that the Company shall be obligated to pay Indemnifiable
Expenses as a result of any proceeding against Indemnitee, the Company, if
appropriate, shall be entitled to assume the defense of such proceeding, with
counsel approved by Indemnitee, which approval shall not be unreasonably
withheld, upon the delivery to Indemnitee of written notice of its election to
do so. After delivery of such notice, approval of such counsel by Indemnitee and
the retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees of counsel subsequently incurred by
that Indemnitee with respect to that same proceeding, provided that
(i) Indemnitee shall have the right to employ his or her counsel in any such
proceeding at Indemnitee's expense, and (ii) if (A) the employment
<PAGE>
of counsel by Indemnitee has been previously authorized by the Company,
(B) Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense,
or (C) the Company shall not, in fact, have employed counsel to assume defense
of such proceeding, then the fees and expenses of Indemnitee's counsel shall be
at the expense of the Company.
7. SUCCESSORS
----------
This Agreement establishes contract rights which shall be binding upon, and
shall inure to the benefit of, the successors, assigns, heirs and legal
representatives of the parties hereto.
8. MUTUAL ACKNOWLEDGMENT
---------------------
Both the Company and Indemnitee acknowledge that in certain instances,
Federal law or applicable public policy may prohibit the Company from
indemnifying its directors and officers under this Agreement or otherwise.
Indemnitee understands and acknowledges that the Company may be required in the
future to undertake to the Securities and Exchange Commission to submit the
question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee, and, in that event, the Indemnitee's rights and the Company's
obligations hereunder shall be subject to that determination.
9. CONTRACT RIGHTS NOT EXCLUSIVE
-----------------------------
The contract rights conferred by this Agreement shall be in addition to,
but not exclusive of, any other right which Indemnitee may have or may hereafter
acquire under any statute, provision of the Company's Certificate of
Incorporation or Bylaws, agreement, vote of stockholders or disinterested
directors, or otherwise.
10. INDEMNITEE'S OBLIGATIONS
------------------------
The Indemnitee shall promptly advise the Company in writing of the
institution of any investigation, claim, action, suit or proceeding which is or
may be subject to this Agreement and keep the Company generally informed of, and
consult with the Company with respect to, the status of any such investigation,
claim, action, suit or proceeding. In addition, Indemnitee shall give the
Company such information and cooperation as it may reasonably require and as
shall be within Indemnitee's power.
11. NOTICES
-------
Any notice or other communication hereunder must be given in writing and
either (a) delivered in person, (b) transmitted by telex, telefax or
telecommunications mechanism provided that any notice so given is also mailed as
provided in clause (c) or
<PAGE>
(c) mailed by registered or certified mail, properly addressed, as follows:
If to the Company, addressed to:
Balance Bar Company
1015 Mark Avenue
Carpinteria, CA 93013
Attention: Chief Executive Officer
Facsimile No. (805) 566-0235
With a copy to:
Seed, Mackall & Cole LLP
1332 Anacapa Street, Suite 200
Santa Barbara, California 93101
Attention: Thomas N. Harding, Esq.
Facsimile No. (805) 962-1404
If to Indemnitee addressed to:
Attention:
Facsimile No.
With copies to:
or to such other address or to such other person as either party shall have last
designated by such notice to the other party. Each such notice or other
communication shall be effective (i) if given by telecommunication, when
transmitted to the applicable number so specified in (or pursuant to) this
Section 11 and an appropriate answerback is received, (ii) if given by mail,
three days after such communication is deposited in the mails as aforesaid or
(iii) if given by any other means, when actually delivered at such address.
<PAGE>
12. ATTORNEYS' FEES
---------------
In the event that any action is instituted by Indemnitee under this
Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be
entitled to be paid all court costs and expenses, including reasonable
attorneys' fees, incurred by Indemnitee with respect to such action, unless as a
part of such action, a court of competent jurisdiction determines that each of
the material assertions made by Indemnitee as a basis for such action were not
made in good faith or were frivolous. In the event of an action instituted by or
in the name of the Company under this Agreement, or to enforce or interpret any
other terms of this Agreement, Indemnitee shall be entitled to be paid all court
costs and expenses, including attorneys' fees, incurred by Indemnitee in defense
of such action (including with respect to Indemnitee's counterclaims and
cross-claims made in such action), unless as a part of such action the court
determines that each of Indemnitee's material defenses to such action were made
in bad faith or were frivolous.
13. SEVERABILITY
------------
Should any provision of this Agreement, or any clause hereof, be held to be
invalid, illegal or unenforceable, in whole or in part, the remaining provisions
and clauses of this Agreement shall remain fully enforceable and binding on the
parties. The parties agree to replace any such invalid, illegal or
unenforceable provision of this Agreement with a valid, legal and enforceable
provision which will achieve, to the extent possible, the economic, business,
and other purposes of the invalid, illegal or unenforceable provision.
14. MODIFICATION AND WAIVER
-----------------------
No supplement, modification, waiver or amendment of this Agreement shall be
binding unless executed in writing by both of the parties hereto. No waiver of
any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provisions hereof (whether of not similar) nor shall such
waiver constitute a continuing waiver.
15. CHOICE OF LAW
-------------
The validity, interpretation, performance and enforcement of this Agreement
shall be governed by the laws of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
"COMPANY"
By
-----------------------
Name:
Title:
"INDEMNITEE"
Name:
<PAGE>
EXHIBIT A
UNDERTAKING AGREEMENT
---------------------
This UNDERTAKING AGREEMENT is made on , 199 between
---------------- --
BALANCE BAR COMPANY, a Delaware corporation (the "Company") and ,
--------------
an officer and/or member of the Board of Directors of the Company
("Indemnitee").
RECITALS
--------
A. Indemnitee may become involved in investigations, claims, actions,
suits or proceedings which have arisen or may arise in the future as a result of
Indemnitee's service to the Company;
B. Indemnitee desires that the Company pay any and all expenses
(including, but not limited to, attorneys' fees and court costs) actually and
reasonably incurred by Indemnitee or on Indemnitee's behalf in defending or
investigating any such suits or claims and that such payment be made in advance
of the final disposition of such investigations, claims, actions, suits or
proceedings to the extent that Indemnitee has not been previously reimbursed by
insurance.
C. The Company is willing to make such payments but, in accordance with
Section 145 of the General Corporation Law of the State of Delaware, the Company
may make such payments only if it receives an undertaking to repay from
Indemnitee.
D. Indemnitee is willing to give such an undertaking.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows;
AGREEMENT
---------
1. In regard to any payments made by the Company to Indemnitee pursuant
to the terms of the Indemnification Agreement dated , 1997,
-----------------
between the Company and Indemnitee, Indemnitee hereby undertakes and agrees to
repay to the Company any and all amounts so paid promptly and in any event
within thirty (30) days after the disposition, including any appeals, of any
litigation or threatened litigation on account of which payments were made, but
only to the extent that Indemnitee is ultimately found not entitled to be
indemnified by the Company under the Bylaws of the Company and Section 145 of
the General Corporation Law of the State of Delaware, or other applicable law.
2. This Agreement shall not affect in any manner rights which Indemnitee
<PAGE>
may have against the Company, any insurer or any other person to seek
indemnification for or reimbursement of any expenses referred to herein or any
judgment which may be rendered in any litigation or proceeding.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
on the date first above written.
"COMPANY"
BALANCE BAR COMPANY,
a Delaware corporation
By
-------------------
"INDEMNITEE"
---------------------
<PAGE>
EXHIBIT 10.2
PRODUCTION AGREEMENT
--------------------
THIS PRODUCTION AGREEMENT (the "Agreement") is made and entered into as of
January 27, 1998, by and between BARIATRIX INTERNATIONAL, INC., a Vermont
corporation ("Bariatrix") and BIO-ENGINEERED FOODS, INC., a Delaware corporation
("BFI").
RECITALS
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A. Bariatrix is in the business of producing nutritional food products.
BFI is in the business of distributing such products.
B. Bariatrix has produced certain products for distribution by BFI under
a series of Production Agreements, the most recent of which was dated November
13, 1996 (the "Prior Agreement").
C. The parties wish to provide for the ongoing production of products by
Bariatrix for BFI on the terms and conditions set forth herein.
AGREEMENT
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NOW, THEREFORE, the parties hereto, for good and sufficient consideration,
the receipt of which is hereby acknowledged, and intending to be legally bound,
do hereby agree as follows:
1. DESCRIPTION OF PRODUCTS
-----------------------
The products to be produced by Bariatrix under this Agreement for sale to
BFI (the "Products") shall consist of the following:
1.1 The nutritional bars currently produced by Bariatrix to match the
nutritional profiles and names provided by BFI, as identified on Schedule 1 to
this Agreement, including any new flavors or sizes thereof ("Bars");
1.2 The nutritional drink mixes currently produced by Bariatrix to match
the nutritional profiles and names provided by BFI, as set forth on Schedule 1
to this Agreement, including any new flavors or sizes thereof ("Mixes");
1.3 Any new or additional products mutually agreed to in writing by the
parties hereto.
*Confidential portions omitted and filed separately with the Commission.
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2. PRODUCTION QUANTITIES
---------------------
2.1 During each calendar month during the term of this Agreement, BFI
will order from Bariatrix and accept delivery of, at a minimum, [ * ] Bars.
BFI will order from Bariatrix and accept delivery of, at a minimum, [ * ]
Bars during each calendar year during the term of this Agreement, commencing
with the calendar year ending December 31, 1998.
2.2 During the term of this Agreement (as set forth in Section 12), BFI
will provide to Bariatrix a purchase order for the Products it wishes to
purchase during the period stated in such purchase order. Subject to the
provisions of Section 2.5 below, Bariatrix will produce and deliver such
Products in accordance with the terms and conditions of the purchase order,
within a variation of plus ten percent (10%) and minus five percent (5%) from
the total quantity specified in the purchase order for each flavor. Bariatrix
will invoice BFI on the actual amount delivered and accepted by BFI. The actual
production and delivery of Products will be coordinated pursuant to the
production scheduling process described in Section 2.5 below.
2.3 Bariatrix agrees to produce not less than [ * ] Bars per calendar
month, to the extent ordered by BFI under Section 2.2. Upon 30 days' prior
written notice by BFI to Bariatrix, Bariatrix will increase its minimum monthly
production capability to 4 million Bars. Bariatrix will use all commercially
reasonable efforts to fill orders in excess of the monthly minimum requirement
set forth in this Section. The quantities of the Bars produced by Bariatrix in
any month will be in the respective flavors ordered by BFI, except for
reasonable and minor variations necessitated by production efficiencies.
2.4 Bariatrix agrees to produce not less than (i) [ * ] cases of 15-
serving canisters (six canisters per case; "cases") of the Mixes per calendar
month, and (ii) [ * ] single-serving packets ("packets") of the Mixes per
calendar month, each to the extent ordered by BFI under Section 2.2. Upon 30
days' prior written notice by BFI to Bariatrix, Bariatrix will increase its
minimum monthly production to [ * ] cases and [ * ] packets of the
Mixes. Bariatrix will use all commercially reasonable efforts to fill orders in
excess of the monthly minimum requirement set forth in this Section. The
quantities of the Mixes produced by Bariatrix in any month will be in the
respective flavors ordered by BFI, except for reasonable and minor variations
necessitated by production efficiencies. BFI will not be required to order any
minimum quantities of the Mixes. If BFI cancels any part of a purchase order for
Mixes in a given month, Bariatrix's monthly minimum production requirement for
such month shall be reduced by the number of units of the Mixes cancelled.
2.5 Production of the Products will be coordinated in accordance with the
following:
2.5.1 Prior to 11:00 a.m. Pacific Time on each Monday during the
term of this Agreement, Bariatrix will provide BFI with a written rolling
production schedule with
*Confidential portions omitted and filed separately with the Commission.
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respect to the production and delivery of Products ordered by BFI (each a
"Production Schedule"). Each Production Schedule will specify the dates and
quantities of production and delivery of the Products for the workweek that
begins on the following Monday ("Week 1"), the workweek that begins on the
second following Monday ("Week 2"), and the workweek that begins on the third
following Monday ("Week 3").
2.5.2 BFI will notify Bariatrix within one day of receipt whether
the Production Schedule is approved by BFI. If BFI notifies Bariatrix that the
Production Schedule is not reasonably acceptable to BFI, then, subject to
Section 2.5.3, Bariatrix will use its best efforts to revise the Production
Schedule to address BFI's concerns.
2.5.3 The parties agree that, once the quantities and time schedule
in a Production Schedule have been approved by BFI, then (except as permitted by
Section 19) they may only be changed to the extent set forth below. The
quantities and schedule set forth in the Production Schedule for Week 1 may be
not be changed from those set forth for such week in the prior Production
Schedule. The quantities and schedule contained in the Production Schedule for
Week 2 may be changed at the request of BFI no later than the Monday before the
commencement of Week 2 (i.e., the Monday of Week 1), to the extent deemed
commercially necessary by BFI, but BFI agrees to act in good faith to minimize
such changes. The quantities and schedule in the Production Schedule for Week 3
may be changed at the request of BFI no later than the Monday before the
commencement of Week 2, as BFI deems reasonably necessary. Bariatrix will
provide BFI with production quantity figures on the day following each
production run.
2.5.4 If Bariatrix fails to meet the quantities and time schedule
set forth in a Production Schedule, Section 4 hereof will apply. In addition,
BFI may cancel the remaining unproduced portion of the relevant purchase order,
if such delay continues for more than fifteen (15) days (on and after June 1,
1998, such 15-day period will be reduced to ten (10) days). If BFI cancels any
part of a purchase order for Bars in a given month, Bariatrix's monthly minimum
production requirement for such month shall be reduced by the number of Bars
cancelled.
2.5.5 Nothing in this Section 2.5 will be deemed to limit
Bariatrix's obligation to deliver the minimum monthly requirements for the
Products set forth in Section 2.3 or Section 2.4 above.
2.6 Both parties agree that the goal of this Section 2 is to ensure the
timely fulfillment of all BFI's customers' orders by meeting BFI's production
schedules and purchase orders for each flavor. Bariatrix agrees that it will
inform BFI immediately, or in any case within one business day, of any real or
anticipated delays. Bariatrix also agrees that, in the event of lost production
time for any reason except through fault of BFI, BFI will be given first
priority from among Bariatrix's other customers in making up production
schedules.
*Confidential portions omitted and filed separately with the Commission.
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2.7 Bariatrix hereby agrees to maintain a production schedule sufficient
to allow BFI to maintain its finished goods inventory at minimum levels as
specified on Schedule 2 to this Agreement. BFI reserves the right to change the
required minimum finished goods inventory with forty-five (45) days prior
notice. Bariatrix will have until January 1, 1998, to achieve the minimum
inventory levels set forth on Schedule 2. In the event of an increase in an
inventory level requested by BFI as described above, Bariatrix will have 45 days
after BFI's written request to achieve such level. Bariatrix will update
information with respect to the inventories of the Products daily on its
computer system, and will provide twenty-four hour access to such information to
BFI by means of a computer modem connection.
2.8 Bariatrix will produce all Products at Bariatrix's facility in
Lachine, Quebec, Canada. The foregoing notwithstanding, Bariatrix may produce
Products at another of its facilities if (i) the equipment and processes of such
alternate facility are of a quality at least as good as those of Bariatrix's
Lachine facility, (ii) production at such alternate facility would not result in
increased transit time for the Products to the delivery point set forth in
Section 5.1, and (iii) Bariatrix has received BFI's express written approval of
such alternate production facility, which approval will not be unreasonably
withheld.
2.9 Bariatrix covenants and agrees to maintain at all times sufficient
inventories of ingredients and supplies to meet its obligations hereunder.
3. PRICES; PAYMENT TERMS
---------------------
3.1 The initial price schedule for the Products is set forth on Schedule
3, and is exclusive of the costs of the Product Packaging (as defined in Section
7), which will be provided by BFI. The price for any Product includes
Bariatrix's cost of (i) inserting the Products into the Product Packaging, and
(ii) usual domestic packing of good quality so as to sustain (without damages)
normal domestic air and/or motor freight transportation to point of delivery.
The parties agree that such usual domestic packing includes, without limitation,
putting shrink wrap on individual boxes of the Products (or using an
alternatively approved carton closure system), placing such individual boxes in
corrugated cardboard containers with shipping labels attached, and putting such
containers on pallets, including adequate pallet wrap. Any other special
packing, boxing, crating, or cartage which is required by BFI will be for BFI's
account unless specifically agreed to in writing between the parties.
3.2 Bariatrix will have the right to adjust the prices to be paid for the
Products hereunder by providing to BFI a notice of such a price adjustment not
less than ninety (90) days prior to the proposed effective date of such price
adjustment. Any such price adjustment will be made only if required by the
aggregate effect of (i) actual changes in the cost of labor to Bariatrix; (ii)
actual changes in the U.S./Canadian currency exchange rate; and (iii) actual
changes in the cost of the ingredients utilized in the Products. Bariatrix will
provide BFI with documentary evidence of the changes in such factors together
with the notice of the price adjustment. Any proposed price increase will not
exceed, on a percentage basis, the increase in the weighted average (as set
forth below) of these three factors since
*Confidential portions omitted and filed separately with the Commission.
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the date of the last price adjustment. The three factors shall be weighted
based upon their respective percentage contributions to the cost of the relevant
Product over the immediately preceding twelve months. Should BFI reject the
proposed price adjustment, then Bariatrix may cease production of the item
concerned, or, if requested by BFI, reformulate the item with the approval of
BFI to meet the requirements of economic manufacturing. Bariatrix agrees that
it will not increase the prices set forth on Schedule 3 at any time prior to May
31, 1998, unless it has experienced unforeseen and material increases in the
three factors listed above. In the event of a significant reduction in any of
the three factors listed above, Bariatrix will promptly notify BFI of such
reduction, and the parties agree to implement an equitable price reduction as
negotiated in good faith by the parties.
3.3 Payment terms will be [ * ] after the date of Bariatrix's invoice.
Such invoice will be dated no earlier than the date of the delivery of the
ordered Products as specified in Section 5.1. If BFI makes payment on an invoice
within ten (10) days of its date, BFI may take a [ * ] discount from the payment
amount on such invoice, provided that no other invoices to BFI are then overdue.
Bariatrix will provide invoices to BFI by overnight delivery. Interest will
accrue and be payable at a rate of 1% per month on any amounts not timely paid.
If BFI is more than fifteen (15) days late in the payment of any invoice,
Bariatrix shall have the right to cease production of the Products, and any
resulting delay in production or delivery shall be deemed the responsibility of
BFI. The foregoing sentence shall not apply to any amount where the amount due
is disputed in good faith by BFI, and BFI has paid in full the undisputed
portion of the invoice.
3.4 Bariatrix represents and warrants that the prices set forth herein do
not and will not violate any federal, state, county or municipal law or
regulation relative to price discrimination, price-fixing, or price
stabilization. Without limiting the foregoing, Bariatrix will not communicate
with any other supplier or potential supplier of Products to BFI with respect to
the pricing of the Products.
4. FINANCIAL INCENTIVE FOR TIMELY PERFORMANCE
------------------------------------------
4.1 The parties acknowledge that if Bariatrix is unable to supply ordered
Products in the expected time frame, BFI will be forced to incur additional
costs in the way of rush charges from other suppliers, additional shipping
charges, overtime, additional Product Packaging costs and other expenses. In
addition, BFI's relations with its customers and its ability to compete in its
markets may be damaged by any inability to supply Products. The parties further
acknowledge that it may be impossible, impracticable or burdensome for BFI to
quantify these expenses and potential damages.
4.2 Accordingly, as an additional incentive for Bariatrix to provide
ordered Products on a timely basis as required by Section 2, the parties hereby
agree that, if the number of Bars produced and delivered by Bariatrix in any
given week is less than 95% of the number of Bars specified in the latest BFI-
approved Production Schedule for such week, and if the production is not made up
within ten working days, then Bariatrix will rebate to
*Confidential portions omitted and filed separately with the Commission.
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BFI an amount equal to [ * ] multiplied by the number of Bars constituting
such underage.
4.3 If the number of cases of Mixes produced and delivered by Bariatrix in
any given week is less than 95% of the number of cases of Mixes specified in the
latest BFI-approved Production Schedule for such week, then Bariatrix will
rebate to BFI an amount equal to [ * ] multiplied by the number of cases
constituting such underage. In addition, if the number of packets of Mixes
produced and delivered by Bariatrix in any given week is less than 95% of the
number of packets of Mixes specified in the latest BFI-approved Production
Schedule for such week, and if the production is not made up within ten working
days, then Bariatrix will rebate to BFI an amount equal to [ * ] multiplied
by the number of packets constituting such underage. Such rebate will be paid
by Bariatrix to BFI (or, at Bariatrix's option, credited against amounts owed to
Bariatrix by BFI for subsequent Product orders) within ten (10) days after the
end of such week.
5. DELIVERIES
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5.1 The Products will be shipped F.O.B. the warehouse maintained by
Bariatrix for BFI at 2065 Shelburne Road, Shelburne, Vermont. The foregoing
notwithstanding, with respect to any Products (including Bars, Mixes and any
combination thereof) that may be shipped to a single destination west of
Denver, Colorado, designated by BFI, in a full truckload (meaning 20 to 24
pallets), the shipping costs for such Products will be paid by Bariatrix. Title
to the Products, and all risk of loss or damage, will transfer to BFI at the
F.O.B. point in Shelburne, Vermont.
5.2 The Products will be delivered free and clear of any and all liens,
security interests or encumbrances, except that Bariatrix will be entitled to
claim a lien and/or security interest on the Products to secure payment in full
of the amounts due in accordance with Section 3 hereof in addition to all other
rights and remedies to which it may otherwise be entitled. BFI hereby agrees to
execute promptly such financing statements and other documents as may be
necessary to perfect and protect such liens and security interest. The
foregoing notwithstanding, any security interest in the products will terminate
upon their sale by BFI in the ordinary course of BFI's business.
6. PRODUCT QUALITY; INSPECTION
---------------------------
6.1 Bariatrix represents and warrants that the Products will be free of
defects and fit for their intended purposes. Bariatrix further represents and
warrants that the Products will be manufactured to match the formulations,
nutritional profiles and names supplied by BFI in all material respects. During
the term of this Agreement, Bariatrix will have the right without prior
notification to BFI, to make minor processing adjustments to take advantage of
new technology deriving from Bariatrix's ongoing research program or to improve
manufacturing processes, providing that such changes do not modify the
ingredient listings, nutritional profiles, appearance, taste, texture, shelf
life, net weight, labeling requirements,
*Confidential portions omitted and filed separately with the Commission.
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or shape of the Products. In the event that such adjustments would result in
modification of any of these aspects, Bariatrix will notify BFI and refrain from
making the adjustments without BFI's prior written consent. Bariatrix further
represents that the Products will be represented by internal product codes
established, or to be established, for each Product.
6.2 Bariatrix represents and warrants that: all Products produced and
packaged for sale in the United States will be manufactured, stored and shipped
by Bariatrix in accordance with (i) all applicable standards of the U.S. Food
and Drug Administration, (ii) the requirements of the Fair Labor Standards Act
of 1938, as amended, and regulations and orders pursuant thereto issued by the
U.S. Department of Labor (to the extent applicable) and (iii) all other federal,
state, and local laws, rules and regulations; all Products produced and packaged
for sale in Canada will be manufactured, stored and shipped by Bariatrix in
accordance with (i) all applicable standards of the Canadian Department of
Agriculture, and (ii) all other Canadian national, provincial, and local laws,
rules and regulations; and all Products will be manufactured in accordance with
(i) prudent manufacturing practice, and (ii) the current Standard Operating
Procedures for Good Manufacturing Practice as maintained by Bariatrix.
Bariatrix further represents and warrants that all Products produced and
packaged for sale outside the United States or Canada will be manufactured to
meet any and all standards referenced on their labels or otherwise known to or
communicated to Bariatrix. BFI represents and warrants that the Products will
be maintained and stored by BFI in accordance with reasonable instructions
provided by Bariatrix and all applicable standards of the U.S. Food and Drug
Administration, and other federal, state, and local laws, rules and regulations
and prudent practice.
6.3 Upon delivery of the Products, BFI may inspect a representative sample
of the Products and reject the shipment if, by normal quality assurance
statistical methods, the shipment does not conform to the quality of previous
Products manufactured and sold by Bariatrix to BFI, provided that it notifies
Bariatrix of such rejection within three business days of the delivery of such
Products. Upon provision of such notice, such Products will become the property
of Bariatrix and will be promptly removed from BFI property at Bariatrix's sole
cost and expense. Bariatrix shall then promptly replace such nonconforming
Products with conforming Products at its sole cost and expense. Variations in
the organoleptic properties and/or analytical values attributable to
fluctuations in ingredient properties within specification ranges and outside
the control of Bariatrix will not be deemed sufficient ground for rejection of
the Products. However, nothing herein limits Bariatrix's warranties with
respect to the Products.
6.4 For each production run of any of the Products, Bariatrix will
promptly provide BFI with an accurate certificate of analysis which describes
(i) average weight, (ii) protein, carbohydrate and fat content, and (iii)
microbiological testing of the Product. Technical specification testing will be
based on randomized samples taken at the beginning, middle, and end of each
production run with the required numbers of Products per sample to give
sufficient statistical validity to guarantee that the composition of an order
meets specifications as defined within the norms applicable to the food industry
and with regard for
*Confidential portions omitted and filed separately with the Commission.
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limits of ingredient variation and analytical error. Bariatrix will also
provide BFI with four displays of the Products from each production run by
overnight delivery for BFI's own independent testing purposes.
6.5 During the term of this Agreement, BFI's representatives will have the
right to inspect the production facilities of Bariatrix (i) at any time, upon
twenty-four (24) hours prior notice to Bariatrix (unless Bariatrix provides BFI
with evidence reasonably satisfactory to BFI that Bariatrix is then producing
products that are subject to a confidentiality agreement between Bariatrix and a
third party), or (ii) at any time when Bariatrix is actually producing the
Products, without prior notice.
6.6 At all times during the term of this Agreement, Bariatrix will
maintain Kosher certification of its production facilities and processes.
7. PRODUCT PACKAGING
-----------------
BFI will provide the materials necessary for packaging the Products (the
"Product Packaging"). Prior to the printing of Product Packaging, BFI will
provide Bariatrix with samples of the Product Packaging to be used, including
the product labeling included therein, so that Bariatrix may evaluate the
material and design of the Product Packaging and review such labeling to make
sure the list of ingredients and the nutritional analysis thereon are accurate.
Bariatrix will notify BFI of its approval of the material and design of Product
Packaging, and of the accuracy of the labeling, within three (3) business days
of receipt, unless a longer period is approved by BFI in its sole discretion.
The parties acknowledge that Bariatrix has so reviewed BFI's existing Product
Packaging (including, without limitation, the labeling). Any change in the
Product Packaging is subject to Bariatrix's approval, provided, however, that
Bariatrix will not withhold such approval so long as the listing of ingredients
and nutritional analysis are accurate.
8. EXCLUSIVE PRODUCTION
--------------------
8.1 During the term of this Agreement, including any renewal or extension,
and for a period of one (1) year thereafter, Bariatrix will not produce or sell
in any sales venue, for any person or entity other than BFI, any nutritional
food or drink products using formulations similar to those of the Products.
Without limiting the foregoing, Bariatrix agrees not to produce or sell for any
person or entity other than BFI bars or mixes promoted or marketed as "40-30-30"
(meaning containing proportions of the three macronutrients as follows: 37% to
43% of calories from carbohydrate, 27% to 33% of calories from dietary fat and
27% to 33% of calories from protein) for sale in, or which are sold in, the
natural foods, sports, grocery, or convenience store markets or in any other
retail outlets worldwide. Production of 40-30-30 bars (i) under the trade name
BioZone for sale by Envion only in its existing network marketing program, (ii)
----
for Dr. Barry Sears for sales direct to the consumer only by either mail order
----
or through a line of weight loss centers, but no other retail outlet, or (iii)
to be sold as meal replacements in Canadian medical centers, but not at retail,
which
*Confidential portions omitted and filed separately with the Commission.
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meet the Canadian meal replacement requirements, does not violate this Section
so long as such bars do not utilize BFI's Proprietary Materials (as defined in
Section 9).
8.2 The provisions of Section 8.1 will not apply if BFI enters bankruptcy,
becomes insolvent, otherwise ceases to conduct their business, or if the
Agreement is terminated pursuant to Section 12.3 because of a breach by BFI.
8.3 Formulation, development and manufacture by Bariatrix of any future
Products for BFI, and any enhancements of existing Products, will be subject to
the same terms and conditions as set forth in Sections 8 and 9, unless the
parties agree to cover such future Products in a separate agreement.
8.4 Bariatrix will notify BFI promptly if any person or entity approaches
Bariatrix requesting that it produce any product which would use any trademark
of BFI (including, without limitation, "Balance(TM)," "Balance Bar(TM)," "The
Complete Nutritional Food(R)," "40-30-30 Naturally(TM)" or "40-30-30
Balance(TM)"), any variant of any such trademarks, or any name or mark similar
thereto.
9. PROPRIETARY MATERIALS; COORDINATION WITH NELLSON
------------------------------------------------
9.1 The parties acknowledge that the formulations and ingredient
specifications of the Products and all marketing plans, marketing and sales
data, financial information and customer lists and preferences of BFI
(collectively, "Proprietary Materials") constitute trade secrets of BFI. BFI
hereby grants Bariatrix a limited, non-exclusive license to use the Proprietary
Materials solely for the purposes set forth in this Agreement. Bariatrix agrees
not to use or disclose such Proprietary Materials (or any past formulations of
the Products), other than in accordance with this Agreement, without the written
consent of BFI except where required by law. Bariatrix will hold all such
Proprietary Materials in complete and strict confidence, and will maintain the
confidentiality of all such Proprietary Materials. In event of termination of
the Agreement, Bariatrix will return to BFI all Proprietary Materials and will
not keep any copies of such Proprietary Materials or any portions thereof,
except a single archival copy as may be required for any subsequent legal
inquiry or investigation.
9.2 Bariatrix acknowledges that BFI currently also contracts with Nellson
Candies, Inc. ("Nellson") to produce the Products and that BFI is free to seek
additional sources of supply without violating this Agreement. Bariatrix agrees
to cooperate with Nellson and other future suppliers, as reasonably requested by
BFI, in order to standardize the Products produced by Bariatrix, Nellson and
such future suppliers, if any, to comply with the formulations contained in the
Proprietary Materials. Such cooperation will include, without limitation, the
modification of Product formulations and ingredient specifications and the
reasonable coordination of production processes, in each case to the extent
requested by BFI, but will not require the disclosure of proprietary information
with respect to the productions processes of Bariatrix.
*Confidential portions omitted and filed separately with the Commission.
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10. INSURANCE
---------
Bariatrix will maintain products liability insurance with an insurer
satisfactory to BFI with at least a Ten Million Dollar ($10,000,000) limit on
liability, which policy will reflect BFI as an additional insured. Copies of
such policies and certificates for such insurance will be provided to BFI within
thirty (30) days of the date of execution hereof. Such policy will provide not
less than thirty (30) days' prior notice to BFI in the event of its
cancellation. Bariatrix will maintain such insurance throughout the term of
this Agreement.
11. EXPORT
------
At BFI's request, Bariatrix will use its reasonable efforts to cooperate
with BFI in connection with the satisfaction of all governmental and other
requirements with respect to the export of the Products including, without
limitation, applications for U.S. export licenses.
12. TERM
----
12.1 Unless earlier terminated pursuant to Section 12.2 or Section 12.3
below, this Agreement will continue until December 31, 2002. On December 31 of
each year during the term of this Agreement, commencing December 31, 1998, the
remaining term of this Agreement will be extended automatically for an
additional year, unless either party shall have given the other written notice
of non-renewal at least one hundred eighty (180) days prior to such December 31.
12.2 BFI may terminate this Agreement at any time, for any cause or
without cause, upon 360 days prior written notice to Bariatrix.
12.3 Either party may terminate this Agreement at any time upon the
occurrence of one or more of the following events with respect to the other
party (the "Defaulting Party"):
(a) failure to pay any amounts within sixty (60) days of when due;
(b) Subject to the provisions of Section 19, the breach of or default
under any material provision of this Agreement if the Defaulting Party has been
provided thirty (30) days' prior written notice of its breach or default and,
during such period, the Defaulting Party has failed to cure such breach or
default, or
(c) the bankruptcy or insolvency of the Defaulting Party.
Such termination will not abridge or limit the right of either party to seek
damages or other redress as a result of such breach.
*Confidential portions omitted and filed separately with the Commission.
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12.4 The provisions of Sections 6.1, 6.2, 8 (subject to Section 8.2), 9,
10, 13 and 17 will survive any termination of this Agreement.
13. INDEMNIFICATION
---------------
13.1 Each of the parties (the party indemnifying the other is hereinafter
referred to as the "Indemnifying Party") will indemnify, defend and hold the
other party (the "Indemnified Party") and its directors, officers, employees,
agents, attorneys, insurers, shareholders and affiliates (its "Related Persons")
harmless from and against any claims, damages, liabilities, costs and expenses,
including the reasonable fees and expenses of counsel (collectively, "Losses"),
resulting from any breach or violation of any representation, warranty, covenant
or agreement of such party set forth in this Agreement.
13.2 BFI will indemnify and hold Bariatrix and its Related Persons
harmless from and against any Losses arising out of or in connection with the
Proprietary Materials and the use and distribution of Product Packaging,
including, without limitation, any claim based on an alleged infringement of the
patent, trademark, or other intellectual property rights of another party
arising out of such items, except to the extent that (i) such Losses are
attributable to any negligence or misconduct of Bariatrix, (ii) such Losses
relate to the methods of production of the Products employed by Bariatrix; or
(iii) such Losses relate to the accuracy of the list of ingredients or
nutritional analysis set forth on the Product Packaging.
13.3 Bariatrix will indemnify and hold BFI and its Related Persons
harmless from and against any Losses arising out of or in connection with (i)
the manufacture, production or shipment of the Products, including, without
limitation, any product liability claims with respect to the Products, or (ii)
the accuracy of the list of ingredients and nutritional analysis set forth on
the Product Packaging.
13.4 The Indemnifying Party will have the right to defend any third party
claim, action or proceeding wherein the Indemnified Party and/or its Related
Persons are entitled to indemnification under the provisions of this Section;
provided, however, that the Indemnifying Party must conduct the defense of the
third party claim actively and diligently thereafter to preserve its rights in
this regard. The Indemnified Party and any Related Person may retain separate
co-counsel at its or their sole expense and participate in the defense of the
third party claim. Neither party will settle any such claim, action, or
proceeding without the other party's consent or approval, unless the proposed
settlement involves only the payment of money damages by the settling party and
does not impose an injunction or other equitable relief on the other party or
such Related Persons. The Indemnified Party will fully cooperate, at the
expense of the Indemnifying Party, with the Indemnifying Party in the defense or
settlement of any claim, action or proceeding subject to the provisions of this
Section.
14. ASSIGNMENT
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*Confidential portions omitted and filed separately with the Commission.
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Bariatrix will not transfer or assign its rights and obligations hereunder
without the prior written consent of BFI, other than as part of a Transaction
(as defined in Section 15).
15. CHANGE IN CONTROL OF BARIATRIX
------------------------------
15.1 Bariatrix agrees not to merge, transfer a controlling interest in
its capital stock, or transfer all or substantially all of its assets (other
than in the ordinary course of its business), and _____________________ (the
"Bariatrix Shareholders") agree not to transfer all or any substantial portion
of the capital stock of Bariatrix, without complying with Section 15.2. Any of
the above transactions is referred to herein as a "Transaction."
15.2 Prior to a transfer referenced in Section 15.1, Bariatrix or the
Bariatrix Shareholders, as appropriate, must first give written notice of such
intent to BFI (a "Transfer Notice"). The Transfer Notice shall be accompanied
by a copy of any proposed transfer agreement, and must name the proposed
transferee, describe its business background, and specify the terms of the
transfer, including price and payment terms (collectively the "Offered Terms").
For thirty (30) days following delivery of the Transfer Notice, BFI shall have
the option to enter into a binding agreement to purchase the assets or capital
stock of Bariatrix on the Offered Terms as set forth in the Transfer Notice. If
BFI does not exercise this option within the specified thirty-day period, then
the party transmitting the Transfer Notice may complete the transaction
described therein on the Offered Terms (or terms more favorable to the seller
than the Offered Terms), provided that such transaction is consummated within
sixty (60) days after the end of such thirty-day period. The right of first
refusal contained herein shall thereupon terminate. If the transaction is not
contemplated within this sixty-day period, then the transferring party must
again comply with the rights of first refusal contained in this Section prior to
any such transfer.
15.3 This Agreement will not be terminated, limited or modified in any
way by a Transaction. Bariatrix and the Bariatrix Shareholders will notify any
other party to a Transaction of the terms of this Section 15 prior to entering
into the Transaction. In addition, if requested by BFI, Bariatrix will cause
such other party to the Transaction to sign a written agreement assuming all of
the responsibilities of Bariatrix hereunder.
16. GOVERNING LAW
-------------
This Agreement will be governed by the Uniform Commercial Code and other
applicable laws of the State of California.
*Confidential portions omitted and filed separately with the Commission.
12
<PAGE>
17. DISPUTE RESOLUTION
------------------
In the event of a dispute arising out of or relating to this Agreement that
the parties cannot resolve between themselves without assistance, the Parties
agree to attempt to resolve such dispute through third-party mediation. Any
such dispute that is not resolved within thirty (30) days after a request for
mediation by either of the parties, will be settled by arbitration to be held in
Santa Barbara, California, in accordance with the then-applicable rules of the
American Arbitration Association or any successor thereto. If the parties shall
not have agreed on a mutually satisfactory arbitrator within ten (10) days of
the request of any party for arbitration hereunder, the President of the
American Arbitration Association will forthwith appoint an arbitrator. The
arbitrator shall be a person experienced in the specialty foods industry with no
prior affiliation with either party. The arbitrator may grant injunctions or
other relief in such dispute, but may not award punitive or exemplary damages.
The decision of the arbitrator will be final, conclusive and binding on the
parties to the arbitration. Judgment may be entered on the arbitrator's decision
in any court having jurisdiction, and the parties hereby irrevocably consent to
the jurisdiction of the United States District Court for the Central District of
California, or if that court has no jurisdiction, to the California Superior
Court in and for the County of Santa Barbara for this purpose. The arbitrator
will award to the prevailing party on each material issue that party's
reasonable attorney's fees and cost. The term "prevailing party" shall mean
that party which shall have substantially prevailed on a material issue in
dispute. As to distinct, severable issues in dispute, the arbitrator may decide
which party is the prevailing party. Accordingly, the arbitrator will have the
discretion to award attorney's fees to both parties, in amounts to be determined
by the arbitrator, if the arbitrator shall determine that as to separate and
distinct material issues having a bearing on an entitlement to relief each of
the parties shall have been a prevailing party. Application for cost and
expenses shall be substantiated with documentary verification. The actual cost
of the arbitration itself will be borne by the losing party or will be allocated
between the parties in such proportions as the arbitrator decides if there are
distinct, severable issues in dispute and the arbitrator determines that each
party has to some extent, been a losing party.
18. FINANCIAL INFORMATION
---------------------
Each party agrees to provide the other party with the following financial
information: (i) such party's audited annual financial statements, to be
provided within 90 days after the close of each fiscal year; and (ii) such
party's unaudited
*Confidential portions omitted and filed separately with the Commission.
13
<PAGE>
quarterly balance sheet, to be provided within 45 days after the close of each
fiscal quarter.
19. FORCE MAJEURE
-------------
In the event that either party shall be delayed, hindered in or prevented
from the performance of any act required hereunder, by reason of war, riots,
insurrection, strikes, labor troubles, failure of power, or the act, failure to
act or default of the other party, or any other reason beyond such party's
reasonable control, then performance of such act will be excused for the period
of the delay and the period for the performance of any such act will be extended
for a period equivalent to the period of such delay.
20. INDEPENDENT CONTRACTOR STATUS
-----------------------------
This Agreement does not in any way create the relationship of joint
venture, partnership, or principal and agent between Bariatrix and BFI. The
parties have entered into this Agreement solely as independent contractors.
Neither party will have any right or authority to assume or otherwise create any
obligation or responsibility, express or implied, on behalf of or in the name of
the other party, or to bind the other party in any manner or thing whatsoever,
without the other party's prior written consent.
21. NOTICES
-------
Any notice or other communication hereunder must be given in writing and
either (a) delivered in person, (b) sent by recognized messenger or next-day
courier service, (c) transmitted by telex, telefax or telecommunications
mechanism, provided that any notice so given is also mailed as provided in
clause (d), or (d) mailed by first class mail, postage prepaid, as follows:
If to BFI: Bio Engineered Foods, Inc.
1015 Mark Avenue
Carpinteria, CA 93013
Attention:
Telecopy number: 805-566-0235
With a copy to: Thomas N. Harding, Esq.
Seed, Mackall & Cole
P.O. Box 2578
Santa Barbara, CA 93120
Telecopy number: 805-962-1404
If to Bariatrix: Bariatrix International, Inc.
40 Allen Road
South Burlington, VT 05403
Attention: Mr. Rod Egger
*Confidential portions omitted and filed separately with the Commission.
14
<PAGE>
Telecopy number: 802-862-9306
With a copy to: Peter S. Erly, Esq.
Gravel and Shea
P.O. Box 369
Burlington, VT 05402-0369
Telecopy number: 802-658-1456
or to such other address or to such other person as either party shall have last
designated by such notice to the other party. Each such notice or other
communication shall be effective (i) if given by telecommunication, when
transmitted to the applicable number so specified in (or pursuant to) this
Section 21 and an appropriate answer back is received, (ii) if given by mail,
three days after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other means,
when actually delivered at such address.
22. HEADINGS
--------
Any headings used herein are for convenience and reference only and will
not be deemed to have any substantive effect.
23. ENTIRE AGREEMENT; CONSTRUCTION
------------------------------
23.1 This Agreement and the instruments referred to herein embody the
entire agreement and understanding between the parties relating to the subject
matter hereof and may not be amended, waived, or discharged except by an
instrument in writing executed by the party against whom enforcement of such
amendment, waiver or discharge is sought. All schedules attached are by this
reference incorporated herein. This Agreement supersedes the Prior Agreement in
all respects.
23.2 Unless otherwise agreed by both parties in writing, this
Agreement applies to all purchase orders, sales acknowledgments and other
documents of purchase which BFI or Bariatrix may deliver with respect to the
Products after the date hereof. The terms and conditions of this Agreement will
apply to any such document, whether or not this Agreement or its terms and
conditions are expressly referenced in such document.
23.3 If any claim is made by a party relating to any conflict,
omission or ambiguity in the provisions of this Agreement, no presumption or
burden of proof or persuasion will be implied because this Agreement was
prepared by or at the request of any party or its counsel, notwithstanding any
statute or rule of law to the contrary.
*Confidential portions omitted and filed separately with the Commission.
15
<PAGE>
23.4 Whenever in this Agreement a person is permitted or required to make
a decision or determination (x) in its "discretion" or "sole discretion" or
under a grant of similar authority or latitude, the person will be entitled to
consider any interests and factors as it desires, including its own interests;
(y) in it "good faith," in a "commercially reasonable" manner, "reasonably" or
under another express standard, the person will act under that express standard
and will not be subject to any other or different standards imposed by this
Agreement or otherwise; or (z) if no standard is expressed, the person will
apply relevant provisions of this Agreement in making the decision or
determination.
24. NO WAIVER
---------
The failure of either party to enforce at any time any of the provisions
hereof (including, without limitation, any inspection rights) will not be
construed to be a waiver of such provision, of any other provision, or of the
right of such party thereafter to enforce any such provision or other provision.
25. SECURITIES FILINGS
------------------
The parties agree that BFI will include a copy of this Agreement as an
exhibit to one or more filings with the Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended. BFI will also describe the terms of this Agreement in
one or more such filings. Any such filings will be available to the general
public. Upon request by Bariatrix, BFI will use its reasonable efforts to
obtain confidential treatment from the SEC for key provisions of the Agreement
to the extent feasible, as determined by BFI in consultation with its securities
counsel.
(SIGNATURES ON FOLLOWING PAGE)
*Confidential portions omitted and filed separately with the Commission.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused
this Agreement to be executed as of the date first set forth above.
BARIATRIX INTERNATIONAL, INC. BIO-ENGINEERED FOODS, INC
By:___________________________ By:___________________________
Name:_________________________ Name:_________________________
Title:________________________ Title:________________________
By:___________________________ By:___________________________
Name:_________________________ Name:_________________________
Title:________________________ Title:________________________
BARIATRIX SHAREHOLDERS
Accepted and agreed as to Section 15:
_____________________________ Share ownership:______________
Name:
_____________________________ Share ownership:______________
Name:
_____________________________ Share ownership:______________
Name:
*Confidential portions omitted and filed separately with the Commission.
17
<PAGE>
SCHEDULE 1
BARS CURRENTLY PRODUCED
[ * ]
*Confidential portions omitted and filed separately with the Commission.
18
<PAGE>
SCHEDULE 2
[intentially omitted in original document]
19
<PAGE>
SCHEDULE 3
PRICES
[ * ]
*Confidential portions omitted and filed separately with the Commission.
20
<PAGE>
EXHIBIT 10.3
PRODUCTION AGREEMENT
--------------------
THIS PRODUCTION AGREEMENT (the "Agreement") is made and entered into as of
March 31, 1998, by and between NELLSON CANDIES, INC., a Delaware corporation
("Nellson") and THE BALANCE BAR COMPANY, a Delaware corporation ("BBC").
RECITALS
A. Nellson is in the business of producing nutritional food products.
BBC is in the business of distributing such products.
B. Nellson has produced certain products for distribution by BBC under an
agreement dated October 7, 1996 (the "Prior Agreement").
C. The parties wish to provide for the on-going production of products by
Nellson for BBC on the terms and conditions set forth herein.
AGREEMENT
---------
NOW, THEREFORE, the parties hereto, for good and sufficient consideration,
the receipt of which is hereby acknowledged, and intending to be legally bound,
do hereby agree as follows:
1. DESCRIPTION OF PRODUCTS
-----------------------
The products to be produced by Nellson under this Agreement for sale to BBC
(the "Products") shall consist of both of the following:
1.1 The nutritional bars currently produced by Nellson to match the
nutritional profiles and names provided by BBC, as identified on Schedule 1 to
this Agreement, including line extensions (both flavors and sizes) of existing
products covered under this Agreement, and any new flavors or sizes thereof
("Bars"). When there are quantities of bars mentioned in this Agreement to
satisfy production, exclusivity or purchase requirements, the quantity will
include the existing formulation of Balance Bars, all flavors; Mini-Bars, all
flavors, equal to 2/3 of a bar; and New Era Bars, all flavors, equal to one bar.
1.2 Any new or additional products mutually agreed to in writing by the
parties hereto.
2. PRODUCTION QUANTITIES
---------------------
*Confidential portions omitted and filed separately with the Commission.
1
<PAGE>
2.1 During the term of this Agreement (as set forth in Section 12), BBC
will provide to Nellson a purchase order for the Products it wishes to purchase
during the period stated in such purchase order. Subject to the provisions of
Section 24 below, Nellson will produce and deliver such Products in accordance
with the terms and conditions of the purchase order, with the proviso that a
variation of plus or minus five percent (5%) from the purchase order in the
total quantity of the ordered Products delivered will be invoiced by Nellson and
accepted by BBC based on the actual amount delivered. The actual production and
delivery of Products will be coordinated pursuant to the production scheduling
process described in Section 24 below.
2.2 During each calendar year ending on or before December 31, 2002 during
which this Agreement is in effect, BBC will purchase from Nellson, at a minimum,
the lesser of:
2.2.1 [ * ] of BBC's annual production requirements for Bars;
or
2.2.2 the quantities set forth below, stated in millions of Bars, in
the years indicated.
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
[ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
</TABLE>
The parties agree that BBC has met its requirement for 1997.
2.3 In return for the above stated guaranteed purchases, Nellson agrees to
produce not less than [ * ] Bars per calendar month (and not less than [
* ] Bars per week). Upon 30 days' prior written notice by BBC to Nellson,
Nellson will use best efforts to increase its minimum monthly production rate of
Bars to [ * ] Bars. Nellson will use all commercially reasonable efforts
to fill orders in excess of the monthly minimum requirement set forth in this
Section. The quantities of the Bars produced by Nellson in any month will be in
the respective flavors ordered by BBC, except for reasonable and minor
variations necessitated by production efficiencies. BBC will not be required to
purchase any minimum quantities of bars from Nellson after December 31, 2002.
2.4 Production of the Products will be coordinated in accordance with the
following:
2.4.1 Prior to 11:00 a.m. Pacific Time on each Monday during the term
of this Agreement, BBC will provide Nellson with a written rolling production
schedule with respect to the production and delivery of Products ordered by BBC
(each a "Production Schedule"). Each Production Schedule will include BBC's
estimated production requirements for the following twelve (12) week period.
This will include a firm production commitment
*Confidential portions omitted and filed separately with the Commission.
2
<PAGE>
for the first four (4) weeks and a non-binding estimate of BBC's requirements
for the remaining weeks. These quantities will be expressed in total cases.
Additionally, the Production Schedule will specify the flavors and quantities
(by indicating the total number of cases for each flavor per week) of production
and delivery of the Products for:
(A) the workweek that begins on the following Monday ("Week 2");
and
(B) the workweek that begins on the second following Monday
("Week 3").
On the business day following the delivery of the Production
Schedule, Nellson will deliver to BBC a tentative schedule of dates and
quantities (by indicating the number of shifts for each date) of production and
delivery of the Products for Week 2 and Week 3. Specific flavors and pack-outs
will be provided to Nellson by BBC for Week 2 by 5:00 p.m. Pacific Time on the
Thursday following each Monday that the Production Schedule is made.
2.4.2 The schedule for the first week is absolutely frozen. If BBC
requests changes to Week 2, Nellson will use its best efforts to honor such
requests, but is not obligated to do so. For Week 3 and the following weeks,
Nellson will accommodate changes with respect to flavors and/or pack-outs until
they move into Week 2 or Week 1.
2.4.3 If Nellson fails to meet the quantities and time schedule set
forth in a Production Schedule, Section 4 hereof will apply. In addition, BBC
may cancel the remaining unproduced portion of the relevant purchase order if
such delay or quantities continues for more than seven (7) working days.
2.5 Nellson will provide BBC with production quantity figures on the day
following each production run. All Products will be shipped to an outside BBC
consignment warehouse within twenty-four (24) hours of production unless
requested by BBC to be shipped directly to a BBC customer, held for pick-up by a
BBC customer or shipped directly to BBC's own warehouse. Nellson agrees to
develop capability within a reasonable period of time to allow BBC to have
twenty-four (24) hour electronic access to inventory levels of Products and
packaging materials at Nellson either via access to databases maintained by
Nellson or other mutually agreed upon procedure.
2.6 Nellson will produce all Products at Nellson's facility in Irwindale,
California.
2.7 Nellson covenants and agrees to maintain at all times sufficient
inventories of ingredients to meet its obligations hereunder. Nellson will
maintain in its warehouse at all times sufficient Product Packaging (as defined
in Section 7) for three weeks of production
*Confidential portions omitted and filed separately with the Commission.
3
<PAGE>
(based on [ * ] Bars per week). In addition, Nellson will warehouse up to an
additional 80 pallets of Product Packaging for BBC in Nellson's warehouse.
3. PRICES; PAYMENT TERMS
---------------------
3.1 The initial price schedule for the Products is set forth on Schedule
3, and is exclusive of the costs of the Product Packaging, which will be
provided by BBC. The price for any Product includes Nellson's cost of (i)
inserting the Products into the Product Packaging, and (ii) usual domestic
packing of good quality. The parties agree that such usual domestic packing
includes, without limitation, putting shrink wrap on individual boxes of the
Products, placing such individual boxes in corrugated cardboard containers with
shipping labels attached, and putting such containers on pallets. Any other
special packing, boxing, crating, or cartage which is required by BBC will be
for BBC's account unless specifically agreed to in writing between the parties.
3.2 Nellson will have the right to adjust the prices to be paid for the
Products hereunder by providing to BBC a notice of such a price adjustment not
less than seventy-five (75) days prior to the proposed effective date of such
price adjustment. Any such price adjustment will be made only if required by
the aggregate effect of (i) actual changes in the cost of labor and variable
overhead; and (ii) actual changes in the cost of the ingredients utilized in the
Products.
A price adjustment will be proposed only if the aggregate effect of the
foregoing changes is greater than or equal to a five percent (5%) increase over
the previous base used for pricing for ingredients, labor and variable overhead.
The basis to be used for the price adjustment will be a combination of: (i) the
new actual cost of labor and variable overhead per Bar; and (ii) the new actual
cost of ingredients per Bar. The new adjusted price per Bar will be not greater
than the new actual combined cost per Bar multiplied by a fraction, the
numerator of which is the previous price per Bar, and the denominator of which
is the prior combined cost per Bar. Nellson will provide BBC with documentary
evidence of the changes in such factors together with the notice of the price
adjustment. Should BBC reject the proposed price adjustment, then Nellson may
cease production of the item concerned, or, if requested by BBC, reformulate the
item with the approval of BBC to meet the requirements of economic
manufacturing. In the event of a significant reduction (at least 5%) in either
of the two factors listed above, Nellson will promptly notify BBC of such
reduction, and the parties agree to implement an equitable price reduction as
negotiated in good faith by the parties.
3.3 Payment terms will be [ * ] after the date of Nellson's invoice.
Such invoice will be dated on or after the earlier of (i) the date the relevant
Products were shipped in accordance with Section 25, and (ii) the date that is
one day after the productions of such Products. If BBC makes payment on an
invoice within fifteen (15) days of its date, BBC
*Confidential portions omitted and filed separately with the Commission.
4
<PAGE>
may take a [ * ] discount from the payment amount on such invoice. Nellson will
provide invoices to BBC by overnight delivery. Interest will accrue and be
payable at a rate of 1% per month on any amounts not timely paid.
3.4 Nellson represents and warrants that the prices set forth herein do
not and will not violate any federal, state, county or municipal law or
regulation relative to price discrimination, price-fixing, or price
stabilization.
4. FINANCIAL INCENTIVE FOR TIMELY PERFORMANCE
------------------------------------------
4.1 The parties acknowledge that if Nellson is unable to supply ordered
Products in the expected time frame, BBC will be forced to incur additional
costs in the way of rush charges from other suppliers, additional shipping
charges, overtime, additional Product Packaging costs and other expenses. In
addition, BBC's relations with its customers and its ability to compete in its
markets may be damaged by any inability to supply Products. The parties further
acknowledge that it may be impossible, impracticable or burdensome for BBC to
quantify these expenses and potential damages.
4.2 Accordingly, as an additional incentive for Nellson to provide ordered
Products on a timely basis as required by Section 2, the parties hereby agree
that, if the number of Bars produced and delivered by Nellson in any given week
is less than 95% of the number of Bars specified in the latest BBC-approved
Production Schedule for such week, then Nellson will rebate to BBC an amount
equal to [ * ] multiplied by the number of Bars constituting such
underage. Such rebate will be waived if production is made up within seven (7)
calendar days.
5. DELIVERIES
----------
5.1 The Products will be shipped F.O.B. Nellson's docks in Irwindale,
California. Title to the Products, and all risk of loss or damage, will transfer
to BBC upon proper shipment.
5.2 The Products will be delivered free and clear of any and all liens,
security interests or encumbrances, except that Nellson will be entitled to
claim a lien and/or security interest on the Products to secure payment in full
of the amounts due in accordance with Section 3 hereof in addition to all other
rights and remedies to which it may otherwise be entitled. BBC hereby agrees to
execute promptly such financing statements and other documents as may be
necessary to perfect and protect such liens and security interest. The
foregoing notwithstanding, any security interest in the products will terminate
upon their sale by BBC in the ordinary course of BBC's business.
6. PRODUCT QUALITY; INSPECTION
---------------------------
*Confidential portions omitted and filed separately with the Commission.
5
<PAGE>
6.1 Nellson represents and warrants that the Products will be free of
defects and fit for their intended purposes. Nellson further represents and
warrants that the Products will be manufactured to match the formulations,
nutritional profiles and names supplied by BBC in all material respects. During
the term of this Agreement, Nellson will have the right without prior
notification to BBC, to make minor processing adjustments to take advantage of
new technology deriving from Nellson's ongoing research program or to improve
manufacturing processes, providing that such changes do not modify the
ingredient listings, nutritional profiles, appearance, taste, texture, shelf
life, net weight, labeling requirements, or shape of the Products. In the event
that such adjustments would result in modification of any of these aspects,
Nellson will notify BBC and refrain from making the adjustments without BBC's
prior written consent. Nellson further represents that the Products will be
represented by internal product codes established, or to be established, for
each Product.
6.2 Nellson represents and warrants that: all Products produced and
packaged for sale in the United States will be manufactured, stored and shipped
by Nellson in accordance with (i) all applicable standards of the Food and Drug
Administration, (ii) the requirements of the Fair Labor Standards Act of 1938,
as amended, and regulations and orders pursuant thereto issued by the U.S.
Department of Labor (to the extent applicable) and (iii) all other federal,
state, and local laws, rules and regulations; and all Products will be
manufactured in accordance with the current Standard Operating Procedures for
Good Manufacturing Practice as maintained by Nellson, including HACCP. Nellson
further represents and warrants that all Products produced and packaged for sale
outside the United States will be manufactured to meet any and all standards
known to or communicated to Nellson. BBC represents and warrants that the
Products will be maintained and stored by BBC in accordance with reasonable
instructions provided by Nellson and all applicable standards of the Food and
Drug Administration, and other federal, state, and local laws, rules and
regulations and prudent practice.
6.3 Products will be manufactured and delivered in accordance with BBC
approved Product specifications. Upon delivery of the Products, BBC may inspect
a representative sample of the Products and reject the shipment if such samples
do not meet the requirements of the Product Specifications. Such rejection of
Product must be formally communicated to Nellson within three (3) business days
of Product receipt. Upon receipt of such notice, Nellson will initiate the
steps necessary to credit BBC for the price of the Product, retake ownership of
the Product and remove the Product from BBC property at Nellson's expense.
Nellson shall then replace such nonconforming Products with conforming Products
within seven (7) working days, contingent upon availability of ingredients and
packaging materials. If ingredients or packaging materials are not available
immediately to replace such Products, both BBC and Nellson will use all
available means to expedite the materials for the production of the replacement
Products. The replacement Products will have first priority as soon as materials
are available. Variations in the organoleptic properties and/or analytical
values attributable to fluctuations in ingredient properties within
specification ranges and
*Confidential portions omitted and filed separately with the Commission.
6
<PAGE>
outside the control of Nellson will not be deemed sufficient ground for
rejection of the Products. However, nothing herein limits Nellson's warranties
with respect to the Products.
6.4 For every flavor that is run in any week, Nellson will promptly
provide BBC with an accurate certificate of analysis which describes (i) average
weight, (ii) protein, carbohydrate and fat content, and (iii) microbiological
testing of the Product. Samples will be composites of Bars taken from the
beginning, middle, and end of the production runs with the required numbers of
Products per sample to give sufficient statistical validity to guarantee that
the composition of a week's production meets specifications as defined within
the norms applicable to the food industry and with regard for limits of
ingredient variation and analytical error. Nellson will also provide BBC with
four displays of the Products from each production run by overnight delivery
for BBC's own independent testing purposes. Nellson shall bill BBC for the cost
of such Products, but shall bear the cost of shipping such Products to BBC.
6.5 During the term of this Agreement, BBC's representatives will have the
right to inspect the production facilities of Nellson (i) at any time, upon
twenty-four (24) hours prior notice to Nellson, or (ii) at any time when Nellson
is actually producing the Products, without prior notice, at any time during
normal daytime business hours.
6.6 At all times during the term of this Agreement, Nellson will maintain
Kosher certification of its production facilities and processes when running
BBC's products.
7. PRODUCT PACKAGING
-----------------
BBC will provide the materials necessary for packaging the Products (the
"Product Packaging"). Prior to the printing of Product Packaging, BBC will
provide Nellson with the product labeling included therein so that Nellson may
review such labels. The parties acknowledge that Nellson has so reviewed BBC's
existing Product Packaging. Any change in the Product Packaging is subject to
Nellson's approval, provided, however, that Nellson will not withhold such
approval so long as the listing of ingredients and nutritional analysis are
accurate.
8. EXCLUSIVE PRODUCTION
--------------------
8.1 During the term of this Agreement, including any renewal or extension,
Nellson will not produce or sell in any sales venue, for any person or entity
other than BBC, any nutritional food products using formulations substantially
similar to those of the Products, as long as BBC purchases, on a calendar year
basis, the quantities of Bars noted below in the years indicated:
*Confidential portions omitted and filed separately with the Commission.
7
<PAGE>
<TABLE>
<CAPTION>
Year Quantity of Bars
---- ----------------
<S> <C>
1997 [ * ]
1998 [ * ]
1999 [ * ]
2000 [ * ]
2001 [ * ]
2002 [ * ]
</TABLE>
The above stated quantities guarantee BBC exclusive production by Nellson
and are not to be considered a procurement guarantee, and are separate from the
quantities required for BBC to obtain ownership of Product formulations or to
obtain guaranteed production quantities. The parties agree that BBC has met the
requirements for 1997.
For the purposes of this section, "substantially similar" formulations are
defined as formulations: (i) having a similar macronutrient composition to 40-
30-30 proportion of calories derived from carbohydrates, dietary fat and
protein, respectively, or (ii) which are promoted as "40-30-30" or "Zone
Favorable" (or words of similar import) on the packaging.
8.2 BBC acknowledges that Nellson currently produces a bar that utilizes a
formulation substantially similar to those of the Products (the "Grandfathered
Bar") for one existing customer other than BBC (the "Grandfathered Customer").
BBC agrees that, notwithstanding the foregoing provisions of Section 81, Nellson
may continue to produce the Grandfathered Bar (but no other nutritional food
products using formulations substantially similar to those of the Products) for
the Grandfathered Customer.
8.2.1 Under its contract with the Grandfathered Customer, Nellson is
currently prohibited from identifying the Grandfathered Customer to BBC by name.
Concurrently with the execution of this Agreement, Nellson has placed the name
of the Grandfathered Customer and of the Grandfathered Bar (including flavors)
into a sealed envelope, countersigned by officers or attorneys of both Nellson
and BBC, and has delivered such envelope to _______________, Nellson's counsel.
Nellson has instructed its counsel to hold such envelope pursuant to the terms
of this Agreement.
8.2.2 If BBC provides Nellson with documentary evidence indicating
that Nellson is violating Section 81 (including the product name and distributor
name), Nellson shall notify BBC in writing within three days of whether or not
Nellson takes the position that it is not in violation of such Section on the
grounds that the production is of the Grandfathered Bar for the Grandfathered
Customer. If Nellson does not so notify BBC within such three-day period, then
Nellson shall thereafter be estopped from claiming any exception under this
Section with respect to such claimed violation. If Nellson does claim the
exception provided by this Section, Nellson shall cause its counsel to produce
the sealed envelope within three days after BBC's demand (and such counsel is
hereby so directed). The sealed envelope will then be opened in the presence of
officers or attorneys of both Nellson and BBC. If the
*Confidential portions omitted and filed separately with the Commission.
8
<PAGE>
identity of the product and customer in the sealed envelope match the
product name and distributor alleged by BBC to be the cause of the violation,
then no violation of Section 81 shall be deemed to have occurred. In any other
case, BBC may pursue all remedies available to it under this Agreement.
8.2.3 In the event of any change in the control of the Grandfathered
Customer, whether by merger, sale of stock or sale of assets, the exception from
Section 81 provided hereby shall apply only to the currently-produced flavors of
the Grandfathered Bars.
8.3 The provisions of Section 81 will not apply if BBC enters bankruptcy,
becomes insolvent, otherwise ceases to conduct their business, or if the
Agreement is terminated pursuant to Section 123 because of a breach by BBC.
8.4 Formulation, development and manufacture by Nellson of any future
Products for BBC, and any enhancements of existing Products, will be subject to
the same terms and conditions as set forth in Sections 8 and 9, unless the
future Products are covered by a separate agreement.
8.5 Nellson will notify BBC promptly if any person or entity approaches
Nellson requesting that it produce any product which would use any trademark of
BBC (including, without limitation, "Balance," "Balance Bar," "The Complete
Nutritional Food(R)," "40-30-30 Naturally" or "40-30-30 Balance"), any variant
of any such trademarks, or any name or mark similar thereto.
9. PROPRIETARY MATERIALS; COORDINATION WITH NELLSON
------------------------------------------------
9.1 The parties acknowledge that the formulations and ingredient
specifications of the Products and all marketing plans, marketing and sales
data, financial information and customer lists and preferences of BBC
(collectively, "Proprietary Materials") constitute trade secrets of BBC. BBC
hereby grants Nellson a limited, non-exclusive license to use the Proprietary
Materials solely for the purposes set forth in this Agreement. Nellson agrees
not to use or disclose such Proprietary Materials (or any past formulations of
the Products), other than in accordance with this Agreement, without the written
consent of BBC except where required by law. Nellson will hold all such
Proprietary Materials in complete and strict confidence, and will maintain the
confidentiality of all such Proprietary Materials. In event of termination of
the Agreement, Nellson will return to BBC all Proprietary Materials and will not
keep any copies of such Proprietary Materials or any portions thereof, except a
single archival copy as may be required for any subsequent legal inquiry or
investigation.
9.2 The parties acknowledge and agree that Nellson has transferred to BBC
all of the ownership rights to product formulations heretofore used by Nellson
with respect to the
*Confidential portions omitted and filed separately with the Commission.
9
<PAGE>
Products. As consideration for this transfer, BBC guarantees to purchase from
Nellson, on a yearly basis for a four-year period, the following quantities of
Bars, stated in millions:
<TABLE>
<CAPTION>
1997 1998 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Annual: [ * ] [ * ] [ * ] [ * ]
Semi-Annual: [ * ] [ * ] [ * ] [ * ]
</TABLE>
This yearly purchase commitment is guaranteed for each of the first three years
shown above. The year 2000 quantity requirement of [ * ] Bars will be
reduced by the cumulative amount of Bars purchased in the years 1997 through
1999 in excess of the [ * ] bar requirement for those three years. Half-size
25-gram Bars will count as 2/3 of a Bar in the satisfaction of this purchase
requirement. If BBC falls short of the purchase quantity, if this agreement is
terminated prior to January 1, 2001, or if for any reason BBC otherwise decides
to buy out its requirement under this Section prior to the purchase of [ * ]
Bars through the year 2000, then the parties agree to negotiate such buyout in
good faith and for reasonable consideration. If BBC terminates the contract
with a 360-day notice effective from January 1, 2000 onward, ownership of the
formula will be retained by BBC as long as BBC has met the total purchase
requirement of [ * ] bars between 1997 and 2000 (as detailed above) and
BBC purchases the lesser of [ * ] of its total Bar requirement or [
* ] bars during the final year of this Agreement. Transfer of ownership
rights for any new type, concept, or format of bar not in existence at the time
of signing of this agreement will be covered in a separate agreement. All Bars
purchased by BBC during 1997 will be counted against the above requirements even
though purchased prior to the execution of this Agreement.
9.3 Nellson acknowledges that BBC currently also contracts with Bariatrix
International, Inc. ("Bariatrix") to produce the Products and that BBC is free
to seek additional sources of supply without violating this Agreement. Nellson
agrees to cooperate with Bariatrix and other future suppliers, as reasonably
requested by BBC, in order to standardize the Products produced by Nellson,
Bariatrix and such future suppliers, if any, to comply with the formulations
contained in the Proprietary Materials. Such cooperation will include, without
limitation, the modification of Product formulations and ingredient
specifications and the reasonable coordination of production processes,
exclusive of capital investment, in each case to the extent requested by BBC.
If such requests are deemed to require capital investment, both parties agree to
negotiate in good faith the obligations of each for such investment.
10. INSURANCE
---------
Throughout the term of this Agreement Nellson will maintain products
liability insurance with an insurer satisfactory to BBC with at least a Ten
Million Dollar ($10,000,000) limit on liability, which policy will reflect BBC
as an additional insured. Copies of such
*Confidential portions omitted and filed separately with the Commission.
10
<PAGE>
policies and certificates for such insurance will be provided to BBC within
thirty (30) days of the date of execution hereof. Such policy will provide not
less than thirty (30) days' prior notice to BBC in the event of its
cancellation. If this agreement is terminated, Nellson agrees to maintain
insurance coverage in force for all of the products produced by Nellson under
this agreement and that are still in the marketplace or in BBC inventory.
11. EXPORT
------
At BBC's request, Nellson will cooperate with BBC in connection with the
satisfaction of all governmental and other requirements with respect to the
export of the Products including, without limitation, applications for U.S.
export licenses.
12. TERM
----
12.1 Unless earlier terminated pursuant to Section 122 or Section 123
below, this Agreement will continue until December 31, 2002. On December 31 of
each year during the term of this Agreement, commencing December 31, 1998, the
remaining term of this Agreement will be extended automatically for an
additional year, unless either party shall have given the other written notice
of non-renewal at least one hundred eighty (180) days prior to such December 31.
12.2 BBC may terminate this Agreement at any time, for any cause or without
cause, upon 360 days prior written notice to Nellson.
12.3 Either party may terminate this Agreement at any time upon the
occurrence of one or more of the following events with respect to the other
party (the "Defaulting Party"):
(a) failure to pay any amounts within sixty (60) days of when due;
(b) Subject to the provisions of Section 19, the breach of or default
under any material provision of this Agreement if the Defaulting Party has been
provided thirty (30) days' prior written notice of its breach or default and,
during such period, the Defaulting Party has failed to cure such breach or
default, or
(c) the bankruptcy or insolvency of the Defaulting Party.
Such termination will not abridge or limit the right of either party to seek
damages or other redress as a result of such breach.
12.4 The provisions of Sections 61, 62, 8 (subject to Section 83), 9, 10,
13 and 17 will survive any termination of this Agreement.
*Confidential portions omitted and filed separately with the Commission.
11
<PAGE>
13. INDEMNIFICATION
---------------
13.1 Each of the parties (the party indemnifying the other is hereinafter
referred to as the "Indemnifying Party") will indemnify, defend and hold the
other party (the "Indemnified Party") and its directors, officers, employees,
agents, attorneys, insurers, shareholders and affiliates (its "Related Persons")
harmless from and against any claims, damages, liabilities, costs and expenses,
including the reasonable fees and expenses of counsel (collectively, "Losses"),
resulting from any breach or violation of any representation, warranty, covenant
or agreement of such party set forth in this Agreement.
13.2 BBC will indemnify and hold Nellson and its Related Persons harmless
from and against any Losses arising out of or in connection with the Proprietary
Materials and the use and distribution of Product Packaging, including, without
limitation, any claim based on an alleged infringement of the patent, trademark,
or other intellectual property rights of another party arising out of such
items, except to the extent that (i) such Losses are attributable to any
negligence or misconduct of Nellson, (ii) such Losses relate to the methods of
production of the Products employed by Nellson; or (iii) such Losses relate to
the accuracy of the list of ingredients or nutritional analysis.
13.3 Nellson will indemnify and hold BBC and its Related Persons harmless
from and against any Losses arising out of or in connection with (i) the
manufacture, production or shipment of the Products, including, without
limitation, any product liability claims with respect to the Products, or (ii)
the accuracy of the list of ingredients and nutritional analysis.
13.4 The Indemnifying Party will have the right to defend any third party
claim, action or proceeding wherein the Indemnified Party and/or its Related
Persons are entitled to indemnification under the provisions of this Section;
provided, however, that the Indemnifying Party must conduct the defense of the
third party claim actively and diligently thereafter to preserve its rights in
this regard. The Indemnified Party and any Related Person may retain separate
co-counsel at its or their sole expense and participate in the defense of the
third party claim. Neither party will settle any such claim, action, or
proceeding without the other party's consent or approval, unless the proposed
settlement involves only the payment of money damages by the settling party and
does not impose an injunction or other equitable relief on the other party or
such Related Persons. The Indemnified Party will fully cooperate, at the
expense of the Indemnifying Party, with the Indemnifying Party in the defense or
settlement of any claim, action or proceeding subject to the provisions of this
Section.
14. ASSIGNMENT
----------
Nellson will not transfer or assign its rights and obligations hereunder
without the prior written consent of BBC. This Agreement will continue to bind
BBC regardless of any changes in the ownership of its stock.
*Confidential portions omitted and filed separately with the Commission.
12
<PAGE>
15. CHANGE IN CONTROL OF NELLSON
----------------------------
15.1 For purposes of this section, "Change in Control Transaction" means
any of the following:
(i) The sale by NC Holdings, Inc. of more than 50% of its
capital stock of Nellson to a person or entity that is not
an affiliate of NC Holdings, Inc.
(ii) The sale by Artal Luxembourg S.A. or any of its affiliates
of more than 50% of the capital stock of Nellson or NC
Holdings, Inc. to a person or entity that is not an
affiliate of NC Holdings, Inc.
15.2 At least 10 business days prior to any of the foregoing entities
entering into a Change of Control Transaction, Nellson will notify BBC of the
potential change in ownership unless its Board of Directors, in its sole
discretion, determines that offering such notice would be a material impediment
to completing the contemplated Change of Control Transaction.
15.3 If Artal announces publicly its intention to offer NC Holdings, Inc.
for sale, then Nellson agrees that it will notify BBC immediately upon such
announcement being made public.
16. GOVERNING LAW
-------------
This Agreement will be governed by the Uniform Commercial Code and other
applicable laws of the State of California.
17. DISPUTE RESOLUTION
------------------
In the event of a dispute arising out of or relating to this Agreement that
the parties cannot resolve between themselves without assistance, the Parties
agree to attempt to resolve such dispute through third-party mediation. Any such
dispute that is not resolved within thirty (30) days after a request for
mediation by either of the parties, will be settled by arbitration to be held in
Santa Barbara, California, in accordance with the then-applicable rules of the
American Arbitration Association or any successor thereto. If the parties shall
not have agreed on a mutually satisfactory arbitrator within ten (10) days of
the request of any party for arbitration hereunder, the President of the
American Arbitration Association will forthwith appoint an arbitrator. The
arbitrator shall be a person experienced in the specialty foods industry with no
prior affiliation with either party. The arbitrator may grant injunctions or
other relief in such dispute, but may not award punitive or exemplary damages.
The decision of the arbitrator will be final, conclusive and binding on the
parties to the arbitration.
*Confidential portions omitted and filed separately with the Commission.
13
<PAGE>
Judgment may be entered on the arbitrator's decision in any court having
jurisdiction, and the parties hereby irrevocably consent to the jurisdiction of
the United States District Court for the Central District of California, or if
that court has no jurisdiction, to the California Superior Court in and for the
County of Santa Barbara for this purpose. The arbitrator will award to the
prevailing party on each material issue that party's reasonable attorney's fees
and cost. The term "prevailing party" shall mean that party which shall have
substantially prevailed on a material issue in dispute. As to distinct,
severable issues in dispute, the arbitrator may decide which party is the
prevailing party. Accordingly, the arbitrator will have the discretion to award
attorney's fees to both parties, in amounts to be determined by the arbitrator,
if the arbitrator shall determine that as to separate and distinct material
issues having a bearing on an entitlement to relief each of the parties shall
have been a prevailing party. Application for cost and expenses shall be
substantiated with documentary verification. The actual cost of the arbitration
itself will be borne by the losing party or will be allocated between the
parties in such proportions as the arbitrator decides if there are distinct,
severable issues in dispute and the arbitrator determines that each parties has
to some extent, been a losing party.
18. FINANCIAL INFORMATION
---------------------
Each party agrees to provide the other party with the following financial
information: (i) such party's audited annual financial statements, to be
provided within 90 days after the close of each fiscal year; (ii) such party's
unaudited interim financial statements, to be provided within 45 days after the
close of each fiscal quarter; and (iii) such other financial information as may
be reasonably requested by the other party. All financial information of either
party will be held in strict confidence by the other party.
19. FORCE MAJEURE
-------------
In the event that either party shall be delayed, hindered in or prevented
from the performance of any act required hereunder, by reason of war, riots,
insurrection, strikes, labor troubles, failure of power, or the act, failure to
act or default of the other party, or any other reason beyond such party's
reasonable control, then performance of such act will be excused for the period
of the delay and the period for the performance of any such act will be extended
for a period equivalent to the period of such delay.
20. INDEPENDENT CONTRACTOR STATUS
-----------------------------
This Agreement does not in any way create the relationship of joint
venture, partnership, or principal and agent between Nellson and BBC. The
parties have entered into this Agreement solely as independent contractors.
Neither party will have any right or authority to assume or otherwise create any
obligation or responsibility, express or implied, on
*Confidential portions omitted and filed separately with the Commission.
14
<PAGE>
behalf of or in the name of the other party, or to bind the other party in any
manner or thing whatsoever, without the other party's prior written consent.
21. NOTICES
-------
Any notice or other communication hereunder must be given in writing and
either (a) delivered in person, (b) sent by recognized messenger or next-day
courier service, (c) transmitted by telex, telefax or telecommunications
mechanism, provided that any notice so given is also mailed as provided in
clause (d), or (d) mailed by first class mail, postage prepaid, as follows:
If to BBC: Bio Engineered Foods, Inc.
1015 Mark Avenue
Carpinteria, CA 93013
Attention:
Telecopy number: 805-566-0235
With a copy to: Thomas N. Harding, Esq.
Seed, Mackall & Cole
P.O. Box 2578
Santa Barbara, CA 93120
Telecopy number: 805-962-1404
If to Nellson: Nellson Candies, Inc.
5801 Ayala Avenue
Irwindale, CA 91706
Attention: Mr. Paul Hanson
Telecopy number: (626) 812-6511
or to such other address or to such other person as either party shall have last
designated by such notice to the other party. Each such notice or other
communication shall be effective (i) if given by telecommunication, when
transmitted to the applicable number so specified in (or pursuant to) this
Section 21 and an appropriate answerback is received, (ii) if given by mail,
three days after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other means,
when actually delivered at such address.
22. HEADINGS
--------
Any headings used herein are for convenience and reference only and will
not be deemed to have any substantive effect.
*Confidential portions omitted and filed separately with the Commission.
15
<PAGE>
23. ENTIRE AGREEMENT; CONSTRUCTION
------------------------------
23.1 This Agreement and the instruments referred to herein embody the
entire agreement and understanding between the parties relating to the subject
matter hereof and may not be amended, waived, or discharged except by an
instrument in writing executed by the party against whom enforcement of such
amendment, waiver or discharge is sought. All schedules attached are by this
reference incorporated herein. This Agreement supersedes the Prior Agreement in
all respects.
23.2 Unless otherwise agreed by both parties in writing, this Agreement
applies to all purchase orders, sales acknowledgments and other documents of
purchase which BBC or Nellson may deliver with respect to the Products after the
date hereof. The terms and conditions of this Agreement will apply to any such
document, whether or not this Agreement or its terms and conditions are
expressly referenced in such document.
23.3 If any claim is made by a party relating to any conflict, omission or
ambiguity in the provisions of this Agreement, no presumption or burden of proof
or persuasion will be implied because this Agreement was prepared by or at the
request of any party or its counsel, notwithstanding any statute or rule of law
to the contrary.
23.4 Whenever in this Agreement a person is permitted or required to make a
decision or determination (x) in its "discretion" or "sole discretion" or under
a grant of similar authority or latitude, the person will be entitled to
consider any interests and factors as it desires, including its own interests;
(y) in it "good faith," in a "commercially reasonable" manner, "reasonably" or
under another express standard, the person will act under that express standard
and will not be subject to any other or different standards imposed by this
Agreement or otherwise; or (z) if no standard is expressed, the person will
apply relevant provisions of this Agreement in making the decision or
determination.
24. NO WAIVER
---------
The failure of either party to enforce at any time any of the provisions
hereof (including, without limitation, any inspection rights) will not be
construed to be a waiver of such provision, of any other provision, or of the
right of such party thereafter to enforce any such provision or other provision.
25. SECURITIES FILINGS
------------------
The parties agree that BBC will include a copy of this Agreement as an
exhibit to one or more filings with the Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended. BBC will also describe the terms of this Agreement in
one or more such filings. Any such
*Confidential portions omitted and filed separately with the Commission.
16
<PAGE>
filings will be available to the general public. Upon request by Nellson, BBC
will use its reasonable efforts to obtain confidential treatment from the SEC
for key provisions of the Agreement to the extent feasible, as determined by BBC
in consultation with its securities counsel.
*Confidential portions omitted and filed separately with the Commission.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused this Agreement to be executed as of the date first set forth above.
NELLSON CANDIES, INC. THE BALANCE BAR COMPANY
By:________________ By:________________
Name: Name:
Title: Title:
By:________________ By:________________
Name: Name:
Title: Title:
*Confidential portions omitted and filed separately with the Commission.
18
<PAGE>
SCHEDULE 1
BARS CURRENTLY PRODUCED
[ * ]
*Confidential portions omitted and filed separately with the Commission.
19
<PAGE>
SCHEDULE 2
[intentially omitted in original document]
*Confidential portions omitted and filed separately with the Commission.
20
<PAGE>
SCHEDULE 3
PRICES
[ * ]
*Confidential portions omitted and filed separately with the Commission.
21
<PAGE>
EXHIBIT 10.4
BIO-ENGINEERED FOODS, INC.
--------------------------
1993 STOCK INCENTIVE PLAN
-------------------------
1. PURPOSE.
1.1 Incentive to Employees. This 1993 Stock Incentive Plan (the "Plan") is
----------------------
intended to provide incentive to, and to encourage stock ownership by, selected
employees, officers, directors and consultants of BIO-ENGINEERED FOODS, INC., a
Delaware corporation (the "Company"), any Subsidiary (as defined below) and any
Parent (as defined below), so that such employees, officers, directors and
consultants may acquire a proprietary interest in, or increase their proprietary
interest in, the Company. For the purposes of the Plan, the terms "Subsidiary"
and "Parent" shall mean any present or future corporation which would be a
"subsidiary corporation" or a "parent corporation," respectively, of the
Company, as those terms are defined in Section 424 of the Internal Revenue Code
of 1986, as amended (the "Code").
1.2 Stock Incentive Awards. The Plan provides for the grant of options to
----------------------
purchase shares of the Company's authorized but unissued Common or Preferred
Stock ("Shares") to selected officers, employees, directors and consultants of
the Company (sometimes collectively referred to herein as "offerees", "grantees"
or "optionees"). Options granted under the Plan may include non-statutory
options and options intended to qualify as "incentive stock options", as that
term is defined in Section 422 of the Code ("incentive stock options").
2. ADMINISTRATION.
2.1 Board of Directors. The Plan shall be administered by the Board of
------------------
Directors of the Company (the "Board") or by a Committee as defined in Section
2.2 below. The interpretation and construction by the Board or the Committee of
any provision of the Plan, or of any agreement or option issued or executed
under or pursuant to the Plan, shall be final and binding upon optionees
hereunder. No member of the Board or the Committee shall be liable for any
action or determination undertaken or made in good faith with respect to the
Plan or any agreement or option issued or executed under or pursuant to the
Plan.
2.2 Committee of the Board. The Board may, in its sole and absolute
----------------------
discretion, delegate any or all of its duties and authority with respect to the
Plan to a committee of at least two (2) Directors of the Company (the
"Committee") to be appointed by and to serve at the pleasure of the Board. No
person eligible to receive options under this Plan shall vote as a member of the
Board or the Committee upon his or her own option award. Once appointed, the
Committee shall continue to serve until otherwise directed by the Board. From
time to time, the Board may increase or decrease
<PAGE>
the size of the Committee, add additional members to, remove members (with or
without cause) from, appoint new members in substitution therefor, and fill
vacancies, however caused, in the Committee. The Committee shall act pursuant to
a vote of the majority of its members, whether present in person or by
telephonic means at a meeting of the Committee, or by the unanimous written
consent of its members, and minutes shall be kept of all of its meetings and
copies thereof shall be provided to the Board. Subject to the limitations
prescribed by the Plan and the Board, the Committee may establish and follow
such rules and regulations for the conduct of its business as it may determine
to be advisable.
2.3 Administrative Powers. Subject to the provisions of the Plan, the
---------------------
Board or the Committee, as the case may be (the "Administrator"), shall have
authority to take the following actions:
(a) to construe and interpret the Plan and apply its provisions;
(b) to promulgate, amend and rescind rules and regulations relating to
the administration of the Plan;
(c) to authorize any person to execute, on behalf of the Company, any
instrument required to carry out the purposes of the Plan;
(d) to determine when options are to be granted under the Plan;
(e) from time to time to select those officers, employees, directors
and consultants to whom options shall be granted from among the eligible
officers, employees, directors and consultants (as determined pursuant to
Section 3 below) of the Company, any Subsidiary or Parent;
(f) to determine the number of Shares to be made subject to each
option;
(g) to prescribe the terms and condition of each option, including,
without limitation, the exercise price and medium of payment, to determine
whether such option is to be classified as an incentive stock option or as a
non-statutory stock option, and to specify the provisions of the stock option
agreement relating to such option;
(h) to amend any outstanding stock option agreement for the purpose of
modifying the exercise price as the case may be, subject to applicable legal
restrictions and to the consent of the other party to such agreement;
<PAGE>
(i) to determine the duration and purpose of leaves of absences
which may be granted to employees without constituting termination of their
employment for purposes of the Plan; and
(j) to make any and all other determinations which they
determine to be necessary or advisable for administration of the Plan.
3. ELIGIBILITY.
3.1 General Rule. Any employee, officer, director or consultant of the
------------
Company, any Subsidiary or Parent, shall be eligible to receive options granted
under the Plan and may hold more than one option.
3.2 Limitation with Respect to Incentive Stock Options.
--------------------------------------------------
(a) Limitation to Employees. No incentive stock option shall be
-----------------------
granted under the Plan except to employees (including employees who are
officers) of the Company, any Subsidiary, or any parent.
(b) Limitation on Amount. The aggregate Fair Market Value (determined
--------------------
as of the date of grant) of Shares with respect to which incentive stock options
are exercisable for the first time by any one optionee during any calendar
year (under this Plan and all other stock option plans of the Company) shall not
exceed $100,000.
4. FAIR MARKET VALUE.
For purposes of the Plan, "Fair Market Value" of Shares of Common Stock of
the Company on any date shall mean that amount which the Administrator
determines in good faith to be the amount which a willing buyer would pay to an
equally willing seller to purchase such Shares subject to an option or stock
purchase agreement on such date.
5. THE STOCK.
The stock subject to any option granted under the Plan shall be Shares of
the Company's authorized but unissued Common Stock or Preferred Stock. Subject
to adjustment as set forth in this Section 5, the total number of Shares which
may be issued under the Plan upon exercise of options or other rights to
purchase Shares shall not exceed 150,000 shares of Preferred Stock and 100,000
shares of Common Stock; provided, however, that if (a) any outstanding option
-------- -------
shall for any reason expire or terminate unexercised, or (b) any
3
<PAGE>
Shares issued under the Plan are repurchased by the Company pursuant to the
terms of the option agreement or stock purchase agreement under which they were
issued, then such Shares shall again be available for issuance under the Plan.
Each time any of the events set forth in Section 6.8(a) or Section 6.8(b) of the
Plan occurs, the number of Shares purchasable under the Plan shall be adjusted
in the same manner as the number of Shares subject to any outstanding option
would be adjusted under the provisions of Section 6.8(c) of the Plan.
6. TERMS AND CONDITIONS OF OPTIONS.
6.1 Option Agreement. Each option granted under the Plan shall be
----------------
evidenced by an option agreement between the optionee and the Company in the
form from time to time adopted by the Administrator and containing such terms
and conditions which the Administrator deems appropriate; provided such terms
and conditions are not inconsistent with the Plan. The provisions of the various
option agreements entered into under the Plan need not be identical.
6.2 Exercise Price. Each option agreement shall state the price at which
--------------
the Shares subject to the option may be purchased (the "Exercise Price"). In the
case of an incentive stock option, the Exercise Price shall not be less than
100% of the Fair Market Value of such Shares on the date the option is granted
(as determined by the Administrator); provided, however, that in the case of an
-------- -------
incentive stock option granted to a "Ten Percent Shareholder" (as defined
below), the Exercise Price shall not be less than 110% of the Fair Market Value
on the date the option is granted (as determined by the Administrator). The
exercise price of a non-statutory option shall be at the price determined by the
Administrator. For purposes of the Plan, "Ten Percent Shareholder" means a
person who, on the date of grant by the Administrator of an option to that
person owns, either directly or through attribution as provided in Section
424(d) of the Code, capital stock of the Company possessing more than 10% of the
total combined voting power of all classes of stock of his or her employer
corporation or of any Parent or Subsidiary.
6.3 Number of Shares. Each option agreement shall state the number of
----------------
Shares which may be purchased upon exercise, and shall specify that the option
is an incentive stock option or a non-statutory stock option.
6.4 Term of Option. Each option agreement shall provide that the option
--------------
shall terminate at the expiration of the earliest of:
(a) that date selected by the Administrator, which shall be not more
than ten (10) years after the date the option is
4
<PAGE>
granted or, in the case of an incentive option granted to a Ten Percent
Shareholder, five (5) years after the date the option is granted;
(b) thirty 30 days (one hundred eighty (180) days in the case of a
non-statutory stock option) after the date of termination of the optionee's
services to or employment with the Company, any Subsidiary or any Parent for any
reason other than those set forth in clauses (c), (d) or (e) below;
(c) one year after the date of termination of the optionee's employment
with the Company, any Subsidiary or any Parent as a result of the permanent and
total disability of the optionee;
(d) one year after the death of the optionee, provided that such death
occurs during the optionee's employment by the Company or within thirty (30)
days after termination of such employment other than for cause; and
(e) in the event that the optionee's employment is terminated (i)
voluntarily by the optionee, or (ii) for cause (of which the Administrator
shall be the sole judge), all of the optionee's unexercised options shall expire
as of the date of termination;
provided, that the option agreement for any option may provide for shorter
- --------
periods in each of the foregoing instances if so determined by the
Administrator. For the purposes of Section 6.4(c), "permanent and total
disability" shall mean a disability of the type defined in Section 22(e)(3) of
the Code. An individual shall not be considered permanently disabled unless he
or she furnishes proof of the existence of such permanent disability in such
form and manner, and at such times, as the Administrator may require.
6.5 Transfer of Option. Each option agreement shall provide that the option
------------------
shall not be transferable by the optionee otherwise than by will or the laws of
descent and distribution.
6.6 Exercise of Option. Each option agreement shall provide that the option
------------------
shall not be exercisable during the lifetime of the optionee by any person other
than the optionee. Except as provided in Section 6.12 hereof, each option
granted pursuant to the Plan shall be exercisable, in whole or in part, no
earlier than one year from the date of grant of the option; provided, however,
that a non-statutory option may, at the discretion of the Administrator, become
exercisable beginning six (6) months after the date of grant. At the discretion
of the Administrator, options may be exercisable in installments at a rate of
not less than 20% per year, in which case such installments (if more than one)
shall (to the extent not exercised) accumulate and be exercisable, in whole
5
<PAGE>
or in part, in any subsequent installment period but in no event later than the
date of the termination of the option.
6.7 Investment Purposes. Unless and until the issuance and sale of the
-------------------
Shares acquired by an optionee pursuant to the exercise of options granted
under the Plan are registered under the Act or any similar subsequent
legislation, each option agreement under the Plan shall provide that the
purchase of Shares pursuant to the option agreement shall be for investment
purposes, and not with a view to resale or distribution other than as permitted
under the Act. Each option agreement shall further provide that no Shares shall
be purchased or sold thereunder unless and until (a) any then applicable
requirements of state or federal laws and regulatory agencies shall have been
fully complied with to the satisfatction of the Company and its counsel, and (b)
if required to do so by the Company, the optionee shall have executed and
delivered to the Company a stock restriction agreement in such form and
containing such provisions as the Administrator may require.
6.8 Stock Splits, Etc. Each option agreement shall provide that,
------------------
subject to any required action by the shareholders of the Company:
(a) If outstanding Shares shall be subdivided into a greater number
of Shares, or a dividend in Shares or other securities of the Company
convertible into or exchangeable for the Shares (in which latter event the
number of Shares issuable upon the conversion or exchange of such securities
shall be deemed to have been distributed) shall be paid in respect of the
Shares, the Exercise Price of any outstanding option in effect immediately
prior to such subdivision or at the record date of such dividend shall,
simultaneously with the effectiveness of such subdivision or immediately after
the record date of such dividend, be proportionately reduced, and conversely, if
the outstanding Shares shall be combined into a small number of Shares, the
Exercise Price of any outstanding option in effect immediately prior to such
combination shall, simultaneously with the effectiveness of such combination, be
proportionately increased.
(b) In the event the Company at any time, or from time to time,
shall make or issue, or fix a record date for the determination of holders of
Shares entitled to receive, a dividend or other distribution payable in
securities of the Company other than Shares or securities convertible into or
exchangeable for Shares then and in each such event, provision shall be made so
that the holders of options shall receive upon exercise thereof, in addition to
the number of Shares receivable thereupon, the amount of securities of the
Company which they would have received had their option been exercised on the
date of such event and had thereafter, during the period from the date of such
event to and including the date of exercise, retained such securities receivable
6
<PAGE>
by them as aforesaid during such period, giving application to all adjustments
called for during such period under this Section 6.8 with respect to the rights
of the holders of options.
(c) When any adjustment is required to be made in the Exercise Price,
the number of Shares purchasable upon the exercise of any outstanding option
shall be adjusted to that number of Shares determined by (i) multiplying an
amount equal to the number of Shares purchasable upon the exercise of the option
immediately prior to such adjustment by the Exercise Price in effect immediately
prior to such adjustment, and then (ii) dividing that product by the Exercise
Price in effect immediately after such adjustment.
(d) In the case of any capital reorganization, any reclassification
of the Shares (other than a change in par value or recapitalization described in
Section 6.8(a) or 6.8(b) hereof), or the consolidation of the Company with, or a
sale of substantially all of the assets of the Company to (which sale is
followed by a liquidation or dissolution of the Company), or the merger of the
Company with another person, except as provided in Section 6.12 hereof, the
holder of any outstanding option shall thereafter be entitled upon exercise of
the option to purchase the kind and number of Shares or other securities or
property of the surviving corporation receivable upon such event by a holder of
the number of Shares which such option entitles the holder to purchase from the
Company immediately prior to such event. In every such case, appropriate
adjustment shall be made in the application of the provisions set forth in the
option agreement and in the Plan with respect to the rights and interests
thereafter of the optionee, to the end that the provisions set forth in the
option agreement and in the Plan (including the specified changes and other
adjustments to the Exercise Price) shall thereafter be applicable in relation to
any Shares or other securities or property thereafter purchasable upon exercise
of such option.
(e) A dissolution or liquidation of the Company shall cause each
outstanding option to terminate; provided that each optionee shall have the
--------
right exercisable during a 10-day period ending on the fifth day prior to such
dissolution or liquidation to exercise his or her option in whole or in part,
without regard to any installment provisions under his or her option agreement;
but any exercise of the option which except for the provisions of this Section
6.8(e) would not then be exercisable, shall be conditioned upon the actual
occurrence of such dissolution or liquidation, and if such dissolution or
liquidation does not occur, the optionee's exercise of the option during such
10-day period shall be null and void, and of no force and effect. For purposes
of this Section 6.8(e) and subject to the previous sentence, any exercise of the
option by the optionee pursuant to this Section 6.8(e) shall be
7
<PAGE>
deemed to occur immediately prior to the consummation of any such dissolution or
liquidation.
(f) To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the Administrator,
whose determination in that respect shall be final, binding and conclusive.
(g) Except as expressly provided in this Section 6.8 or in Section
6.12, no optionee shall have any rights by reason of any subdivision or
consolidation of shares of stock of any class or the payment of any stock
dividend or any other increase or decrease in the number of shares of stock of
any class, and the dissolution, liquidation, merger, consolidation or split-up
or sale of assets or stock to another corporation, or any issue by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall not affect, and no adjustment by reason thereof shall be
made with respect to, the number of, or Exercise Price for, the shares.
(h) The grant of an option pursuant to the Plan shall not affect in
any way the rights or power of the Company to make adjustments,
reclassification, reorganizations or changes of its capital or business
structure or to merge, consolidate, dissolve or liquidate, or to sell or
transfer all or any part of its business or assets.
6.9 Rights as a Shareholder. Each option agreement shall provide that
-----------------------
no optionee or transferee of an option shall have any rights as a shareholder
with respect to any of the Shares subject to the option until the date of
issuance of a stock certificate for such Shares. No adjustment shall be made
for dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distribution or other rights for which the record date is prior to
the date such stock certificate is issued, except as provided in Section 6.8
above.
6.10 Restrictions on Transfers of Shares. Each option agreement may
-----------------------------------
contain such restrictions on transfer of Shares obtained pursuant to the
exercise of options as the Administrator may determine including without
limitation, rights of repurchase and rights of refusal.
6.11 Modification, Extension, and Renewal of Option. Subject to the terms
----------------------------------------------
and conditions and within the limitations of the Plan and the Code, the
Administrator may modify (including a modification of the Exercise Price) extend
or renew outstanding options granted under the Plan, or accept the surrender of
outstanding options (to the extent not previously exercised) and authorize the
granting of new options in substitution therefor (to the extent not previously
exercised). However, no modification of
8
<PAGE>
an option shall be made without the consent of the optionee which would alter or
impair any rights of the optionee under the option.
6.12 Acceleration.
------------
(a) A "Change in Control" for purposes of this Plan shall mean (i) a
single entity or group of affiliated entities acquires more than 50% of the
stock of the Company issued and outstanding immediately prior to such
acquisition; or (ii) shareholders approve the consummation of any merger of the
Company or any sale or other disposition of all or substantially all of its
assets, if the shareholders of the Company immediately before such transaction
own, immediately after consummation of such transaction, equity securities
(other than options and other rights to acquire equity securities) possessing
less than 50% of the voting power of the surviving or acquiring corporation.
(b) If a Change in Control has occurred or if the Board of Directors
determines in good faith that a Change in Control is about to occur, the Board
of Directors may determine that it is necessary or desirable to accelerate the
options granted hereunder. Upon such determination, all outstanding options will
be immediately exercisable by the holder of the option for the total remaining
number of Shares covered by the option. Such option may then be exercised by its
respective holder at any time within a period of 30 calendar days following the
date on which the Board of Directors determines that it is necessary or
desirable to accelerate the options.
(c) Any options subject to acceleration under this Section that are
not exercised during the period of 30 days provided in subsection (b) above
shall be treated as if no Change in Control had occurred and shall be governed
by their original terms. Nevertheless, by a notice to that effect which is
communicated in any reasonable manner to as many of the holders of options as is
feasible and which is communicated before the last day of the 30 day period
created by subsection (b) above, the Board of Directors may provide that any
options accelerated pursuant to this Section 6.12 shall expire at midnight upon
the last day of the 30 day period provided by subsection (b).
7. PAYMENT FOR SHARES.
7.1 General Rule. The Exercise Price for any Shares purchased under the
------------
Plan shall be payable in cash, by check or, at the discretion of the
Administrator, with Shares which are already owned by the optionee and which are
surrendered to the Company in good form for transfer. Such Shares shall be
valued at their Fair Market Value on the date when the new Shares are purchased
under the Plan.
9
<PAGE>
7.2 Promissory Note. The Administrator in its sole discretion may specify
---------------
in any option agreement entered into hereunder that payment may be made with a
full recourse promissory note executed by the optionee or offeree. Such note
shall bear interest at the rate specified in the option agreement for a term of
no more than five years with interest only payable during the term. Subject to
the foregoing, the Administrator in its sole discretion shall specify the term,
interest rate and other provisions of the note. The Administrator may require
that the offeree or optionee pledge his Shares to the Company for the purpose of
securing payment for the note, and the Administrator may require that the
certificate(s) representing such Shares be held by the Company as a security
holder in order to perfect the Company's security interest.
7.3 Withholding.
-----------
(a) Generally. Notwithstanding the provisions of Sections 7.1 and
---------
7.2 hereof, whenever under any agreement evidencing options, shares or any
monetary amount are issued to any grantee, the Company shall be entitled to
require as a condition of delivery that the grantee agree to remit, at the time
of such delivery or at such later date as the Company may determine, an amount
sufficient to satisfy all federal, state and local withholding tax requirements
relating thereto.
(b) Withholding of Shares. With the consent of the Administrator,
---------------------
and in accordance with any rules and procedures from time to time adopted by the
Administrator, a grantee may elect to satisfy by (i) directing the Company to
withhold a portion of the Shares otherwise deliverable or (ii) tendering to the
Company other Shares which are already owned by such grantee or purchaser,
which, in all cases, have a Fair Market Value on the date as of which the amount
of tax to be withhold is determined (the "Tax Date") equal to the amount of tax
to be paid with respect to such Shares.
(c) Form of Election. Any election made pursuant to Paragraph 7.3(b)
----------------
above must:
(i) be made in writing on or prior to the Tax Date and specify
whether all or a stated percentage of the applicable taxes will be paid with
Shares and whether the amounts so paid shall be made in accordance with the
"flat" withholding rates for supplemental wages or as determined in accordance
with the grantee's Form W-4 (or comparable state or local forms);
(ii) be irrevocable once made; and
(iii) conform in all respects to all rules and procedures from
time to time adopted by the Administrator and be subject to rejection by the
Administrator for any reason.
10
<PAGE>
8. TERM OF THE PLAN.
Unless sooner terminated by the Board in its sole discretion, the Plan
shall expire on June 16, 2003.
9. AMENDMENTS TO THE PLAN.
The Plan may be amended from time to time by the Board; provided that any
--------
amendment which (a) increases the number of Shares which may be issued under the
Plan, (b) materially increases the benefits accruing to persons eligible to
purchase Shares under the Plan or (c) materially modifies the requirements for
eligibility for purchasing Shares under the Plan, shall not become effective
unless and until approved by the shareholders of the Company.
The Company intends that the Plan shall comply with the requirements of
Section 422 of the Code with respect to incentive stock options issued under the
Plan. Should any provisions of the Plan not be necessary to comply with the Code
requirements or should any additional provisions be necessary for the Plan to
comply with the Code requirements, the Board may amend the Plan to add or modify
the provisions of the Plan accordingly without the necessity of shareholder
approval.
10. EFFECTIVE DATE; SHAREHOLDER APPROVAL.
This Plan shall be effective as of the date it has been adopted by the
Board of Directors of the Company; however, no Shares may be sold under the Plan
unless and until shareholder approval of the Plan shall have been obtained.
Options may be granted prior to obtaining shareholder approval; provided that
--------
each option agreement shall provide that the option may not be exercised unless
such approval is obtained prior to June 16, 1994.
11. ASSUMPTION.
The terms and conditions of any outstanding options granted pursuant to
this Plan shall be assumed by, be binding upon and inure to the benefit of any
successor corporation to the Company and shall continue to be governed by, to
the extent applicable, the terms and conditions of the Plan.
11
<PAGE>
EXHIBIT 10.5
BIO-ENGINEERED FOODS, INC.
--------------------------
1997 STOCK INCENTIVE PLAN
-------------------------
1. PURPOSE.
1.1 INCENTIVE TO EMPLOYEES. This 1997 Stock Incentive Plan (the "Plan")
----------------------
is intended to provide incentive to, and to encourage stock ownership by,
selected employees, officers, directors and consultants of Bio-Engineered Foods,
Inc., a Delaware corporation (the "Company"), any Subsidiary (as defined below)
and any Parent (as defined below), so that such employees, officers, directors
and consultants may acquire a proprietary interest in, or increase their
proprietary interest in, the Company. For the purposes of the Plan, the terms
"Subsidiary" and "Parent" shall mean any present or future corporation which
would be a "subsidiary corporation" or a "parent corporation," respectively, of
the Company, as those terms are defined in Section 424 of the Internal Revenue
Code of 1986, as amended (the "Code").
1.2 STOCK OPTION AWARDS. The Plan provides for the grant of options to
-------------------
purchase shares of the Company's authorized but unissued Common Stock ("Shares")
to selected officers, employees, directors and consultants of the Company
(sometimes collectively referred to herein as "offerees", "grantees" or
"optionees"). Options granted under the Plan may include both non-statutory
options and options intended to qualify as "incentive stock options", as that
term is defined in Section 422 of the Code ("incentive stock options").
2. ADMINISTRATION.
2.1 BOARD OF DIRECTORS. The Plan shall be administered by the Board of
------------------
Directors of the Company (the "Board") or by a Committee as defined in
Section 2.2 below. The interpretation and construction by the Board or the
Committee of any provision of the Plan, or of any agreement or option issued or
executed under or pursuant to the Plan, shall be final and binding upon
optionees hereunder. No member of the Board or the Committee shall be liable for
any action or determination undertaken or made in good faith with respect to the
Plan or any agreement or option issued or executed under or pursuant to the
Plan.
2.2 COMMITTEE OF THE BOARD. The Board may, in its sole and absolute
----------------------
discretion, delegate any or all of its duties and authority with respect to the
Plan to a committee of at least two (2) Directors of the Company (the
"Committee") to be appointed by and to serve at the pleasure of the Board. Once
appointed, the Committee shall continue to serve until otherwise directed by the
Board. From time to time, the Board may increase or decrease the size of the
Committee, add additional members to, remove members (with or without cause)
from, appoint new members in substitution therefor, and fill vacancies, however
caused, in the Committee. The Committee shall act pursuant to a vote of the
majority of its members, whether present
<PAGE>
in person or by telephonic means at a meeting of the Committee, or by the
unanimous written consent of its members, and minutes shall be kept of all of
its meetings and copies thereof shall be provided to the Board. Subject to the
limitations prescribed by the Plan and the Board, the Committee may establish
and follow such rules and regulations for the conduct of its business as it may
determine to be advisable.
2.3 ADMINISTRATIVE POWERS. Subject to the provisions of the Plan, the
---------------------
Board or the Committee, as the case may be (the "Administrator"), shall have
authority to take the following actions:
(a) to construe and interpret the Plan and apply its provisions;
(b) to promulgate, amend and rescind rules and regulations relating to the
administration of the Plan;
(c) to authorize any person to execute, on behalf of the Company, any
instrument required to carry out the purposes of the Plan;
(d) to determine when options are to be granted under the Plan;
(e) from time to time to select those officers, employees, directors and
consultants to whom options shall be granted from among the eligible
officers, employees, directors and consultants (as determined pursuant
to Section 3 below) of the Company, any Subsidiary or Parent;
(f) to determine the number of Shares to be made subject to each option;
(g) to prescribe the terms and condition of each option, including, without
limitation, the exercise price and medium of payment, to determine
whether such option is to be classified as an incentive stock option or
as a non-statutory stock option, and to specify the provisions of the
stock option agreement relating to such option;
(h) to amend any outstanding stock option agreement for the purpose of
modifying the exercise price as the case may be, subject to applicable
legal restrictions and to the consent of the other party to such
agreement;
(i) to determine the duration and purpose of leaves of absences which may
be granted to employees without constituting termination of their
employment for purposes of the Plan; and
(j) to make any and all other determinations which they determine to be
necessary or advisable for administration of the Plan.
<PAGE>
3. ELIGIBILITY.
3.1 GENERAL RULE. Any employee, officer, director or consultant of the
------------
Company, any Subsidiary or Parent, shall be eligible to receive options granted
under the Plan and may hold more than one option.
3.2 ELIGIBLE DIRECTOR LIMITATION. Notwithstanding the provisions of
----------------------------
Section 3.1 above, no person shall be eligible to receive an option granted
under the Plan if at the time the option is granted, he or she is a director of
the Company and has not by resolution of the Board of Directors been designated
as an "eligible director." No member of the Committee may be designated as an
eligible director.
3.3 LIMITATION WITH RESPECT TO INCENTIVE STOCK OPTIONS.
--------------------------------------------------
(a) LIMITATION TO EMPLOYEES. No incentive stock option shall be
-----------------------
granted under the Plan except to employees (including employees who are
officers) of the Company, any Subsidiary, or any parent.
(b) LIMITATION ON AMOUNT. The aggregate Fair Market Value
--------------------
(determined as of the date of grant) of Shares with respect to which incentive
stock options are exercisable for the first time by an optionee during any
calendar year (under the Plan and all such plans of the Company) shall not
exceed $100,000.
4. FAIR MARKET VALUE.
For purposes of the Plan, "Fair Market Value" of Shares of Common Stock of
the Company on any date shall mean:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
NASDAQ National Market or The NASDAQ SmallCap Market of The NASDAQ Stock
Market, its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source
as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean between the high bid and low asked prices for the
Common Stock on the last market trading day prior to the day of
determination, or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
<PAGE>
5. THE STOCK.
Subject to adjustment as set forth in this Section 5, the total number of
Shares which may be issued under the Plan upon exercise of options or other
rights to purchase Shares shall not exceed the sum of (i) Shares, plus
====
(ii) that number of Shares available for issuance under the Company's 1993 Stock
Incentive Plan (the "'93 Plan"), less those shares actually issued or reserved
for issuance upon the exercise of options awarded under the '93 Plan; provided,
--------
however, that if any outstanding option shall for any reason expire or terminate
- -------
unexercised, then such Shares shall again be available for issuance under the
Plan. Each time any of the events set forth in Section 6.8(a) or Section 6.8(b)
of the Plan occurs, the number of Shares purchasable under the Plan shall be
adjusted in the same manner as the number of Shares subject to any outstanding
option would be adjusted under the provisions of Section 6.8(c) of the Plan.
6. TERMS AND CONDITIONS OF OPTIONS.
6.1 OPTION AGREEMENT. Each option granted under the Plan shall be
----------------
evidenced by an option agreement between the optionee and the Company in the
form from time to time adopted by the Administrator and containing such terms
and conditions which the Adminis trator deems appropriate; provided such terms
and conditions are not inconsistent with the Plan. The provisions of the
various option agreements entered into under the Plan need not be identical.
6.2 EXERCISE PRICE. Each option agreement shall state the price at which
--------------
the Shares subject to the option may be purchased (the "Exercise Price"). In
the case of an incentive stock option, the Exercise Price shall not be less than
100% of the Fair Market Value of such Shares on the date the option is granted
(as determined by the Administrator), and in the case of a non-statutory stock
option, the Exercise Price shall not be less than 85% of the Fair Market Value
of such Shares on the date the option is granted (as determined by the
Administrator); provided, however, that in the case of any stock option granted
-------- -------
to a "Ten Percent Shareholder" (as defined below), the Exercise Price shall not
be less than 110% of the Fair Market Value on the date the option is granted (as
determined by the Administrator). For purposes of the Plan, "Ten Percent
Shareholder" means a person who, on the date of grant by the Administrator of an
option to that person owns, either directly or through attribution as provided
in Section 424(d) of the Code, capital stock of the Company possessing more than
10% of the total combined voting power of all classes of stock of his or her
employer corporation or of any Parent or Subsidiary.
6.3 NUMBER OF SHARES. Each option agreement shall state the number of
----------------
Shares which may be purchased upon exercise, and shall specify that the option
is an incentive stock option or a non-statutory stock option.
<PAGE>
6.4 TERM OF OPTION. Each option agreement shall provide that the option
--------------
shall terminate at the expiration of the earliest of:
(a) that date selected by the Administrator, which shall be not more
than ten (10) years after the date the option is granted or, in the case of an
incentive option granted to a Ten Percent Shareholder, five (5) years after the
date the option is granted;
(b) thirty (30) days (one hundred eighty (180) days in the case of a
non-statutory stock option) after the date of termination of the optionee's
services to or employment with the Company, any Subsidiary or any Parent for any
reason other than those set forth in clauses (c) or (d) below;
(c) one year after the date of termination of the optionee's
employment with the Company, any Subsidiary or any Parent as a result of the
disability of the optionee; provided, however, that if such disability is not a
"disability" as such term is defined in Section 22(e)(3) of the Code, in the
case of an incentive stock option such incentive stock option shall
automatically convert to a nonstatutory stock option on the day three months
and one day following such termination;
(d) one year after the death of the optionee, provided that such death
occurs during the optionee's employment by the Company or within thirty (30)
days after termination of such employment other than for cause.
For the purposes of Section 6.4(c), an optionee shall not be
considered disabled unless he or she furnishes proof of the existence of such
disability in such form and manner, and at such times, as the Administrator may
require.
6.5 TRANSFER OF OPTION. Each option agreement shall provide that the
------------------
option shall not be transferable by the optionee otherwise than by will or the
laws of descent and distribution.
6.6 EXERCISE OF OPTION. Each option agreement shall provide that the
------------------
option shall not be exercisable during the lifetime of the optionee by any
person other than the optionee. Except as provided in Section 6.12 hereof, each
option granted pursuant to the Plan shall become exercisable, in whole or in
part, at such times as shall be set forth in the option agreement. At the
discretion of the Administrator, options may be exercisable in installments at a
rate of not less than 20% per year, in which case such installments (if more
than one) shall (to the extent not exercised) accumulate and be exercisable, in
whole or in part, in any subsequent installment period but in no event later
than the date of the termination of the option.
6.7 INVESTMENT PURPOSES. Unless and until the issuance and sale of the
-------------------
<PAGE>
Shares acquired by an optionee pursuant to the exercise of options granted under
the Plan are registered under the Act or any similar subsequent legislation,
each option agreement under the Plan shall provide that the purchase of Shares
pursuant to the option agreement shall be for investment purposes, and not with
a view to resale or distribution other than as permitted under the Act. Each
option agreement shall further provide that no Shares shall be purchased or sold
thereunder unless and until (a) any then applicable requirements of state or
federal laws and regulatory agencies shall have been fully complied with to the
satisfaction of the Company and its counsel, and (b) if required to do so by the
Company, the optionee shall have executed and delivered to the Company a stock
restriction agreement in such form and containing such provisions as the
Administrator may require in accordance with law.
6.8 STOCK SPLITS, ETC. Each option agreement shall provide that, subject
------------------
to any required action by the shareholders of the Company:
(a) If outstanding Shares shall be subdivided into a greater number
of Shares, or a dividend in Shares or other securities of the Company
convertible into or exchangeable for the Shares (in which latter event the
number of Shares issuable upon the conversion or exchange of such securities
shall be deemed to have been distributed) shall be paid in respect of the
Shares, the Exercise Price of any outstanding option in effect immediately prior
to such subdivision or at the record date of such dividend shall, simultaneously
with the effectiveness of such subdivision or immediately after the record date
of such dividend, be proportion ately reduced, and conversely, if the
outstanding Shares shall be combined into a small number of Shares, the Exercise
Price of any outstanding option in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased.
(b) In the event the Company at any time, or from time to time, shall
make or issue, or fix a record date for the determination of holders of Shares
entitled to receive, a dividend or other distribution payable in securities of
the Company other than Shares or securities convertible into or exchangeable for
Shares then and in each such event, provision shall be made so that the holders
of options shall receive upon exercise thereof, in addition to the number of
Shares receivable thereupon, the amount of securities of the Company which they
would have received had their option been exercised on the date of such event
and had thereafter, during the period from the date of such event to and
including the date of exercise, retained such securities receivable by them as
aforesaid during such period, giving application to all adjustments called for
during such period under this Section 6.8 with respect to the rights of the
holders of options.
(c) When any adjustment is required to be made in the Exercise Price,
the number of Shares purchasable upon the exercise of any outstanding option
shall be adjusted to that number of Shares determined by (i) multiplying an
amount equal to the
<PAGE>
number of Shares purchasable upon the exercise of the option immediately prior
to such adjustment by the Exercise Price in effect immedi ately prior to such
adjustment, and then (ii) dividing that product by the Exercise Price in effect
immediately after such adjustment.
(d) In the case of any capital reorganization, any reclassification
of the Shares (other than a change in par value or recapitalization described in
Section 6.8(a) or 6.8(b) hereof), or the consolidation of the Company with, or a
sale of substantially all of the assets of the Company to (which sale is
followed by a liquidation or dissolution of the Company), or the merger of the
Company with another person, except as provided in Section 6.12 hereof, the
holder of any outstanding option shall thereafter be entitled upon exercise of
the option to purchase the kind and number of Shares or other securities or
property of the surviving corporation receivable upon such event by a holder of
the number of Shares which such option entitles the holder to purchase from the
Company immediately prior to such event. In every such case, appropriate
adjustment shall be made in the application of the provisions set forth in the
option agreement and in the Plan with respect to the rights and interests
thereafter of the optionee, to the end that the provisions set forth in the
option agreement and in the Plan (including the specified changes and other
adjustments to the Exercise Price) shall thereafter be applicable in relation to
any Shares or other securities or property thereafter purchas able upon
exercise of such option.
(e) A dissolution or liquidation of the Company shall cause each
outstanding option to terminate; provided that each optionee shall have the
--------
right exercisable during a 10-day period ending on the fifth day prior to such
dissolution or liquidation to exercise his or her option in whole or in part,
without regard to any installment provisions under his or her option agreement;
but any exercise of the option which except for the provisions of this
Section 6.8(e) would not then be exercisable, shall be conditioned upon the
actual occurrence of such dissolution or liquidation, and if such dissolution or
liquidation does not occur, the optionee's exercise of the option during such
10-day period shall be null and void, and of no force and effect. For purposes
of this Section 6.8 (e) and subject to the previous sentence, any exercise of
the option by the optionee pursuant to this Section 6.8(e) shall be deemed to
occur immediately prior to the consummation of any such dissolution or
liquidation.
(f) To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the Administrator,
whose determination in that respect shall be final, binding and conclusive.
(g) Except as expressly provided in this Section 6.8 or in Section
6.12, no optionee shall have any rights by reason of any subdivision or
consolidation of shares of stock of any class or the payment of any stock
dividend or any other increase or decrease in the number of shares of stock of
any class, and the dissolution, liquidation,
<PAGE>
merger, consolidation or split-up or sale of assets or stock to another
corporation, or any issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of, or
Exercise Price for, the shares.
(h) The grant of an option pursuant to the Plan shall not affect in
any way the rights or power of the Company to make adjustments,
reclassification, reorganizations or changes of its capital or business
structure or to merge, consolidate, dissolve or liquidate, or to sell or
transfer all or any part of its business or assets.
6.9 RIGHTS AS A SHAREHOLDER. Each option agreement shall provide that no
-----------------------
optionee or transferee of an option shall have any rights as a shareholder with
respect to any of the Shares subject to the option until the date of issuance of
a stock certificate for such Shares. No adjustment shall be made for dividends
(ordinary or extraordinary, whether in cash, securities or other property) or
distribution or other rights for which the record date is prior to the date such
stock certificate is issued, except as provided in Section 6.8 above.
6.10 RESTRICTIONS ON TRANSFERS OF SHARES. Each option agreement may
-----------------------------------
contain such restrictions on transfer of Shares obtained pursuant to the
exercise of options as the Administrator may determine including without
limitation, rights of repurchase and rights of refusal as permitted under law.
6.11 MODIFICATION, EXTENSION AND RENEWAL OF OPTION. Subject to the terms
---------------------------------------------
and conditions and within the limitations of the Plan and the Code, the
Administrator may modify (including a modifica tion of the Exercise Price)
extend or renew outstanding options granted under the Plan, or accept the
surrender of outstanding options (to the extent not previously exercised) and
authorize the granting of new options in substitution therefor (to the extent
not previously exercised). However, no modification of an option shall be made
without the consent of the optionee which would alter or impair any rights of
the optionee under the option.
6.12 ACCELERATION.
------------
(a) A "Change in Control" for purposes of this Plan shall mean (i) a
single entity or group of affiliated entities acquires more than 50% of the
stock of the Company issued and outstanding immediately prior to such
acquisition; or (ii) shareholders approve the consummation of any merger of the
Company or any sale or other disposition of all or substantially all of its
assets, if the shareholders of the Company immediately before such transaction
own, immediately after consummation of such transac tion, equity securities
(other than options and other rights to acquire equity securities) possessing
less than 50% of the voting power of the surviving or acquiring corporation.
<PAGE>
(b) If a Change in Control has occurred or if the Board of Directors
determines in good faith that a Change in Control is about to occur, the Board
of Directors may determine that it is necessary or desirable to accelerate the
exercisability of all options granted hereunder. Upon such determination, the
Board of Directors shall establish the date upon which all options not
theretofore exercisable shall become exercisable, the period of time (not in
excess of 10 days) during which such options may be exercised and the notice
period required for exercise. The Board of Directors shall notify all optionees
of such date, exercise period and notice requirement.
(c) Any options subject to acceleration under this Section that are
not exercised during the exercise period estab lished by the Board of Directors
pursuant to subsection (b) above shall be treated as if no Change in Control had
occurred and shall be governed by their original terms. Nevertheless, by a
notice to that effect which is communicated in any reasonable manner to as many
of the holders of options as is feasible, the Board of Directors may provide
that any options accelerated pursuant to this Section 6.12 shall expire at the
end of the exercise period established by the Board of Directors pursuant to
subsection (b).
(d) In the event of a Change in Control that consists of a merger of
the Company with or into another entity in which holders of the Company's common
stock will receive cash for their shares, the Board of Directors, upon making
the determination set forth in subsection (b) may provide that, upon
consummation of such Change in Control, all then outstanding options granted
hereunder shall be automatically converted into the right to receive cash in
amounts equal to the differences, if any, between the price to be received by
holders of the Company's common stock for their shares and the respective
Exercise Prices of the outstanding options.
7. PAYMENT FOR SHARES.
7.1 GENERAL RULE. The Exercise Price for any Shares purchased under the
------------
Plan shall be payable (i) in cash, (ii) by check, (iii) subject to Section 7.2,
by promissory note, (iv) at the discretion of the Administrator, with Shares
which have already been owned by the optionee for more than six months and which
are surrendered to the Company in good form for transfer (such Shares to be
valued at their Fair Market Value on the date when the new Shares are purchased
under the Plan), (v) by delivery (on a form prescribed by the Company) of an
irrevocable direction to a securities broker approved by the Company to sell
Shares and to deliver all or part of the sales proceeds to the Company in
payment of all or part of the Exercise Price and any withholding taxes, (vi) by
delivery (on a form prescribed by the Company) of an irrevocable direction to
pledge Shares to a securities broker or lender approved by the Company, as
security for a loan, and to deliver all or part of the loan proceeds to the
Company in payment of all or part of the Exercise Price and any withholding
taxes, or (vii) by any combination of the above, in each case as set forth in
the relevant option agreement.
<PAGE>
7.2 PROMISSORY NOTE. The Administrator in its sole discretion may
---------------
specify in any option agreement entered into hereunder that payment may be made
with a full recourse promissory note executed by the optionee or offeree. Such
note shall bear interest at the rate specified in the option agreement for a
term of no more than five years with interest only payable during the term.
Subject to the foregoing, the Administrator in its sole discretion shall specify
the term, interest rate and other provisions of the note. The Administrator may
require that the offeree or optionee pledge his Shares to the Company for the
purpose of securing payment for the note, and the Administrator may require that
the certificate(s) representing such Shares be held by the Company as a security
holder in order to perfect the Company's security interest.
7.3 WITHHOLDING.
-----------
(a) GENERALLY. Notwithstanding the provisions of Sections 7.1 and
---------
7.2 hereof, whenever under any agreement evidenc ing options, or any shares or
any monetary amount are issued to any grantee, the Company shall be entitled to
require as a condition of delivery that the grantee agree to remit, at the time
of such delivery or at such later date as the Company may determine, an amount
sufficient to satisfy all federal, state and local withholding tax requirements
relating thereto.
(b) WITHHOLDING OF SHARES. With the consent of the Administrator,
---------------------
and in accordance with any rules and procedures from time to time adopted by the
Administrator, a grantee may elect to satisfy by (i) directing the Company to
withhold a portion of the Shares otherwise deliverable or (ii) tendering to the
Company other Shares which are already owned by such grantee or purchaser,
which, in all cases, have a Fair Market Value on the date as of which the amount
of tax to be withhold is determined (the "Tax Date") equal to the amount of tax
to be paid with respect to such Shares.
(c) FORM OF ELECTION. Any election made pursuant to Paragraph 7.3(b)
----------------
above must:
(i) be made in writing on or prior to the Tax Date and specify
whether all or a stated percentage of the applicable taxes will be paid with
Shares and whether the amounts so paid shall be made in accordance with the
"flat" withholding rates for supplemental wages or as determined in accordance
with the grantee's Form W-4 (or comparable state or local forms);
(ii) be irrevocable once made; and
(iii) conform in all respects to all rules and procedures from
time to time adopted by the Administrator and be subject to rejection by the
Administrator for any reason.
<PAGE>
8. TERM OF THE PLAN.
Unless sooner terminated by the Board in its sole discretion, the Plan
shall expire on January __, 2007.
9. AMENDMENTS TO THE PLAN.
The Plan may be amended from time to time by the Board; provided that any
--------
amendment which (a) increases the number of Shares which may be issued under the
Plan, (b) materially increases the benefits accruing to persons eligible to
purchase Shares under the Plan or (c) materially modifies the requirements for
eligibil ity for purchasing Shares under the Plan, shall not become effective
unless and until approved by the shareholders of the Company.
The Company intends that the Plan shall comply with the requirements of
Section 422 of the Code with respect to incentive stock options issued under the
Plan. Should any provisions of the Plan not be necessary to comply with the
Code requirements or should any additional provisions be necessary for the Plan
to comply with the Code requirements, the Board may amend the Plan to add or
modify the provisions of the Plan accordingly without the necessity of
shareholder approval.
10. EFFECTIVE DATE; SHAREHOLDER APPROVAL.
This Plan shall be effective as of the date it has been adopted by the
Board of Directors of the Company; however, no Shares may be sold under the Plan
unless and until shareholder approval of the Plan shall have been obtained.
Options may be granted prior to obtaining shareholder approval; provided that
--------
each option agreement shall provide that the option may not be exercised unless
such approval is obtained prior to January __, 1998.
11. ASSUMPTION.
The terms and conditions of any outstanding options granted pursuant to
this Plan shall be assumed by, be binding upon and inure to the benefit of any
successor corporation to the Company and shall continue to be governed by, to
the extent applicable, the terms and conditions of this Plan.
12. ANNUAL FINANCIAL STATEMENTS.
Any person who is granted an option under the terms of this Plan shall
receive financial statements of the Company on an annual basis as long as such
person has any unexercised options outstand ing as of the last day of each
fiscal year of the Company.
<PAGE>
EXHIBIT 10.8.1
SANTA BARBARA BANK & TRUST
LOAN AGREEMENT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$9,000,000.00 03-23-1998 04-01-2000 16450 4A 910 14492 PWM
- -----------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: THE BALANCE BAR COMPANY LENDER: SANTA BARBARA BANK & TRUST
1015 MARK AVENUE MAIN OFFICE
CARPINTERIA, CA 93013 C/O LOAN SERVICES
P.O. BOX 1173
SANTA BARBARA CA 93102-1173
====================================================================================================================================
</TABLE>
THIS LOAN AGREEMENT BETWEEN THE BALANCE BAR COMPANY ("BORROWER") AND SANTA
BARBARA BANK & TRUST ("LENDER") IS MADE AND EXECUTED ON THE FOLLOWING TERMS AND
CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS
APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL
ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR
SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL
ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM
LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN"
AND COLLECTIVELY AS THE "LOANS". BORROWER UNDERSTANDS AND AGREES THAT: (A) IN
GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S
REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (B)
THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE
SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL
BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS
AGREEMENT.
TERM. This Agreement shall be effective as of MARCH 23, 1998, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
ACCOUNT. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to Borrower
(or to a third party grantor acceptable to Lender).
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.
ADVANCE. The word "Advance" means a disbursement of Loan funds under this
Agreement.
BORROWER. The word "Borrower" means The Balance Bar Company. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates of
Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender
from time to time, the lesser of (a) $9,000,000.00; or (b) 75.000% of the
aggregate amount of Eligible Accounts.
BUSINESS DAY. The words "Business Day" mean a day on which commercial banks
are open for business in the State of California.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
COLLATERAL. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether granted
now or in the future, and whether granted in the form of a security interest,
mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust,
factor's lien, equipment trust, conditional sale, trust receipt, lien,
charge, lien or title retention contract, lease or consignment intended as a
security device, or any other security or lien interest whatsoever whether
created by law, contract, or otherwise. The word "Collateral" includes
without limitation all collateral described below in the section titled
"COLLATERAL."
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable to
Lender. The net amount of any Eligible Account against which Borrower may
borrow shall exclude all returns, discounts, credits, and offsets of any
nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts
do not include:
<PAGE>
03-23-1998 LOAN AGREEMENT PAGE 2
LOAN NO 16450 (CONTINUED)
================================================================================
(a) Accounts with respect to which the Account Debtor is an officer, an
employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary of,
or affiliated with or related to Borrower or its shareholders, officers,
or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a resident of
the United States, except to the extent such Accounts are supported by
insurance, bonds or other assurances satisfactory to Lender.
(e) Accounts with respect to which Borrower is or may become liable to the
Account Debtor for goods sold or services rendered by the Account Debtor
to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account Debtor.
(h) Accounts with respect to which Lender, in its sole discretion, deems
the creditworthiness or financial condition of the Account Debtor to be
unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had filed against
it a petition in bankruptcy or an application for relief under any
provision of any state or federal bankruptcy, insolvency, or debtor-in-
relief acts; or who has had appointed a trustee, custodian, or receiver
for the assets of such Account Debtor; or who has made an assignment for
the benefit of creditors or has become insolvent or fails generally to pay
its debts (including its payrolls) as such debts become due.
(j) Accounts with respect to which the Account Debtor is the United States
government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 90 DAYS from the
invoice date.
(l) That portion of the Accounts of any single Account Debtor which
exceeds 20.000% of all of Borrower's Accounts.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section titled
"EVENTS OF DEFAULT."
EXPIRATION DATE. The words "Expiration Date" mean the date of termination of
Lender's commitment to lend under this Agreement.
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any Collateral
for the Indebtedness, including without limitation all Borrowers granting
such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in connection
with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or hereafter
existing, voluntary or involuntary, due or not due, absolute or contingent,
liquidated or unliquidated; whether Borrower may be liable individually or
jointly with others; whether Borrower may be obligated as a guarantor,
surety, or otherwise; whether recovery upon such Indebtedness may be or
hereafter may become barred by any statute of limitations; and whether such
Indebtedness may be or hereafter may become otherwise unenforceable.
LENDER. The word "Lender" means Santa Barbara Bank & Trust, its successors
and assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced, including
without limitation those loans and financial accommodations described herein
or described on any exhibit or schedule attached to this Agreement from time
to time.
<PAGE>
03-23-1998 LOAN AGREEMENT PAGE 3
LOAN NO 16450 (CONTINUED)
================================================================================
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being contested
in good faith; (c) liens of materialmen, mechanics, warehousemen, or
carriers, or other like liens arising in the ordinary course of business and
securing obligations which are not yet delinquent; (d) purchase money liens
or purchase money security interests upon or in any property acquired or held
by Borrower in the ordinary course of business to secure indebtedness
outstanding on the date of this Agreement or permitted to be incurred under
the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens
and security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those liens and
security interests which in the aggregate constitute an immaterial and
insignificant monetary amount with respect to the net value of Borrower's
assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings
or other agreements, whether created by law, contract, or otherwise,
evidencing, governing, representing, or creating a Security Interest.
SECURITY INTEREST. The words "Security interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as a
security device, or any other security or lien interest whatsoever, whether
created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act
of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement to
indebtedness owed by Borrower to Lender in form and substance acceptable to
Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but
including leaseholds and leasehold improvements) less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current assets,
excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject to
the following conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this Agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered by
Borrower to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall be
in full force and effect.
(d) All guaranties required by Lender for the Line of Credit shall have
been executed by each Guarantor, delivered to Lender, and be in full force
and effect.
(e) Lender, at its option and for its sole benefit, shall have conducted
an audit of Borrower's Accounts, books, records, and operations, and
Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due and
payable.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and Borrower
shall have delivered to Lender the compliance certificate called for in
the paragraph below titled "Compliance Certificate."
MAKING LOAN ADVANCES. Advances under the credit facility, as well as directions
for payment from Borrower's accounts, may be requested orally or in writing by
authorized persons. Lender may, but need not, require that all oral requests be
confirmed in writing. Each Advance shall be conclusively
<PAGE>
03-23-1998 LOAN AGREEMENT PAGE 4
LOAN NO 16450 (CONTINUED)
================================================================================
deemed to have been made at the request of and for the benefit of Borrower (a)
when credited to any deposit account of Borrower maintained with Lender or (b)
when advanced in accordance with the instructions of an authorized person.
Lender, at its option, may set a cutoff time, after which all requests for
Advances will be treated as having been requested on the next succeeding
Business Day.
MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of the
outstanding Advances shall exceed the applicable Borrowing Base, Borrower,
immediately upon written or oral notice from Lender, shall pay to Lender an
amount equal to the difference between the outstanding principal balance of the
Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to
Lender in full the aggregate unpaid principal amount of all Advances then
outstanding and all accrued unpaid interest, together with all other applicable
fees, costs and charges, if any, not yet paid.
LOAN ACCOUNT. Lender shall maintain on its books a record of account in which
Lender shall make entries for each Advance and such other debits and credits as
shall be appropriate in connection with the credit facility. Lender shall
provide Borrower with periodic statements of Borrower's account, which
statements shall be considered to be correct and conclusively binding on
Borrower unless Borrower notifies Lender to the contrary within thirty (30) days
after Borrower's receipt of any such statement which Borrower deems to be
incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all
other Loans, obligations and duties owed by Borrower to Lender, Borrower (and
others, if required) shall grant to Lender Security Interests in such property
and assets as Lender may require (the "Collateral"), including without
limitation Borrower's present and future Accounts and general intangibles.
Lender's Security Interests in the Collateral shall be continuing liens and
shall include the proceeds and products of the Collateral, including without
limitation the proceeds of any insurance. With respect to the Collateral,
Borrower agrees and represents and warrants to Lender:
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's Security Interests in the Collateral. Upon
request of Lender, Borrower will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Borrower will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Contemporaneous with the execution of this
Agreement, Borrower will execute one or more UCC financing statements and any
similar statements as may be required by applicable law, and will file such
financing statements and all such similar statements in the appropriate
location or locations. Borrower hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue any Security Interest. Lender may at any time, and
without further authorization from Borrower, file a carbon, photograph,
facsimile, or other reproduction of any financing statement for use as a
financing statement. Borrower will reimburse Lender for all expenses for the
perfection, termination, and the continuation of the perfection of Lender's
security interest in the Collateral. Borrower promptly will notify Lender of
any change in Borrower's name including any change to the assumed business
names of Borrower. Borrower also promptly will notify Lender of any change
in Borrower's Social Security Number or Employer Identification Number.
Borrower further agrees to notify Lender in writing prior to any change in
address or location of Borrower's principal governance office or should
Borrower merge or consolidate with any other entity.
COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records
shall be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the Accounts,
Borrower agrees to keep and maintain such records as Lender may require,
including without limitation information concerning Eligible Accounts and
Account balances and agings. The following is an accurate and complete list
of all locations at which Borrower keeps or maintains business records
concerning Borrower's Accounts: 1015 MARK AVENUE, CARPINTERIA, CA 93013.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender a schedule of
Accounts and Eligible Accounts, in form and substance satisfactory to the
Lender. Thereafter Borrower shall execute and deliver to Lender such
supplemental schedules of Eligible Accounts and such other matters and
information relating to Borrower's Accounts as Lender may request.
Supplemental schedules shall be delivered according to the following
schedule: BORROWING CERTIFICATE, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
AGINGS WITHIN 10 DAYS OF EACH MONTH END.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; and (c) Lender, its
assigns, or agents shall have the right at any time and at Borrower's expense
to inspect, examine, and audit Borrower's records and to confirm with Account
Debtors the accuracy of such Accounts.
ADDITIONAL CREDIT FACILITIES. In addition to the Line of Credit facility, the
following credit accommodations are either in place or will be made available to
Borrower:
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Delaware, and
is validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own
its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly qualified as
a foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its businesses
or financial condition.
<PAGE>
03-23-1998 LOAN AGREEMENT PAGE 5
LOAN NO 16450 (CONTINUED)
================================================================================
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not conflict
with, result in a violation of, or constitute a default under (a) any
provision of its articles of incorporation or organization, or bylaws, or any
agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against Borrower
in accordance with their respective terms.
PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq.,
Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety
Code, Section 25100, et seq., or other applicable state or Federal laws,
rules, or regulations adopted pursuant to any of the foregoing. Except as
disclosed to and acknowledged by Lender in writing, Borrower represents and
warrants that: (a) During the period of Borrower's ownership of the
properties, there has been no use, generation, manufacture, storage,
treatment, disposal, release or threatened release of any hazardous waste or
substance by any person on, under, about or from any of the properties. (b)
Borrower has no knowledge of, or reason to believe that there has been (i)
any use, generation, manufacture, storage, treatment, disposal, release, or
threatened release of any hazardous waste or substance on, under, about or
from the properties by any prior owners or occupants of any of the
properties, or (ii) any actual or threatened litigation or claims of any kind
by any person relating to such matters. (c) Neither Borrower nor any tenant,
contractor, agent or other authorized user of any of the properties shall
use, generate, manufacture, store, treat, dispose of, or release any
hazardous waste or substance on, under, about or from any of the properties;
and any such activity shall be conducted in compliance with all applicable
federal, state, and local laws, regulations, and ordinances, including
without limitation those laws, regulations and ordinances described above.
Borrower authorizes Lender and its agents to enter upon the properties to
make such inspections and tests as Lender may deem appropriate to determined
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and for
Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any other
person. The representations and warranties contained herein are based on
Borrower's due diligence in investigating the properties for hazardous waste
and hazardous substances. Borrower hereby (a) releases and waives any future
claims against Lender for indemnity or contribution in the event Borrower
becomes liable for cleanup or other costs under any such laws, and (b) agrees
to indemnify and hold harmless Lender against any and all claims, losses,
liabilities, damages, penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section of the
Agreement or as a consequence of any use, generation, manufacture, storage,
disposal, release or threatened release occurring prior to Borrower's
ownership or interest in the properties, whether or not the same was or
should have been known to Borrower. The provisions of this section of the
Agreement, including the obligation to indemnify, shall survive the payment
of the Indebtedness and the termination or expiration of this Agreement and
shall not be affected by Lender's acquisition of any interest in any of the
properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which may
materially adversely affect Borrower's financial condition or properties,
other than litigation, claims, or other events, if any, that have been
disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith in
the ordinary course of business and for which adequate reserves have been
provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or affecting
any of the Collateral directly or indirectly securing repayment of Borrower's
Loan and Note, that would be prior or that may in any way be superior to
Lender's Security Interests and rights in and to such Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to any
such plan, (ii) Borrower has not withdrawn from any such plan or initiated
steps to do so, (iii) no steps have been taken to terminate any such plan,
and (iv) there are no unfunded liabilities other than those previously
disclosed to Lender in writing.
<PAGE>
03-23-1998 LOAN AGREEMENT PAGE 6
LOAN NO 16450 (CONTINUED)
================================================================================
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business, or
Borrower's Chief executive office, if Borrower has more than one place of
business, is located at 1015 Mark Avenue, Carpinteria, CA 93013. Unless
Borrower has designated otherwise in writing this location is also the office
or offices where Borrower keeps its records concerning the Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all information
hereafter furnished by or on behalf of Borrower to Lender will be, true and
accurate in every material respect on the date as of which such information
is dated or certified; and none of such information is or will be incomplete
by omitting to state any material fact necessary to make such information not
misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect until
such time as Borrower's Indebtedness shall be paid in full, or until this
Agreement shall be terminated in the manner provided above, whichever is the
last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of any
Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis, and
permit Lender to examine and audit Borrower's books and records at all
reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited by
a certified public accountant satisfactory to Lender, and, as soon as
available, but in no event later than thirty (30) days after the end of each
fiscal quarter, Borrower's balance sheet and profit and loss statement for
the period ended, prepared and certified as correct to the best knowledge and
belief by Borrower's chief financial officer or other officer or person
acceptable to Lender. All financial reports required to be provided under
this Agreement shall be prepared in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by
Borrower as being true and correct.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
list of assets and liabilities, agings of receivables and payables, inventory
schedules, budgets, forecasts, tax returns, and other reports with respect to
Borrower's financial condition and business operations as Lender may request
from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and ratios:
NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net Worth
of less than 2.00 TO 1.00.
CURRENT RATIO. Maintain a ratio of Current Assets to Current Liabilities in
excess of 1.75 TO 1.00. Except as provided above, all computations made to
determine compliance with the requirements contained in this paragraph shall
be made in accordance with generally accepted accounting principles, applied
on a consistent basis, and certified by Borrower as being true and correct.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Borrower
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest for the Loans, Borrower
will provide Lender with such loss payable or other endorsements as Lender
may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each
existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties
insured; (e) the then current property values on the basis of which insurance
has been obtained, and the manner of determining those values; and (f) the
expiration date of the policy. In addition, upon request of Lender (however not
more often than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value or
replacement cost of any Collateral. The cost of such appraisal shall be paid by
Borrower.
OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements,
whether now or hereafter existing, between Borrower and any other party and
notify Lender immediately in writing of any default in connection with any other
such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business operations,
unless specifically consented to the contrary by Lender in writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness
and obligations, including without limitation all assessments, taxes,
governmental charges, levies and liens, of every kind and nature, imposed upon
Borrower or its properties, income, or profits, prior to the date on which
penalties would attach, and all lawful claims that, if unpaid, might become a
lien or charge upon any of Borrower's properties, income, or profits. Provided
<PAGE>
03-23-1998 LOAN AGREEMENT PAGE 7
LOAN NO 16450 (CONTINUED)
================================================================================
however, Borrower will not be required to pay and discharge any such assessment,
tax, charge, levy, lien or claim so long as (a) the legality of the same shall
be contested in good faith by appropriate proceedings, and (b) Borrower shall
have established on its books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien, or claim in accordance with generally
accepted accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies, liens and
claims and will authorize the appropriate governmental official to deliver to
Lender at any time a written statement of any assessments, taxes, charges,
levies, liens and claims against Borrower's properties, income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions set
forth in this Agreement and in the Related Documents in a timely manner, and
promptly notify Lender if Borrower learns of the occurrence of any event which
constitutes an Event of Default under this Agreement or under any of the Related
Documents.
OPERATIONS. Maintain executive and management personnel with substantially the
same qualifications and experience as the present executive and management
personnel; provide written notice to Lender of any change in executive and
management personnel; conduct its business affairs in a reasonable and prudent
manner and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee benefit
plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records and
to make copies and memoranda of Borrower's books, accounts, and records. If
Borrower now or at any time hereafter maintains any records (including without
limitation computer generated records and computer software programs for the
generation of such records) in the possession of a third party, Borrower, upon
request of Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of any records
it may request, all at Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender at
least annually and at the time of each disbursement of Loan proceeds with a
certificate executed by Borrower's chief financial officer, or other officer or
person acceptable to Lender, certifying that the representations and warranties
set forth in this Agreement are true and correct as of the date of the
certificate and further certifying that, as of the date of the certificate, no
Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all environmental protection federal, state and local law, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part of
any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless such
environmental activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within thirty
(30) days after receipt thereof a copy of any notice, summons, lien, citation,
directive, letter or other communication from any governmental agency or
instrumentality concerning any intentional or unintentional action or omission
on Borrower's part in connection with any environmental activity whether or not
there is damage to the environment and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all Security
Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this Agreement,
create, incur or assume indebtedness for borrowed money, including capital
leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage,
assign, pledge, lease, grant a security interest in, or encumber any of
Borrower's assets, or (c) sell with recourse any of Borrower's accounts,
except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate with
any other entity, change ownership, change its name, dissolve or transfer or
sell Collateral out of the ordinary course of business, (c) pay any dividends
on Borrower's stock (other than dividends payable in its stock), provided,
however that notwithstanding the foregoing, but only so long as no Event of
Default has occurred and is continuing or would result from the payment of
dividends, if Borrower is a "Subchapter S Corporation" (as defined in the
Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends
on its stock to its shareholders from time to time in amounts necessary to
enable the shareholders to pay income taxes and make estimated income tax
payments to satisfy their liabilities under federal and state law which arise
solely from their status as Shareholders of a Subchapter S Corporation
because of their ownership of shares of stock of Borrower, or (d) purchase or
retire any of Borrower's outstanding shares or alter or amend Borrower's
capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other enterprise
or entity, or (c) incur any obligation as surety or guarantor other than in
the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse
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03-23-1998 LOAN AGREEMENT PAGE 8
LOAN NO 16450 (CONTINUED)
================================================================================
change in Borrower's financial condition, in the financial condition of any
Guarantor, or in the value of any Collateral securing any Loan; (d) any
Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
Guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in
good faith deems itself insecure, even though no Event of Default shall have
occurred.
ADDITIONAL COVENANTS.
1) A/R and Inventory audits as of July 1, of each year, with cost paid by
Borrower.
2) No payment of dividends or repurchase of common shares without prior written
approval from the Bank, except as defined under the change of ownership section
described below.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or
more of the common and/or preferred stock of Borrower, excluding any percentage
change related to the sale of stock through a public stock offering.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on
the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition contained
in this Agreement or in any of the Related Documents, or failure of Borrower
to comply with or to perform any other term, obligation covenant or condition
contained in any other agreement between Lender and Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective obligations
under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at any
time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and
for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver for
any part of Borrower's property, any assignment for the benefit of creditors,
any type of creditor workout, or the commencement of any proceeding under any
bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender. However this Event of
Default shall not apply if there is a good faith dispute by Borrower or
Grantor, as the case may be, as to the validity or reasonableness of the
claim which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the creditor or forfeiture
proceeding and furnishes reserves or a surety bond for the creditor or
forfeiture proceeding satisfactory to Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender,
and, in doing so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given a
notice of a similar default within the preceding twelve (12) months, it may
be cured (and no Event of Default will have occurred) if Borrow or Grantor,
as the case may be, after receiving written notice from Lender demanding cure
of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps
which Lender deems in Lender's sole discretion to be sufficient to cure the
default and thereafter continues and completes all reasonable and necessary
steps sufficient to produce compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option, all
Indebtedness immediately will become due and payable, all without notice of any
kind to Borrower, except that in the case of an Event of Default of the type
described in the "Insolvency" subsection
<PAGE>
03-23-1998 LOAN AGREEMENT PAGE 9
LOAN NO 16450 (CONTINUED)
================================================================================
above, such acceleration shall be automatic and not optional. In addition,
Lender shall have all the rights and remedies provided in the Related Documents
or available at law, in equity, or otherwise. Except as may be prohibited by
applicable law, all of Lender's rights and remedies shall be cumulative and may
be exercised singularly or concurrently. Election by Lender to pursue any remedy
shall not exclude pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation of Borrower or of any
Grantor shall not affect Lender's right to declare a default and to exercise its
rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the makers set
forth in this Agreement. No alteration of or amendment to this Agreement
shall be effective unless given in writing and signed by the party or parties
sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY
LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES
UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF SANTA
BARBARA COUNTY, THE STATE OF CALIFORNIA. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale
or transfer, whether now or later, of one or more participation interests in
the Loans to one or more purchasers, whether related or unrelated to Lender.
Lender may provide, without any limitation whatsoever, to any one or more
purchasers, or potential purchasers, any information or knowledge Lender may
have about Borrower or about any other matter relating to the Loan, and
Borrower hereby waives any rights to privacy it may have with respect to such
matters. Borrower additionally waives any and all notices of sale of
participation interests, as well as all notices of any repurchase of such
participation interests. Borrower also agrees that the purchasers of any
such participation interests will be considered as the absolute owners of
such interests in the Loans and will have all the rights granted under the
participation agreement or agreements governing the sale of such
participation interests. Borrower further waives all rights of offset or
counterclaim that it may have now or later against Lender or against any
purchaser of such a participation interest and unconditionally agrees that
either Lender or such purchaser may enforce Borrower's obligation under the
Loans irrespective of the failure or insolvency of any holder of any interest
in the Loans. Borrower further agrees that the purchaser of any such
participation interests may enforce its interests irrespective of any
personal claims or defenses that Borrower may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant to
this Agreement. Lender may pay someone else to help collect the Loans and to
enforce this Agreement, and Borrower will pay that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses, whether or not there is a lawsuit, including
attorneys' fees for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated post-
judgment collection services. Borrower also will pay any court costs, in
addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required by
law), and shall be effective when actually delivered or when deposited with a
nationally recognized overnight courier or deposited in the United States
mail, first class, postage prepaid, addressed to the party to whom the notice
is to be given at the address shown above. Any party may change its address
for notices under this Agreement by giving formal written notice to the other
parties, specifying that the purpose of the notice is to change the party's
address. To the extent permitted by applicable law, if there is more than
one Borrower, notice to any Borrower will constitute notice to all Borrowers.
For notice purposes, Borrower will keep Lender informed at all times of
Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of this
Agreement in all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other financial
accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery to
Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
<PAGE>
03-23-1998 LOAN AGREEMENT PAGE 10
LOAN NO 16450 (CONTINUED)
================================================================================
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall operate
as a waiver of such right or any other right. A waiver by Lender of a
provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with the provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the granting
of such consent by Lender in any instance shall not constitute continuing
consent in subsequent instances where such consent is required, and in all
cases such consent may be granted or withheld in the sole discretion of
Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND
BORROWER AGREES TO IT TERMS. THIS AGREEMENT IS DATED AS OF MARCH 23, 1998.
BORROWER:
The Balance Bar Company
By: _________________________________________
James A. Wolfe, Chief Executive Officer
By: _________________________________________
Thomas J. Flahie, Senior Vice President,
Finance & Administration
LENDER:
Santa Barbara Bank & Trust
By: _________________________________________
Authorized Officer
<PAGE>
EXHIBIT 10.8.2
SANTA BARBARA BANK & TRUST
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$9,000,000.00 03-23-1998 04-01-2000 16450 4A 910 14492 PWM
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: THE BALANCE BAR COMPANY LENDER: SANTA BARBARA BANK & TRUST
1015 MARK AVENUE MAIN OFFICE
CARPINTERIA, CA 93013-2412 C/O LOAN SERVICES
P.O. BOX 1173
SANTA BARBARA CA 93102-1173
====================================================================================================================================
</TABLE>
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN THE BALANCE BAR
COMPANY (REFERRED TO BELOW AS "GRANTOR"); AND SANTA BARBARA BANK & TRUST
(REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO
LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND
AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT
TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property
of Grantor, whether now owned or hereafter acquired, whether now existing
or hereafter arising, and wherever located:
ALL INVENTORY (INCLUDING ALL RAW MATERIALS, WORK IN PROCESS, FINISHED
GOODS AND GOODS HELD FOR SALE OR LEASED OR FINISHED UNDER CONTRACTS OF
SERVICE IN WHICH DEBTOR HAS OR LATER ACQUIRES A RIGHT); RECEIVABLES
(INCLUDING ACCOUNTS, INSTRUMENTS, DOCUMENTS, CHATTEL PAPER AND GENERAL
INTANGIBLES); ACCOUNTS (INCLUDING RIGHTS TO PAYMENTS FOR GOODS SOLD OR
LEASED OR SERVICES RENDERED BY GRANTOR); CONTRACT RIGHTS; EQUIPMENT
(IN WHICH GRANTOR HAS, OR LATER ACQUIRES, A RIGHT; AND DOCUMENTS OF
TITLE COVERING ALL OR A PART OF SAID EQUIPMENT); FURNITURE; FIXTURES
AND GENERAL INTANGIBLES.
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means The Balance Bar Company, its successors
and assigns.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents.
LENDER. The word "Lender" means Santa Barbara Bank & Trust, its successors
and assigns.
<PAGE>
03-23-1998 COMMERCIAL SECURITY AGREEMENT PAGE 2
LOAN NO 16450 (CONTINUED)
================================================================================
NOTE. The word "Note" means the note or credit agreement dated March 23,
1998, in the principal amount of $9,000,000.00 from The Balance Bar Company
to Lender, together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or credit
agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in the future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for which
the grant of a security interest would be prohibited by law. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
Indebtedness against any and all such accounts, and, at Lender's option, to
administratively freeze all such accounts to allow Lender to protect Lender's
charge and setoff rights provided in this paragraph.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by lender. Grantor hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue the security interest granted in this
Agreement. Lender may at any time and without further authorization from
Grantor, file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Grantor. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN
EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND
EVEN THOUGH FOR A PERIOD OF TIME GRANTOR MAY NOT BE INDEBTED TO LENDER.
NO VIOLATION. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is a
party, and its certificate or articles of incorporation and bylaws do not
prohibit any term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased
by Grantor; (b) all real property being rented or leased by Grantor; (c)
all storage facilities owned, rented, leased, or being used by Grantor; and
(d) all other properties where Collateral is or may be located. Except in
the ordinary course of its business, Grantor shall not remove the
Collateral from its existing locations without the prior written consent of
Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing locations without the prior written
consent of Lender. To the extent that the Collateral consists of vehicles,
or other titled property, Grantor shall not take or permit any action which
would require application for certificates of title for the vehicles
outside the State of California, without the prior written consent of
Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale
in the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall
not pledge, mortgage, encumber or otherwise permit the Collateral to be
subject to any lien, security interest, encumbrance, or charge, other than
the security interest provided for in this Agreement, without the prior
written consent of Lender. This includes security interests even if junior
in right to the security interests granted under this Agreement. Unless
waived by Lender, all proceeds from any disposition of the Collateral (for
whatever reason) shall be held in trust for Lender and shall not be
commingled with any other funds; provided however, this requirement shall
not constitute consent by Lender to any sale or other disposition. Upon
receipt, Grantor shall immediately deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
<PAGE>
03-23-1998 COMMERCIAL SECURITY AGREEMENT PAGE 3
LOAN NO 16450 (CONTINUED)
================================================================================
COLLATERAL SCHEDULES AND LOCATIONS. Insofar as the Collateral consists of
inventory, Grantor shall deliver to Lender, as often as Lender shall
require, such lists, descriptions, and designations of such Collateral as
Lender may require to identify the nature, extent, and location of such
Collateral. Such information shall be submitted for Grantor and each of
its subsidiaries or related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall
have the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of
all cases involving the return, rejection, repossession, loss or damage of
or to any Collateral; of any request for credit or adjustment or of any
other dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges the could accrue as a
result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms see defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"),
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901,
et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health
and Safety Code, Section 25100, et seq., or other applicable state or
Federal laws, rules, or regulations adopted pursuant to any of the
foregoing. The terms "hazardous waste" and "hazardous substance" shall
also include, without limitation, petroleum and petroleum by-products or
any fraction thereof and asbestos. The representations and warranties
contained herein are based on Grantor's due diligence in investigating the
Collateral for hazardous wastes and substances. Grantor hereby (a)
releases and waives any future claims against Lender for indemnity or
contribution in the event Grantor becomes liable for cleanup or other costs
under any such laws, and (b) agrees to indemnify and hold harmless Lender
against any and all claims and losses resulting from a breach of this
provision of this Agreement. This obligation to indemnify shall survive
the payment of the Indebtedness and the satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least ten (10) days' prior written
notice to Lender and not including any disclaimer of the insurer's
liability for failure to give such a notice. Each insurance policy also
shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Grantor
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require.
In no event shall the insurance be in an amount less than the amount agreed
upon in the Agreement to Provide Insurance. If Grantor at any time fails
to obtain or maintain any insurance as required under this Agreement,
Lender may (but shall not be obligated to) obtain such insurance as Lender
deems appropriate, including if it so chooses "single interest insurance,"
which will cover only Lender's interest in the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay ail of the
Indebtedness, and shall pay the balance to Grantor. Any proceeds which
have not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit
<PAGE>
03-23-1998 COMMERCIAL SECURITY AGREEMENT PAGE 4
LOAN NO 16450 (CONTINUED)
================================================================================
and shall constitute a non-interest-bearing account which Lender may
satisfy by payment of the insurance premiums required to be paid by Grantor
as they become due. Lender does not hold the reserve funds in trust for
Grantor, and Lender is not the agent of Grantor for payment of the
insurance premiums required to be paid by Grantor. The responsibility for
the payment of premiums shall remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following: (a)
the name of the insurer; (b) the risks insured; (c) the amount of the
policy, (d) the property insured; (e) the then current value on the basis
of which insurance has been obtained and the manner of determining that
value; and (f) the expiration date of the policy. In addition, Grantor
shall upon request by Lender (however not more often than annually) have an
independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of
the tangible personal property and beneficial use of all the Collateral and may
use it in any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor's right to possession and beneficial use shall
not apply to any Collateral where possession of the Collateral by Lender is
required by law to perfect Lender's security interest in such Collateral. If
Lender at any time has possession of any Collateral, whether before or after an
Event of Default, Lender shall be deemed to have exercised reasonable care in
the custody and preservation of the Collateral if Lender takes such action for
that purpose as Grantor shall request or as Lender, in Lender's sole discretion,
shall deem appropriate under the circumstances, but failure to honor any request
by Grantor shall not of itself be deemed to be a failure to exercise reasonable
care. Lender shall not be required to take any steps necessary to preserve any
rights in the Collateral against prior parties, nor to protect, preserve or
maintain any security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due
on the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
collateral documents to create a valid and perfected security interest or
lien) at any time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's properly, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of an,
proceeding under any bankruptcy or insolvency laws by or against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the Indebtedness. This includes a garnishment of any of Grantor's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor dies
or becomes incompetent. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender,
and, in doing so, cure the Event of Default.
<PAGE>
03-23-1998 COMMERCIAL SECURITY AGREEMENT PAGE 5
LOAN NO 16450 (CONTINUED)
================================================================================
ADVERSE CHANGE. A material change occurs in Grantor's financial condition,
or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a) cures the default within fifteen (15) days; or
(b), if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the California Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all
or any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If
the Collateral contains other goods not covered by this Agreement at the
time of repossession, Grantor agrees Lender may take such other goods,
provided that Lender makes reasonable efforts to return them to Grantor
after repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in its
own name or that of Grantor. Lender may sell the Collateral at public
auction or private sale. Unless the Collateral threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Lender will give Grantor reasonable notice of the time after which any
private sale or any other intended disposition of the Collateral is to be
made. The requirements of reasonable notice shall be met if such notice is
given at least ten (10) days, or such lesser time as required by state law,
before the time of the sale or disposition. All expenses relating to the
disposition of the Collateral, including without limitation the expenses of
retaking, holding, insuring, preparing for sale and selling the Collateral,
shall become a part of the Indebtedness secured by this Agreement and shall
be payable on demand, with interest at the Note rate from date of
expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the
Collateral consists of accounts, general intangibles, insurance policies,
instruments chattel paper, chooses in action, or similar property, Lender
may demand, collect, receipt for, settle, compromise, adjust, sue for,
foreclose, or realize on the Collateral as Lender may determine, whether or
not Indebtedness or Collateral is then due. For these purposes, Lender
may, or behalf of and in the name of Grantor, receive, open and dispose of
mail addressed to Grantor; change any address to which mail and payment are
to be sent; and endorse notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, o storage of
any Collateral. To facilitate collection, Lender may notify account
debtors and obligors on any Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies
of a secured creditor under the provisions of the Uniform Commercial Code,
as may be amended from time to time. In addition, Lender shall have and
may exercise any or all other rights and remedies it may have available at
law, in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement, after
Grantor's failure to perform, shall not affect Lender's right to declare a
default and to exercise its remedies.
<PAGE>
03-23-1998 COMMERCIAL SECURITY AGREEMENT PAGE 6
LOAN NO 16450 (CONTINUED)
================================================================================
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted
by Lender in the State of California. If there is a lawsuit, Grantor
agrees upon Lender's request to submit to the jurisdiction of the courts of
the State of California. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand ail of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay all court costs and such additional fees
as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the persons
signing below is responsible for ail obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in United
States mail first class postage prepaid addressed to the party to whom the
notice is to be given at the address shown above. Any party may change its
address for notices under this Agreement by giving formal written notice to
the other parties, specifying that the purpose of the notice is to change
the party's address. To the extent permitted by applicable law, if there
is more than one Grantor, notice to any Grantor will constitute notice to
all Grantors. For notice purposes, Grantor will keep Lender informed at
all times of Grantor's current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, drafts or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary or
advisable. This power is given as security for the Indebtedness, and the
authority hereby conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and inure
to the benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a waiver
of Lender's right otherwise to demand strict compliance with that provision
or any other provision of this Agreement. No prior waiver by Lender, nor
any course of dealing between Lender and Grantor, shall constitute a waiver
of any of Lender's rights or of any of Grantor's obligations as to any
future transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for
the Indebtedness, Borrower irrevocably waives, disclaims and relinquishes
all claims against such other person which Borrower has or would otherwise
have by virtue of payment of the Indebtedness or any part thereof,
specifically including but not limited to all rights of indemnity,
contribution or exoneration.
<PAGE>
03-23-1998 COMMERCIAL SECURITY AGREEMENT PAGE 7
LOAN NO 16450 (CONTINUED)
================================================================================
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED MARCH
23, 1998.
GRANTOR:
THE BALANCE BAR COMPANY
BY
---------------------------------------------
JAMES A. WOLFE, CHIEF EXECUTIVE OFFICER
THOMAS J. FLAHIE, SENIOR VICE PRESIDENT, FINANCE & ADMINISTRATION
================================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.24(c) 1998 CFI ProServices, Inc.
All rights reserved. (CA-E40 2BBC1.LN C2.OVL)
<PAGE>
EXHIBIT 10.8.3
SANTA BARBARA BANK & TRUST
PROMISSORY NOTE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$9,000,000.00 03-23-1998 04-01-2000 16450 4A 910 14492 PWM
- -----------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: THE BALANCE BAR COMPANY LENDER: SANTA BARBARA BANK & TRUST
1015 MARK AVENUE MAIN OFFICE
CARPINTERIA, CA 93013-2912 C/O LOAN SERVICES
P.O. BOX 1173
SANTA BARBARA, CA 93102-1173
====================================================================================================================================
</TABLE>
PRINCIPAL AMOUNT: $9,000,000.00 INITIAL RATE: 9.250% DATE OF NOTE: MARCH
23, 1998
PROMISE TO PAY. THE BALANCE BAR COMPANY, ("BORROWER") PROMISES TO PAY TO SANTA
BARBARA BANK & TRUST ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES
OF AMERICA, THE PRINCIPAL AMOUNT OF NINE MILLION & 00/100 DOLLARS
($9,000,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE
UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE
CALCULATED FROM THE DATE, EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE.
PAYMENT. BORROWER WILL PAY THIS LOAN ON DEMAND, OR IF NO DEMAND IS MADE, IN ONE
PAYMENT OF ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON APRIL
1, 2000. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ACCRUED
UNPAID INTEREST BEGINNING APRIL 1, 1998, AND ALL SUBSEQUENT INTEREST PAYMENTS
ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. The annual interest rate for
this Note is computed on a 365/360 basis; that is, by applying the ratio of the
annual interest rate over a year of 360 days, multiplied by the outstanding
principal balance, multiplied by the actual number of days the principal balance
is outstanding. Borrower will pay Lender at Lender's address shown above or at
such other place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal and any remaining amount to any unpaid collection
costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is the Prime
rate as published in the Wall Street Journal. When a range of rates has been
published, the higher of the rates will be used (the "Index"). The Index is not
necessarily the lowest rate charged by Lender on its loans. If the Index
becomes unavailable during the term of this loan, Lender may designate a
substitute index after notice to Borrower. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that Lender
may make loans based on other rates as well. The interest rate change will not
occur more often than each day. THE INDEX CURRENTLY IS 8.500%. THE INTEREST
RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A
RATE OF 0.750 PERCENTAGE POINTS OVER THE INDEX, RESULTING IN AN INITIAL RATE OF
9.250%. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even upon
full prepayment of this Note, Borrower understands that Lender is entitled to a
MINIMUM INTEREST CHARGE OF $100.00. Other than Borrower's obligation to pay any
minimum interest charge, Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due. Early payments will not, unless agreed
to by Lender in writing, relieve Borrower of Borrower's obligation to continue
to make payments of accrued unpaid interest. Rather, they will reduce the
principal balance due.
LATE CHARGE. If a payment is 15 DAYS OR MORE LATE, Borrower will be charged
5.000% OF THE REGULARLY SCHEDULED PAYMENT.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other agreement,
in favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the Indebtedness is impaired.
(i) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
<PAGE>
03-23-1998 PROMISSORY NOTE PAGE 2
LOAN NO 16450 (CONTINUED)
===============================================================================
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Lender may hire or pay someone
else to help collect this Note if Borrower does not pay. Borrower also will pay
Lender that amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses whether or not there is a
lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Borrower also
will pay any court costs, in addition to all other sums provided by law. THIS
NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF
CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO
SUBMIT TO THE JURISDICTION OF THE COURTS OF SANTA BARBARA COUNTY, THE STATE OF
CALIFORNIA. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF CALIFORNIA.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note, as well as directions for payment from Borrower's accounts, may be
requested orally or in writing by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing. The
following party or parties are authorized to request advances under the line of
credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority: JAMES A. WOLFE, THOMAS J.
FLAHIE, RICHARD LAMB AND KRISTINA B. ERIKSEN. Borrower agrees to be liable for
all sums either: (a) advanced in accordance with the instructions of an
authorized person or (b) credited to any of Borrower's accounts with Lender.
The unpaid principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Note if: (a) Borrower or any guarantor is in default under the terms of this
Note or any agreement that Borrower or any guarantor has with Lender, including
any agreement made in connection with the signing of this Note; (b) Borrower or
any guarantor ceases doing business or is insolvent; (c) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Note or any other loan with Lender; (d) Borrower has applied
funds provided pursuant to this Note for purposes other than those authorized by
Lender; or (e) Lender in good faith deems itself insecure under this Note or any
other agreement between Lender and Borrower.
ADDITIONAL PROVISIONS. I represent and warrant to Lender that the verbal or
written financial information given is true and correct and that there has been
no adverse change in the financial information. I also waive the provisions of
section 1801.21 of the California Vehicle Code relating to accessibility to
Department of Motor Vehicle information.
NAME CHANGE. At this time the name of this business has been changed from the
Bio-Engineered Foods, Inc. to The Balance Bar Company.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive any applicable statute of limitations, presentment, demand
for payment, protest and notice of dishonor. Upon any change in the terms of
this Note, and unless otherwise expressly stated in writing, no party who signs
this Note, whether as maker, guarantor, accommodation maker or endorser, shall
be released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any party
or guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
THE BALANCE BAR COMPANY
BY:
---------------------------------------
JAMES A. WOLFE, CHIEF EXECUTIVE OFFICER
BY:
---------------------------------------
THOMAS J. FLAHIE, SENIOR VICE PRESIDENT, FINANCE & ADMINISTRATION
===============================================================================
Variable Rate, Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver.
3.24(c) 1998 CFI ProServices, Inc. All
rights reserved. (CA-D20 2BBC.LN C2.OVL)
<PAGE>
EXHIBIT 10.8.4
SANTA BARBARA BANK & TRUST
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$285,430.11 03-23-1998 01-01-2001 17735 4A 910 14492 PWM
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: THE BALANCE BAR COMPANY LENDER: SANTA BARBARA BANK & TRUST
1015 MARK AVENUE MAIN OFFICE
CARPINTERIA, CA 93013-2912 C/O LOAN SERVICES
P.O. BOX 1173
SANTA BARBARA, CA 93102-1173
====================================================================================================================================
</TABLE>
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN THE BALANCE BAR
COMPANY (REFERRED TO BELOW AS "GRANTOR"); AND SANTA BARBARA BANK & TRUST
(REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO
LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND
AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT
TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement, as
this Commercial Security Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this Commercial
Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
ALL INVENTORY (INCLUDING ALL RAW MATERIALS, WORK IN PROCESS, FINISHED
GOODS AND GOODS HELD FOR SALE OR LEASED OR FINISHED UNDER CONTRACTS OF
SERVICE IN WHICH DEBTOR HAS OR LATER ACQUIRES A RIGHT); RECEIVABLES
(INCLUDING ACCOUNTS, INSTRUMENTS, DOCUMENTS, CHATTEL PAPER AND GENERAL
INTANGIBLES); ACCOUNTS (INCLUDING RIGHTS TO PAYMENTS FOR GOODS SOLD OR
LEASED OR SERVICES RENDERED BY GRANTOR); CONTRACT RIGHTS, EQUIPMENT (IN
WHICH GRANTOR HAS, OR LATER ACQUIRES, A RIGHT; AND DOCUMENTS OF TITLE
COVERING ALL OR A PART OF SAID EQUIPMENT); FURNITURE, FIXTURES, AND
GENERAL INTANGIBLES.
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions for
any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property described
in this Collateral section.
(e) All records and data relating to any of the property described in this
Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of Grantor's
right, title, and interest in and to all computer software required to
utilize, create, maintain, and process any such records or data on
electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section titled
"Events of Default."
GRANTOR. The word "Grantor" means The Balance Bar Company, its successors
and assigns.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in connection
with the Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents.
LENDER. The word "Lender" means Santa Barbara Bank & Trust, its successors
and assigns.
NOTE. The word "Note" means the note or credit agreement dated March 23,
1998, in the principal amount of $285,430.11 from The Balance Bar Company to
Lender, together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or credit
agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
<PAGE>
03-23-1998 COMMERCIAL SECURITY AGREEMENT PAGE 2
LOAN NO 17735 (CONTINUED)
===============================================================================
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in the future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for which
the grant of a security interest would be prohibited by law. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
Indebtedness against any and all such accounts, and, at Lender's option, to
administratively freeze all such accounts to allow Lender to protect Lender's
charge and setoff rights provided in this paragraph.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
ORGANIZATION. Grantor is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of California.
AUTHORIZATION. The execution, delivery, and performance of this Agreement by
Grantor have been duly authorized by all necessary action by Grantor and do
not conflict with, result in a violation of, or constitute a default under
(a) any provision of its articles of incorporation or organization, or
bylaws, or any agreement or other instrument binding upon Grantor or (b) any
law, governmental regulation, court decree, or order applicable to Grantor.
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue the security interest granted in this Agreement.
Lender may at any time, and without further authorization from Grantor, file
a carbon, photographic or other reproduction of any financing statement or of
this Agreement for use as a financing statement. Grantor will reimburse
Lender for all expenses for the perfection and the continuation of the
perfection of Lender's security interest in the Collateral. Grantor promptly
will notify Lender before any change in Grantor's name including any change
to the assumed business names of Grantor.
NO VIOLATION. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its certificate or articles of incorporation and bylaws do not prohibit any
term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver to
Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral from
its existing locations without the prior written consent of Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the records
concerning the Collateral) at Grantor's address shown above, or at such other
locations as are acceptable to Lender. Except in the ordinary course of its
business, including the sales of inventory, Grantor shall not remove the
Collateral from its existing locations without the prior written consent of
Lender. To the extent that the Collateral consists of vehicles, or other
titled property, Grantor shall not take or permit any action which would
require application for certificates of title for the vehicles outside the
State of California, without the prior written consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to buyers
who qualify as a buyer in the ordinary course of business. A sale in the
ordinary course of Grantor's business does not include a transfer in partial
or total satisfaction of a debt or any bulk sale. Grantor shall not pledge,
mortgage, encumber or otherwise permit the Collateral to be subject to any
lien, security interest, encumbrance, or charge, other than the security
interest provided for in this Agreement, without the prior written consent of
Lender. This includes security interests even if junior in right to the
security interests granted under this Agreement. Unless waived by Lender,
all proceeds from any disposition of the Collateral (for whatever reason)
shall be held in trust for Lender and shall not be commingled with any other
funds; provided however, this requirement shall not constitute consent by
Lender to any sale or other disposition. Upon receipt, Grantor shall
immediately deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other persons.
COLLATERAL SCHEDULES AND LOCATIONS. Insofar as the Collateral consists of
inventory, Grantor shall deliver to Lender, as often as Lender shall require,
such lists, descriptions, and designations of such Collateral as Lender may
require to identify the nature, extent, and location of such Collateral.
Such information shall be submitted for Grantor and each of its subsidiaries
or related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit or
permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall have
the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of all
cases involving the return, rejection, repossession, loss or damage of or to
any Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount of
the Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness, or
upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and so
long as Lender's interest in the Collateral is not jeopardized in Lender's
sole opinion. If the Collateral is subjected to a lien which is not
discharged within fifteen (15) days, Grantor shall deposit with Lender cash,
a sufficient corporate surety bond or other security satisfactory to Lender
in an amount adequate to provide for the discharge of the lien plus any
interest, costs, attorneys' fees or other charges that could accrue
<PAGE>
EXHIBIT 10.8.5
03-23-1998 COMMERCIAL SECURITY AGREEMENT
LOAN NO 17735 (CONTINUED)
===============================================================================
as a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien on
the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended,
42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5
through 7.7 of Division 20 of the California Health and Safety Code, Section
25100, et seq., or other applicable state or Federal laws, rules, or
regulations adopted pursuant to any of the foregoing. The terms "hazardous
waste" and "hazardous substance" shall also include, without limitation,
petroleum and petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous wastes and
substances. Grantor hereby (a) releases and waives any future claims against
Lender for indemnity or contribution in the event Grantor becomes liable for
cleanup or other costs under any such laws, and (b) hereby agrees to
indemnify and hold harmless Lender against any and all claims and losses
resulting from a breach of this provision of this Agreement. This obligation
to indemnify shall survive the payment of the Indebtedness and the
satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender
from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least ten (10) days' prior written notice
to Lender and not including any disclaimer of the insurer's liability for
failure to give such a notice. Each insurance policy also shall include an
endorsement providing that coverage in favor of Lender will not be impaired
in any way by any act, omission or default of Grantor or any other person. In
connection with all policies covering assets in which Lender holds or is
offered a security interest, Grantor will provide Lender with such loss
payable or other endorsements as Lender may require. In no event shall the
insurance be in an amount less than the amount agreed upon in the Agreement
to Provide Insurance. If Grantor at any time fails to obtain or maintain any
insurance as required under this Agreement, Lender may (but shall not be
obligated to) obtain such insurance as Lender deems appropriate, including if
it so chooses "single interest insurance," which will cover only Lender's
interest in the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral, Lender
shall retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to Grantor. Any proceeds which have
not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are insufficient,
Grantor shall upon demand pay any deficiency to Lender. The reserve funds
shall be held by Lender as a general deposit and shall constitute a non-
interest-bearing account which Lender may satisfy by payment of the insurance
premiums required to be paid by Grantor as they become due. Lender does not
hold the reserve funds in trust for Grantor, and Lender is not the agent of
Grantor for payment of the insurance premiums required to be paid by Grantor.
The responsibility for the payment of premiums shall remain Grantor's sole
responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as
Lender may reasonably request including the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
property insured; (e) the then current value on the basis of which insurance
has been obtained and the manner of determining that value; and (f) the
expiration date of the policy. In addition, Grantor shall upon request by
Lender (however not more often than annually) have an independent appraiser
satisfactory to Lender determine, as applicable, the cash value or
replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of
the tangible personal property and beneficial use of all the Collateral and may
use it in any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor's right to possession and beneficial use shall
not apply to any Collateral where possession of the Collateral by Lender is
required by law to perfect Lender's security interest in such Collateral. If
Lender at any time has possession of any Collateral, whether before or after an
Event of Default, Lender shall be deemed to have exercised reasonable care in
the custody and preservation of the Collateral if Lender takes such action for
that purpose as Grantor shall request or as Lender, in Lender's sole discretion,
shall deem appropriate under the circumstances, but failure to honor any request
by Grantor shall not of itself be deemed to be a failure to exercise reasonable
care. Lender shall not be required to take any steps necessary to preserve any
rights in the Collateral against prior parties, nor to protect, preserve or
maintain any security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
<PAGE>
03-23-1998 COMMERCIAL SECURITY AGREEMENT
LOAN NO 17735 (CONTINUED)
===============================================================================
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due on
the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in any
of the Related Documents or in any other agreement between Lender and
Grantor.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the Note
or the Related Documents is false or misleading in any material respect,
either now or at the time made or furnished.
DETECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a going
business, the insolvency of Grantor, the appointment of a receiver for any
part of Grantor's property, any assignment for the benefit of creditors, any
type of creditor workout, or the commencement of any proceeding under any
bankruptcy or insolvency laws by or against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the Indebtedness. This includes a garnishment of any of Grantor's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Grantor as to the validity or reasonableness
of the claim which is the basis of the creditor or forfeiture proceeding and
if Grantor gives Lender written notice of the creditor or forfeiture
proceeding and deposits with Lender monies or a surety bond for the creditor
or forfeiture proceeding, in an amount determined by Lender, in its sole
discretion, as being an adequate reserve or bond for the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or becomes
incompetent. Lender, at its option, may, but shall not be required to,
permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender, and, in doing
so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a) cures the default within fifteen (15) days; or (b)
if the cure requires more than fifteen (15) days, immediately initiates steps
which Lender deems in Lender's sole discretion to be sufficient to cure the
default and thereafter continues and completes all reasonable and necessary
steps sufficient to produce compliance as soon as reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the California Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and other
documents relating to the Collateral. Lender may require Grantor to assemble
the Collateral and make it available to Lender at a place to be designated by
Lender. Lender also shall have full power to enter upon the property of
Grantor to take possession of and remove the Collateral. If the Collateral
contains other goods not covered by this Agreement at the time of
repossession, Grantor agrees Lender may take such other goods, provided that
Lender makes reasonable efforts to return them to Grantor after repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name or
that of Grantor. Lender may sell the Collateral at public auction or private
sale. Unless the Collateral threatens to decline speedily in value or is of
a type customarily sold on a recognized market, Lender will give Grantor
reasonable notice of the time after which any private sale or any other
intended disposition of the Collateral is to be made. The requirements of
reasonable notice shall be met if such notice is given at least ten (10)
days, or such lesser time as required by state law, before the time of the
sale or disposition. All expenses relating to the disposition of the
Collateral, including without limitation the expenses of retaking, holding,
insuring, preparing for sale and selling the Collateral, shall become a part
of the Indebtedness secured by this Agreement and shall be payable on demand,
with interest at the Note rate from date of expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right, (b)
the receiver may be an employee of Lender and may serve without bond, and (c)
all fees of the receiver and his or her attorney shall become part of the
Indebtedness secured by this Agreement and shall be payable on demand, with
interest at the Note rate from date of expenditure until repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any Collateral
into its own name or that of its nominee and receive the payments, rents,
income, and revenues therefrom and hold the same as security for the
Indebtedness or apply it to payment of the Indebtedness in such order of
preference as Lender may determine. Insofar as the Collateral consists of
accounts, general intangibles, insurance policies, instruments, chattel
paper, choses in action, or similar property, Lender may demand, collect,
receipt for, settle, compromise, adjust, sue for, foreclose, or realize on
the Collateral as Lender may determine, whether or not Indebtedness or
Collateral is then due. For these purposes, Lender may, on behalf of and in
the name of Grantor, receive, open and dispose of mail addressed to Grantor;
change any address to which mail and payments are to be sent; and endorse
notes, checks, drafts, money orders, documents of title, instruments and
items pertaining to payment, shipment, or storage of any Collateral. To
facilitate collection, Lender may notify account debtors and obligors on any
Collateral to make payments directly to Lender.
<PAGE>
03-23-1998 COMMERCIAL SECURITY AGREEMENT
LOAN NO 17735 (CONTINUED)
===============================================================================
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining on
the Indebtedness due to Lender after application of all amounts received from
the exercise of the rights provided in this Agreement. Grantor shall be
liable for a deficiency even if the transaction described in this subsection
is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of
a secured creditor under the provisions of the Uniform Commercial Code, as
may be amended from time to time. In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall be
cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor under this Agreement, after Grantor's failure to
perform, shall not affect Lender's right to declare a default and to exercise
its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Agreement. No alteration of or amendment to this Agreement
shall be effective unless given in writing and signed by the party or parties
sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Grantor agrees
upon Lender's request to submit to the jurisdiction of the courts of the
State of California. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of Lender's
costs and expenses, including attorneys' fees and Lender's legal expenses,
incurred in connection with the enforcement of this Agreement. Lender may
pay someone else to help enforce this Agreement, and Grantor shall pay the
costs and expenses of such enforcement. Costs and expenses include Lender's
attorneys' fees and legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings (and
including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Grantor also
shall pay all court costs and such additional fees as may be directed by the
court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under this
Agreement shall be joint and several, and all references to Grantor shall
mean each and every Grantor. This means that each of the persons signing
below is responsible for all obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required by
law), and shall be effective when actually delivered or when deposited with a
nationally recognized overnight courier or deposited in the United States
mail, first class, postage prepaid, addressed to the party to whom the notice
is to be given at the address shown above. Any party may change its address
for notices under this Agreement by giving formal written notice to the other
parties, specifying that the purpose of the notice is to change the party's
address. To the extent permitted by applicable law, if there is more than
one Grantor, notice to any Grantor will constitute notice to all Grantors.
For notice purposes, Grantor will keep Lender informed at all times of
Grantor's current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover all
sums of money or other property which may now or hereafter become due, owing
or payable from the Collateral; (b) to execute, sign and endorse any and all
claims, instruments, receipts, checks, drafts or warrants issued in payment
for the Collateral; (c) to settle or compromise any and all claims arising
under the Collateral, and, in the place and stead of Grantor, to execute and
deliver its release and settlement for the claim; and (d) to file any claim
or claims or to take any action or institute or take part in any proceedings,
either in its own name or in the name of Grantor, or otherwise, which in the
discretion of Lender may seem to be necessary or advisable. This power is
given as security for the Indebtedness, and the authority hereby conferred is
and shall be irrevocable and shall remain in full force and effect until
renounced by Lender.
PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of this
Agreement in all other respects shall remain valid and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall operate
as a waiver of such right or any other right. A waiver by Lender of a
provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for the
Indebtedness, Borrower irrevocably waives, disclaims and relinquishes all
claims against such other person which Borrower has or would otherwise have
by virtue of payment of the Indebtedness or any part thereof, specifically
including but not limited to all rights of indemnity, contribution or
exoneration.
<PAGE>
03-23-1998 COMMERCIAL SECURITY AGREEMENT
LOAN NO 17735 (CONTINUED)
===============================================================================
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED MARCH 23,
1998.
GRANTOR:
THE BALANCE BAR COMPANY
By:
--------------------------------
JAMES A. WOLFE, CHIEF EXECUTIVE OFFICER
By:
--------------------------------
THOMAS J. FLAHIE, SENIOR VICE PRESIDENT, FINANCE & ADMINISTRATION
<PAGE>
EXHIBIT 10.8.5
SANTA BARBARA BANK & TRUST
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$285,430.11 03-23-1998 01-01-2001 17735 4A 910 14492 PWM
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: THE BALANCE BAR COMPANY LENDER: SANTA BARBARA BANK & TRUST
1015 MARK AVENUE MAIN OFFICE
CARPINTERIA, CA 93013-2912 C/O LOAN SERVICES
P.O. BOX 1173
SANTA BARBARA, CA 93102-1173
====================================================================================================================================
</TABLE>
PRINCIPAL AMOUNT: $285,430.11 INITIAL RATE: 9.500% DATE OF NOTE: MARCH 23, 1998
PROMISE TO PAY. THE BALANCE BAR COMPANY ("BORROWER") PROMISES TO PAY TO SANTA
BARBARA BANK & TRUST ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES
OF AMERICA, THE PRINCIPAL AMOUNT OF TWO HUNDRED EIGHTY FIVE THOUSAND FOUR
HUNDRED THIRTY & 11/100 DOLLARS ($285,430.11), TOGETHER WITH INTEREST ON THE
UNPAID PRINCIPAL BALANCE FROM MARCH 23, 1998, UNTIL PAID IN FULL.
PAYMENT. SUBJECT TO ANY PAYMENT CHANGES RESULTING FROM CHANGES IN THE INDEX,
BORROWER WILL PAY THIS LOAN ON DEMAND, OR IF NO DEMAND IS MADE, IN 33 REGULAR
PAYMENTS OF $9,634.64 EACH AND ONE IRREGULAR LAST PAYMENT ESTIMATED AT
$7,268.85. BORROWER'S FIRST PAYMENT IS DUE APRIL 1, 1998, AND ALL SUBSEQUENT
PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. BORROWER'S FINAL
PAYMENT DUE JANUARY 1, 2001, WILL BE FOR ALL PRINCIPAL AND ALL ACCRUED INTEREST
NOT YET PAID. PAYMENTS INCLUDE PRINCIPAL AND INTEREST. The annual interest
rate for this Note is computed on a 365/360 basis; that is, by applying the
ratio of the annual interest rate over a year of 360 days, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at Lender's address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is the Prime
rate as published in the Wall Street Journal. When a range of rates has been
published, the higher of the rates will be used (the "Index"). The Index is not
necessarily the lowest rate charged by Lender on its loans. If the Index
becomes unavailable during the term of this loan, Lender may designate a
substitute index after notice to Borrower. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that Lender
may make loans based on other rates as well. The interest rate change will not
occur more often than each day. THE INDEX CURRENTLY IS 8.500%. THE INTEREST
RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A
RATE OF 1.000 PERCENTAGE POINT OVER THE INDEX, RESULTING IN AN INITIAL RATE OF
9.500%. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law. Whenever increases occur
in the interest rate, Lender, at its option, may do one or more of the
following: (a) increase Borrower's payments to ensure Borrower's loan will pay
off by its original final maturity date, (b) increase Borrower's payments to
cover accruing interest, (c) increase the number of Borrower's payments, and (d)
continue Borrower's payments at the same amount and increase Borrower's final
payment.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST
CHARGE OF $100.00. Other than Borrower's obligation to pay any minimum interest
charge, Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
under the payment schedule. Rather, they will reduce the principal balance due
and may result in Borrower making fewer payments.
LATE CHARGE. If a payment is 15 DAYS OR MORE LATE, Borrower will be charged
5.000% OF THE REGULARLY SCHEDULED PAYMENT.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Any representation or statement made or furnished to
Lender by Borrower or on Borrower's behalf is false or misleading in any
material respect either now or at the time made or furnished. (d) Borrower
becomes insolvent, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (e) Any creditor tries to take any of Borrower's property on
or in which Lender has a lien or security interest. This includes a garnishment
of any of Borrower's accounts with Lender. (f) Any guarantor dies or any of the
other events described in this default section occurs with respect to any
guarantor of this Note. (g) A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or performance
of the Indebtedness is impaired. (h) Lender in good faith deems itself
insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
<PAGE>
03-29-1998 PROMISSORY NOTE
LOAN NO. 16450 (CONTINUED)
================================================================================
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Lender may hire or pay someone
else to help collect this Note if Borrower does not pay. Borrower also will pay
Lender that amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses whether or not there is a
lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Borrower also
will pay any court costs, in addition to all other sums provided by law. THIS
NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF
CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO
SUBMIT TO THE JURISDICTION OF THE COURTS OF SANTA BARBARA COUNTY, THE STATE OF
CALIFORNIA. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF CALIFORNIA.
COLLATERAL. This Note is secured by a Security Agreement dated March 23, 1998,
a UCC-1 Financing Statement which filed March 3, 1997, as File No. 9706660259
and a UCC-2 Amendment dated March 23, 1998, not yet filed, also security
commercial loan #14492-16450.
ADDITIONAL PROVISIONS. I represent and warrant to Lender that the verbal or
written financial information given is true and correct and that there has been
no adverse change in the financial information. I also waive the provisions of
section 1801.21 of the California Vehicle Code relating to accessibility to
Department of Motor Vehicle information.
APPLICATION OF PAYMENTS. Each monthly Installment Payment (principal including
interest) received by Lender prior to the due date or after the due date but
prior to the date on which a late payment charge accrues shall be credited
against the outstanding obligation as of the date on which such installment
payment was first due. No regular monthly installment that is paid prior to its
due date shall be deemed a prepayment, regardless of when made, unless (a) the
amount of such payment exceeds the regularly scheduled monthly installment, and
(b) the amount of such prepayment is not prohibited by any other provision of
this Note.
NAME CHANGE. At this time the name of this business has been changed from the
Bio-Engineered Foods, Inc. to The Balance Bar Company.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive any applicable statute of limitations, presentment, demand
for payment, protest and notice of dishonor. Upon any change in the terms of
this Note, and unless otherwise expressly stated in writing, no party who signs
this Note, whether as maker, guarantor, accommodation maker or endorser, shall
be released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any party
or guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
THE BALANCE BAR COMPANY
By: _______________________________________
James A. Wolfe, Chief Executive Officer
By: _______________________________________
Thomas J. Flahie, Senior Vice President,
Finance & Administration
================================================================================
Variable Rate. Balloon. LASER PRO. REG. U.S. Pat. & T.M. Off., Ver. 3.24(c)
1998 CFI ProServices, Inc. All rights reserved.
[CA-D202BEF.LNG6.OVL]
<PAGE>
EXHIBIT 10.9
February 4, 1998
Annette Davidson
Trader Joe's Company
538 Mission Street
South Pasadena, CA 91030
Dear Annette:
We would like to formalize our verbal agreement regarding providing Trader Joe's
40-30-30 Bars.
The following reflects our agreement:
1. Balance Bar Company has arranged for production of Trader Joe's 40-30-
30 Bars using the same supplier(s) that produce our bars.
2. [ * ]
3. Trader Joe's agrees to buy 40-30-30 formulated bars exclusively from
Balance Bar Company for a 2 year period starting January 1, 1998 to
December 31, 1999. After 2 years (12/31/99), Trader Joe's could buy
40-30-30 bars from any supplier, with the exception of then current
Balance Bar Company Suppliers. Of course we would like to continue to
provide the bars. At no point would Trader Joe's have any ownership
rights to the product formula.
4. [ * ] Order lead time is 15 days. Orders will continue to be
truckloads of 24 pallets.
We realize that you could purchase 40-30-30 private label bars from another
supplier, at a lower price. The advantages in buying from Balance Bar Company
are:
1. QUALITY. We have spent over five years, at considerable expense,
-------
perfecting the current Balance Bar formulas. The primary reason
people buy our bars is taste and quality. We have talked to numerous
potential co-packers and have found that none could meet our exacting
standards, other than our two current suppliers.
2. CONTINUITY OF SUPPLY. Since we have two packers, your volume needs
--------------------
will always be met on a timely basis.
3. PRICE GUARANTEE. We will guarantee our price for the 1st 24 months.
---------------
*Confidential portions omitted and filed separately with the Commission.
<PAGE>
Trader Joe's supplies artwork for the bars and Balance Bar Company is
responsible for printing costs and ownership of the wrappers.
Please sign both copies of this agreement and return one to me at Balance Bar
Company. Thank you for your business.
Sincerely,
--------------------------
Jim Wolfe Annette Davidson
President & CEO Trader Joe's Company
JW/df
*Confidential portions omitted and filed separately with the Commission.
2
<PAGE>
EXHIBIT 10.10
AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered as of December 22,
1997 by and between Tree of Life, Inc. a Delaware corporation ("TOL"), and Bio-
Engineered Foods, Inc., a Delaware corporation ("BEF").
A. As early as 1940, TOL, or its predecessors in interest, adopted and is
using the marks "BALANCED," "BALANCED FOODS," and BALANCED formative marks (the
"TOL Marks") as a trademark and trade name in connection with a variety of
health and natural food products. TOL owns federal trademark registration nos.
1,596,670, 838,489, 848,251, 845,550, 815,554, 791,925 and 651,530 for
"BALANCED" used in connection with various health and natural food products
including those set forth in Exhibit 1 and application no. 75/268,213 for the
mark BALANCED THE TOTAL NUTRITIONAL DRINK used for meal replacement and dietary
supplement drinks ("TOL Products").
B. As early as July 12, 1992, BEF adopted and is using the marks
"BALANCE" and "BALANCE, THE COMPLETE NUTRITIONAL FOOD" as a trademark in
connection with food bars. BEF adopted and is using the mark "40-30-30 BALANCE"
in connection with food bars and powdered beverages. BEF owns federal trademark
registration no. 1,956,964 for "BALANCE, THE COMPLETE NUTRITIONAL FOOD" and
pending application nos. 75/331,009, 75/321,186 and 75/321,184 for "BALANCE" and
"BALANCE
*Confidential portions omitted and filed separately with the Commission.
1
<PAGE>
BAR" as used in connection with certain food products, as more specifically set
forth in Exhibit 2.
C. Pursuant to an agreement dated as of December 19, 1996 between TOL and
BEF (the "Trademark Agreement"), the scope of BEF's use of the word "BALANCE"
was restricted to certain uses.
D. TOL and BEF desire to terminate the Trademark Agreement and enter into
a new agreement with respect to the use of the word "BALANCE(D)."
NOW, THEREFORE, in consideration of these recitals and the following mutual
promises, the parties agree that the Trademark Agreement is hereby amended and
restated as follows:
1. TOL AGREEMENTS.
--------------
1.1 TOL will not claim that the following actions taken or to be taken by
BEF constitute infringement of the TOL Marks or otherwise constitute
unfair competition or a violation of any of TOL's rights:
1.1.1 BEF's use of the marks "BALANCE, THE COMPLETE NUTRITIONAL
FOOD", "40-30-30 BALANCE" and "BALANCE 40-
*Confidential portions omitted and filed separately with the Commission.
2
<PAGE>
30-30" in connection with any type of goods or services except
for TOL's Products.
1.1.2 BEF's use of the word "BALANCE" alone or in conjunction with
other word(s) and/or symbols in connection with: (a) any type
of nutritional bar products, and (b) processed foods and meals
but only if they are not in the same categories or types of
products as those listed on Exhibit 1 attached hereto and any
additional products introduced by TOL under the mark BALANCED
or a BALANCED formative mark.
1.1.3 BEF's use or seeking registration of marks containing the term
Balance (and which do not begin with Balance and which do not
begin with an article, pronoun, preposition, or other
nonsubstantive term followed by the word Balance), including
40-30-30 Balance, for products falling in classes 5, 30 and
32 of the international classification system for trademarks
except for TOL's Products.
1.1.4 BEF's use of the word "BALANCE" in BEF's company name.
1.1.5 BEF's use of a mark containing the word "BALANCE" for liquid
nutritional supplements, dietary supplements, and meal
replacements provided the mark: (a) does not begin with the
word "BALANCE" or
*Confidential portions omitted and filed separately with the Commission.
3
<PAGE>
with an article, pronoun, preposition or other nonsubstantive
term followed by the word "BALANCE", and (2) is not used with a
tag line, secondary mark, or slogan that is similar to "THE
TOTAL NUTRITIONAL DRINK" used by TOL for similar products.
The marks described in Section 1.1 above are collectively defined as
the "BEF Marks." TOL will refrain from taking any action or bringing
any proceeding, legal or otherwise, against BEF's (or its successors,
licensees and assigns and their respective affiliates and
subsidiaries) use of the BEF Marks in connection with BEF's Products.
In this regard, TOL will neither oppose any federal or state
application to register nor seek cancellation of any federal or state
trademark registration of the BEF Marks.
1.2 TOL will not use the word "BALANCED" alone or in conjunction with
other word(s) and/or symbol(s) on or in connection with the
manufacturing, producing, distributing, marketing, advertising and
otherwise exploiting of nutritional bar products.
1.3 TOL will not use the word "BALANCE" alone or in conjunction with other
word(s) and/or symbol(s) on or in connection with any goods or
services; provided that such restriction will not apply to the use of
the word "BALANCE" in a non-trademark or non-trade name manner.
*Confidential portions omitted and filed separately with the Commission.
4
<PAGE>
2. BEF AGREEMENTS.
--------------
2.1 BEF will not claim that TOL's use of the TOL Marks in connection with
the TOL Products constitutes an infringement of the BEF Marks, or
otherwise constitutes unfair competition or a violation of any of
BEF's rights, and will refrain from taking any action or bringing any
proceeding, legal or otherwise, against TOL's (or its successors,
licensees and assigns and their respective affiliates and
subsidiaries) use of the TOL Marks in connection with the TOL
Products. In this regard, BEF will neither oppose any federal or
state application to register nor seek cancellation of any federal or
state trademark or service mark registration of the TOL Marks in
connection with TOL Products. It is understood and agreed that TOL
Products will not include nutritional bar products.
2.2 BEF will not use the word "BALANCED" alone or in conjunction with
other word(s) and/or symbol(s) on or in connection with any goods or
services; provided that such restriction will not apply to the use of
the word "BALANCED" in a non-trademark or non-trade name manner.
3. OTHER PROPRIETARY RIGHTS. This Agreement shall not preclude the parties
------------------------
from objecting to permitted uses or registration of BALANCE and BALANCED
formative marks and names under this Agreement if such marks contain or are
used with other
*Confidential portions omitted and filed separately with the Commission.
5
<PAGE>
marks, names, terms, designs that violate the proprietary rights of the
other party (e.g., BEF's use of TREE OF LIFE 40-30-30 BALANCE, TOL's use of
BALANCED BIO-FOODS).
4. [ * ]
5. CASUAL OR INADVERTENT ACTS. No casual or inadvertent act or omission by
--------------------------
either party under this Agreement shall constitute a breach of this
Agreement unless the party responsible for such act or omission is notified
in writing of such act or omission by the nonresponsible party and the
responsible party fails to commence reasonable efforts to cure such alleged
breach within thirty (30) days of receiving such notice and cures such
alleged breach within sixty (60) days of receiving such notice.
6. MISCELLANEOUS PROVISIONS.
------------------------
6.1 SURVIVAL. The representations, warranties and agreements in this
--------
Agreement will survive any investigation made by any party, and the
execution of this Agreement.
6.2 ADDITIONAL DOCUMENTS AND ACTS. Each party will sign and deliver
-----------------------------
additional documents and instruments, and perform additional acts,
including providing
*Confidential portions omitted and filed separately with the Commission.
6
<PAGE>
letters of consent for purposes of registering trademarks, that are
commercially reasonable and necessary to perform its obligations in
this Agreement.
6.3 BINDING EFFECT; PARTIES IN INTEREST. This Agreement is binding on and
-----------------------------------
benefits only the parties and their respective permitted successors
and assigns. Nothing in this Agreement gives any rights or remedies to
any person other than the parties and their respective permitted
successors and assigns, nor does anything in this Agreement relieve or
discharge any obligation or liability of any third person to any
party. No provision of this Agreement gives any third person any right
of subrogation or action over or against any party to this Agreement.
6.4 COMPLETE AGREEMENT. This Agreement is the complete and exclusive
------------------
statement of agreement of the parties as to matters covered by it. It
replaces and supersedes all prior written or oral agreements or
statements by and among the parties with respect to the matters
covered by it, including the Trademark Agreement. No representation,
statement, condition or warranty not contained in this Agreement is
binding on the parties.
6.5 AMENDMENTS; WAIVERS. Any amendment to this Agreement requires the
-------------------
approval of all parties. Any waiver of any right or remedy requires
the consent of the party waiving it. Every amendment or waiver must be
in writing and
*Confidential portions omitted and filed separately with the Commission.
7
<PAGE>
designated as an amendment or waiver, as appropriate. No failure by
any party to insist on the strict performance of any provision of this
Agreement, or to exercise any right or remedy, will be deemed a waiver
of such performance, right or remedy, or of any other provision of
this Agreement.
6.6 PRODUCT PURCHASE GUARANTEE. BEF guarantees TOL the right to purchase
--------------------------
the following BEF products during the period covered by the rebate fee
of Paragraph 4 above: (a) any of BEF's products available to TOL as
of December 1, 1997 regardless of the channels of trade they may be
sold through in the future; and (b) any new BEF products that are sold
through TOL's customary channels of trade which include natural foods
stores, supermarkets, and mass market outlets.
6.7 INTERPRETATION. If any claim is made by a party relating to any
--------------
conflict, omission or ambiguity in the provisions of this Agreement,
no presumption or burden of or ambiguity in the provisions of this
Agreement, no presumption or burden of proof or persuasion will be
implied because this Agreement was prepared by or at the request of
any party or its counsel and we waive any statute or rule of law to
the contrary.
6.8 ATTORNEYS' FEES AND COSTS. If any legal action, arbitration or other
-------------------------
proceeding is brought to enforce or interpret this Agreement or
matters
*Confidential portions omitted and filed separately with the Commission.
8
<PAGE>
relating to it, the substantially prevailing party will be entitled to
recover from the other party reasonable attorneys' fees and other
costs incurred in such action, arbitration or proceeding, in addition
to any other relief to which the prevailing party is entitled.
6.9 NOTICES. All notices (including other communications required or
-------
permitted) under this Agreement must be in writing and must be
delivered (a) in person, (b) by registered, express, certified mail,
postage prepaid, return receipt requested, (c) by a generally
recognized courier or messenger service that provides written
acknowledgment of receipt by the addressee, or (d) by facsimile or
other generally accepted means of electronic transmission with a
verification of delivery. Notices are deemed delivered when actually
---
delivered to the address for notices. Notices shall be addressed as
follows:
If to TOL:
1750 Tree Boulevard
P.O. Box 410
St. Augustine, FL 32085-0410
Attn: Vice President Marketing
If to BEF:
1015 Mark Avenue
Carpinteria, CA 93013
Attn: James A. Wolfe, CEO
Any party may furnish, from time to time, other addresses for notices
to it.
*Confidential portions omitted and filed separately with the Commission.
9
<PAGE>
6.10 SPECIFIC PERFORMANCE. It might be impossible to measure in money the
--------------------
damage to a party if another party breaches this Agreement. If any
such failure occurs, the party damaged might not have an adequate
remedy at law or in damages. Therefore, each party consents to the
issuance of an injunction and the enforcement of other equitable
remedies against it to compel performance of this Agreement.
6.11 COUNTERPARTS. This Agreement is being executed in several
------------
counterparts. Each of them is an original and all of them constitute
one agreement.
6.12 HEADINGS; EXHIBITS. The headings in this Agreement are only for
------------------
convenience and ease of reference and are not be considered in
construction or interpretation. All exhibits, schedules and appendices
attached to this Agreement are incorporated herein.
6.13 ENFORCEABILITY. If any provision of this Agreement is held invalid or
--------------
unenforceable, the remainder of this Agreement shall nevertheless
remain in full force and effect.
IN WITNESS WHEREOF, the authorized representatives of the parties
hereto have duly executed this Agreement as of the first date above.
*Confidential portions omitted and filed separately with the Commission.
10
<PAGE>
TREE OF LIFE, INC. BIO-ENGINEERED FOODS, INC.
By: By:
---------------- ---------------------------------
Name: Name: James A. Wolfe
-------------- -------------------------------
Title: Title: CEO
------------- ----------------------------------------
*Confidential portions omitted and filed separately with the Commission.
11
<PAGE>
EXHIBIT 1
TREE OF LIFE, INC
FEDERAL TRADEMARK REGISTRATIONS
-------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
INT'L REG.
MARK REG. NO. CLASS DESCRIPTION OF GOODS DATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCED 1,596,670 29 Applesauce, dried beans, dried milk, 5/15/90
dried edible seeds, garbanzos,
mayonnaise, whey, processed nuts
(namely, pecans, almonds, brazil nuts,
dry roasted peanuts, filberts and
walnut halves).
Candy made primarily of honey; almond
meal, millet meal, miller bran,
sunflower meal, pumpkin meal and
carob chips.
30
- -------------------------------------------------------------------------------
BALANCED 838,489 29 Shelled and unshelled nuts, more 11/7/67
(Stylized) specifically, pistachio and cashew
nuts.
- -------------------------------------------------------------------------------
BALANCED 848,251 29 Noodles, spaghetti and macaroni. 4/30/68
(Stylized)
- -------------------------------------------------------------------------------
BALANCED 845,550 30 Sugar. 3/5/68
- -------------------------------------------------------------------------------
BALANCED 815,554 29 Foods, namely, pumpkin seeds, 9/20/66
(Stylized) sunflower kernels and dried fruit.
- -------------------------------------------------------------------------------
BALANCED 791,925 29 Sugar containing and sugarless 6/29/65
30 spreads, namely, jellies, jams, apple
and peanut butter; condiments, namely,
mustard, catsup, chili sauce and
spaghetti sauce, salt and spices,
unshelled nuts, rice products, namely,
wild rice, cooked rice and brown rice;
honey for use as a food sweetener and
as a food, torula yeast for use as a
food; and soup and soup broth elements,
namely, dehydrated soup, soup powders,
liquid condensed soup and bouillon
cubes.
- -------------------------------------------------------------------------------
BALANCED 651,530 30 Canned foods, namely, fruits and 9/10/57
vegetables and juices thereof, beef,
fish, chicken and condensed soup,
edible oil of vegetable origin for
cooking purposes and brewers' yeast.
- -------------------------------------------------------------------------------
</TABLE>
TREE OF LIFE, INC
FEDERAL TRADEMARK APPLICATIONS
------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
INT'L DESCRIPTION APP.
MARK APP. NO. CLASS OF GOODS DATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCED THE 75/268,213 5 Nutritional supplements, 4/2/97
TOTAL namely, meal replacement
NUTRITIONAL DRINK and dietary supplement
drinks
------------------------------------------------------------------------------
</TABLE>
*Confidential portions omitted and filed separately with the Commission.
12
<PAGE>
EXHIBIT 2
BIO-ENGINEERED FOODS, INC.
FEDERAL TRADEMARK REGISTRATIONS
-------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
MARK REG. NO. INT'L DESCRIPTION OF GOODS REG.
CLASS DATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, THE 1,956,964 5 Food and nutritional supplements. 2/20/96
COMPLETE
NUTRITIONAL
FOOD
- -------------------------------------------------------------------------------
</TABLE>
BIO-ENGINEERED FOODS, INC
FEDERAL TRADEMARK APPLICATIONS
------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
MARK APP. NO. INT'L DESCRIPTION OF GOODS APP.
CLASS DATE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE 75/331009 5 Food and nutritional supplements. 7/25/97
(Stylized)
- -------------------------------------------------------------------------------
BALANCE 75/321186 5 Food and nutritional supplements. 7/8/97
BAR
- -------------------------------------------------------------------------------
BALANCE 75/321184 5 Food and nutritional supplements. 7/8/97
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.11
BIO-ENGINEERED FOODS, INC.
--------------------------
INCENTIVE STOCK OPTION AGREEMENT
--------------------------------
BIO-ENGINEERED FOODS, INC., a Delaware corporation (the "Company"), has
granted to ______________ (the "Optionee"), an option (the "Option") to purchase
a total of _____________ shares (the "Shares") of its common stock ("Common
Stock"), at the price set forth below, and in all respects subject to the terms,
definitions and provisions of the 1993 Stock Incentive Plan (the "Plan") adopted
by the Company, which is incorporated by reference. Unless otherwise defined in
this Agreement, the terms defined in the Plan shall have the same defined
meanings Agreement.
1. NATURE OF THE OPTION. This Option is intended to qualify as an
--------------------
Incentive Stock Option as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
2. EXERCISE PRICE. The exercise price is $____ for each share of Common
--------------
Stock ("Exercise Price"), which price is not less than the Fair Market Value per
share of the Common Stock on the date of grant, as determined pursuant to
Section 4 of the Plan.
3. EXERCISE OF OPTION. This Option shall be exercisable during its term
------------------
in accordance with the provisions of Section 6.6 of the Plan as follows:
3.1 RIGHT TO EXERCISE.
-----------------
3.1.1 Subject to Sections 3.1.2, 3.1.3, 3.1.4 and 3.1.5 below,
and to Section 6.12 of the Plan, this Option shall become exercisable,
cumulatively, thirty-three and one-third percent (33-1/3%) of the Shares subject
to the Option, at any time after December 31, 1996; thirty-three and one-third
percent (33-1/3%) of the Shares subject to the Option, at any time after
December 31, 1997; and thirty-three and one-third percent (33-1/3%) of the
Shares subject to the Option, at any time after December 31, 1998.
3.1.2 Subject to Section 3.1.1, this Option may be exercised in
whole or in part. This Option may not be exercised for a fraction of a Share.
3.1.3 This Option shall not be exercisable during the lifetime
of the Optionee by any person other than the Optionee. In the event of
Optionee's death, disability or other termination of employment, the
exercisability of the Option is governed by Sections 7, 8 and 9 below, subject
to the limitations contained in Sections 3.1.4 and 3.1.5.
<PAGE>
3.1.4 This Option may not be exercised more than ten (10) years
from the date of grant of this Option, and may be exercised during such term
only in accordance with the Plan and the terms of this Option.
3.1.5 In the event that this Option shall become exercisable at
a time or times such that Shares having an aggregate fair market value
(determined as of the date of grant of the option covering such Share) in excess
of $100,000 shall first become available for purchase during any calendar year,
under this Option or any other Incentive Stock Option agreement between the
Company and the Optionee, then that portion of such Shares corresponding to the
excess of such aggregate fair market value over $100,000 shall not be treated as
Incentive Stock Options pursuant to the Code.
3.2 METHOD OF EXERCISE.
------------------
3.2.1 This Option shall be exercisable by written notice which
shall state the election to exercise the Option, the number of shares in respect
of which the Option is being exercised, and such other representations and
agreements as to the holder's investment intent with respect to such shares of
Common Stock as may be required by the Company pursuant to the provisions of the
Plan. Such written notice shall be signed by the Optionee and shall be
delivered in person or by certified mail to the Secretary of the Company. The
written notice shall be accompanied by payment of the exercise price. This
option shall be deemed to be exercised upon receipt by the Company of such
written notice accompanied by the exercise price.
3.2.2 No Shares will be issued pursuant to the exercise of an
Option unless such issuance and such exercise shall comply with all relevant
provisions of law and the requirements of any stock exchange upon which the
Common Stock may then be listed. Assuming such compliance, for income tax
purposes the Shares shall be considered transferred to the Optionee on the date
on which the Option is exercised with respect to such Shares.
4. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable
--------------------------
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, concurrently with the exercise of all or any portion of this
Option, deliver to the Company an executed Employee Restricted Stock Agreement
in the form attached as Exhibit A.
---------
5. METHOD OF PAYMENT. Payment of the exercise price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Optionee:
5.1 cash;
5.2 check; or
5.3 surrender of other shares of Common Stock of the Company
<PAGE>
having a Fair Market Value on the date of exercise equal to the exercise price
of the Shares as to which the Option is being exercised.
6. RESTRICTIONS ON EXERCISE. This Option may not be exercised if the
------------------------
issuance of such Shares upon such exercise or the method of payment of
consideration for such Shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the Company may require Optionee to make any representation and
warranty to the Company as the Administrator may deem to be necessary or
appropriate under any applicable law or regulation.
7. TERMINATION OF STATUS AS AN EMPLOYEE. In the event of termination of
------------------------------------
Optionee's employment with the Company for any reason other than the disability
or death of the Optionee, Optionee may, but only within thirty (30) days after
the date of such termination (but in no event later than the date of expiration
of the term of this Option as set forth in Section 3.1.4), exercise this Option
to the extent that Optionee was entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise this
Option at the date of such termination, or if Optionee does not exercise this
Option within the time specified herein, the Option shall terminate. Nothing
contained in this Option or in the Plan shall confer upon the Optionee any right
to continue in his or her position with the Company or shall interfere in any
way with the rights of the Company, which are hereby reserved, to reduce the
Optionee's compensation from the rate in existence on the date of grant or to
terminate the Optionee's relationship with the Company for any reason.
8. DISABILITY OF OPTIONEE. In the event of termination of Optionee's
----------------------
employment with the Company as a result of Optionee's disability, Optionee may,
but only within one (1) year from the date of the termination of employment (but
in no event later than the date of expiration of the term of this Option as set
forth in Section 3.1.4), exercise this Option to the extent Optionee was
entitled to exercise it at the date of such termination; provided, however, that
if such disability is not a "disability" as such term is defined in Section
22(e)(3) of the Code, this Option shall cease to be an Incentive Stock Option
and shall automatically convert to a nonstatutory stock option on the day three
months and one day following such termination. To the extent that Optionee was
not entitled to exercise the Option at the date of termination, or if Optionee
does not exercise such Option within the time specified herein, the Option shall
terminate. An individual shall not be considered disabled unless he or she
furnishes proof of the existence of such disability in such form and manner, and
at such times, as the Administrator may require.
9. DEATH OF OPTIONEE. In the event of death of Optionee:
-----------------
9.1 during the term of this Option and while an employee of the
Company and having been in continuous status as an Employee since the date of
grant of the Option, the Option may be exercised at any time within one (1) year
following the
<PAGE>
date of death (but in no event later than the date of expiration of the term of
this Option as set forth in Section 3.1.4), by Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent of the right to exercise that had accrued at the date of
death; or
9.2 within thirty (30) days after the termination of Optionee's
continuous status as an employee, the Option may be exercised, at any time
within three (3) months following the date of death (but in no event later than
the date of expiration of the term of this Option as set forth in Section
3.1.4), by Optionee's estate or by a person who acquired the right to exercise
the Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
10. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
11. OPTIONEE NOT A SHAREHOLDER. Neither the Optionee nor any other person
--------------------------
entitled to exercise the Option shall have any of the rights or privileges of a
shareholder of the Company with respect to any of the Shares until the date of
issuance of a stock certificate for such Shares. No adjustment shall be made
for dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued, except as provided in Section 6.8 of
the Plan.
12. EARLY DISPOSITION OF STOCK. Optionee understands that if Optionee
--------------------------
disposes of any Shares received under this Option within two (2) years after the
date of grant, or within one (1) year after such Shares were transferred to him,
Optionee will be treated for federal income tax purposes as having received
ordinary income at the time of such disposition in an amount generally measured
by the difference between the price paid for the Shares and the lower of the
fair market value of the Shares at the date of the exercise or the fair market
value of the Shares at the date of disposition. The amount of such ordinary
income may be measured differently if Optionee is an officer, director or 10%
shareholder of the Company, or if the Shares were subject to a substantial risk
of forfeiture at the time they were transferred to Optionee. Optionee agrees to
notify the Company in writing within 30 days after the date of any such
disposition. Optionee understands that if Optionee disposes of such Shares at
any time after the expiration of such two-year and one-year holding periods, any
gain on such sale will be taxed as long-term capital gain.
13. STOCK SPLITS, COMBINATIONS, RECAPITALIZATIONS, ETC. The number of
---------------------------------------------------
Shares subject to this Option shall be subject to adjustment as set forth in
Section 6.8 of the Plan.
DATE OF GRANT: ___________________
<PAGE>
BIO-ENGINEERED FOODS, INC., a California
Corporation
By: James Wolfe, President
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION
3.1 IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES).
OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN
THE COMPANY'S 1993 STOCK INCENTIVE PLAN WHICH IS INCORPORATED HEREIN BY
REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF
EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S
RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT AT ANY TIME,
WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and certain information
related thereto and represents that Optionee is familiar with the terms and
provisions thereof, and accepts this Option subject to all of the terms and
provisions. Optionee has reviewed the Plan and this Option in their entirety,
has had an opportunity to obtain the advice of counsel prior to executing this
Option and fully understands all provisions of the Option. Optionee agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan.
Date: _______________
<PAGE>
EXHIBIT A
---------
BIO-ENGINEERED FOODS, INC.
FORM OF
EMPLOYEE RESTRICTED STOCK AGREEMENT
This Employee Restricted Stock Agreement (the "Agreement") is made as of
this ____ day of _______________, by and between BIO-ENGINEERED FOODS, INC., a
California corporation (the "Company") and ______________ ("Employee"). In
consideration of the mutual covenants and representations herein set forth, the
Company and Employee agree as follows:
1. ISSUANCE OF RESTRICTED STOCK. Subject to the terms and conditions of
----------------------------
this Agreement and the Incentive Stock Option Agreement between the Company and
Employee dated ________________, the Company agrees to issue to Employee as of
the date of this Agreement, ______ shares (the "Shares") of the Company's common
stock (the "Common Stock") at a purchase price of $_____ per share.
2. STOCK SPLITS, ETC. If, from time to time during the term of this
------------------
Agreement there is any stock dividend or liquidating dividend of cash and/or
property, stock split, combination, reclassification or other change in the
character or amount of any of the outstanding securities of the Company; or
there is any consolidation, merger or sale of all, or substantially all, of the
assets of the Company; then, and in such event, all new, substituted or
additional securities or other property to which Employee is entitled by reason
of his ownership of the Shares shall be immediately subject to this Agreement
and be included in the term "Shares" for all purposes and with the same force
and effect as the Shares of Common Stock to be issued on the date of this
Agreement.
3. RESTRICTIONS ON TRANSFER.
------------------------
3.1 PURCHASE OPTION.
---------------
3.1.1 The Shares shall be subject to the right and option of
the Company to repurchase the Shares (the "Purchase Option") as set forth in
this Section 3.1. In the event Employee shall cease to be employed by the
Company (including a parent or subsidiary of the Company) for any reason (a
"Termination"), the Purchase Option shall come into effect. Following a
Termination, the Company shall have the right, as provided in Section 3.1.3, to
purchase the Shares from the Employee at the purchase price per Share set forth
in Section 3.1.2 (the "Option Price").
3.1.2 If the Termination is for cause, as defined hereinafter,
<PAGE>
the Option Price shall be the purchase price per Share originally paid as set
forth in Section 1 (the "Cause Option Price"); provided however, that the
portion of the Shares repurchased at the Cause Option Price shall lapse at a
rate of twenty percent (20%) per year starting with the first annual anniversary
date of the grant date set forth in the Option Agreement (so that as of the
fifth annual anniversary date of the grant date set forth in the Option
Agreement, the Cause Option Price shall equal the Non-Cause Option Price defined
below). To the extent such Cause Option Price lapses, as described above, the
applicable Option Price shall be the Non-Cause Option Price. In the event of a
Termination for any reason other than cause, the Option Price shall be the Fair
Market Value (as that term is defined in Section 4 of the Company's 1993 Stock
Incentive Plan; the "Plan") for a share of the Company's Common Stock on the
date of the Termination (the "Non-Cause Option Price"). For purposes of this
Section 3.1.2 only, "cause" shall mean Employee's commission of any material act
of dishonesty, fraud or misrepresentation or any act of moral turpitude; default
in the performance of Employee's material obligations, services or duties to the
Company; or Employee's failure to execute specific instructions from the
Company's officers, which failure is not corrected by Employee upon notice from
the Company.
3.1.3 Within 60 days following a Termination, the Company
shall notify Employee by written notice delivered or mailed as provided in
Section 62, as to whether it wishes to purchase the Shares pursuant to exercise
of the Purchase Option. If the Company (or its assignee) elects to purchase the
Shares hereunder, it shall set a date for the closing of the transaction at a
place specified by the Company not later than 15 days from the date of such
notice. At such closing, the Company (or its assignee) shall tender payment for
the Shares and Employee shall tender the certificates representing the Shares so
purchased for cancellation or transfer, as the case may be. The Option Price
may be payable, at the option of the Company, in cancellation of all or a
portion of any outstanding indebtedness of Employee to the Company or in cash
(by check), or both; provided that to the extent the Option Price payable by the
Company is the Cause Option Price, the Option Price shall be payable in cash.
3.2 RIGHT OF FIRST REFUSAL. Other than as set forth in Section 3.1
----------------------
or 34, Employee shall not sell, transfer, pledge, hypothecate or otherwise
dispose of any of the Shares (including transfer by operation of law) until such
Shares are first offered to the Company in accordance with the following terms
and conditions:
3.2.1 The Employee shall deliver a notice ("Notice") to the
Company stating (i) his bona fide intention to sell or transfer such Shares,
(ii) the number of Shares to be sold or transferred, (iii) the price for which
he proposes to sell or transfer such Shares, (iv) the name of the proposed
purchaser or transferee, and (v) the payment terms proposed.
3.2.2 Within thirty (30) days after receipt of the Notice, the
Company or its assignee may elect to purchase all Shares to which the Notice
refers, at the price per Share specified in the Notice. The Company shall
purchase the Shares
<PAGE>
on the payment terms specified in the Notice; provided, however, that the
Company may elect to pay up to 75% of the purchase price to be paid for the
Shares by delivery of a promissory note for a fixed term (not to exceed two
years) to be determined by the Board of Directors of the Company, with interest
thereon payable at the prime rate in effect as of the date of the Notice. The
principal amount of such note shall not exceed the difference between the fair
market value of the Shares purchased by the Company less the aggregate exercise
price paid for such Shares by Employee. The remainder of the purchase price
shall be paid by cash or check payable to the Employee at the time of sale.
3.2.3 If the Shares to which the Notice refers are not elected
to be purchased as provided in Section 322, the Employee must offer the Shares
to the other shareholders of the Company at the price and payment terms
specified in the Notice.
3.2.4 If the Shares to which the Notice refers are not elected
to be purchased, as provided in Sections 3.2.2 and 323, the Employee may sell
the Shares to any person named in the Notice at the price, and on the payment
terms, specified in the Notice, or at a higher price or upon payment terms less
favorable to the proposed transferee, provided that such sale or transfer is
consummated within ninety (90) days of the date of said Notice to the Company,
and provided, further, that any such sale is in accordance with all the terms
and conditions hereof, including Section 35 below.
3.3 MARKET STAND-OFF. Employee agrees that, in connection with an
----------------
initial public offering by the Company of its equity securities pursuant to a
registration statement filed under the Act, the Employee will not sell, make any
short sale or loan, hypothecate, pledge, grant any option for the purchase of or
otherwise dispose of any Common Stock without the prior written consent of the
Company and its underwriters, for such period of time from the effective date of
such registration as may be requested by the Company or such underwriters.
3.4 DRAG-ALONG RIGHTS. Employee agrees that, if a person who is not
-----------------
affiliated with the Company or any of its controlling persons makes a bona fide
offer to all shareholders of the Company to acquire all of their shares of
Common Stock (whether by cash purchase, or in exchange for securities of such
person, or any combination thereof, or by merger or consolidation with such
person or an entity affiliated with such person), and the holders of a majority
of the then-outstanding shares of Common Stock elect to accept such offer, then
the Employee shall be deemed to have accepted such offer and shall transfer the
Shares to the person making such offer on the terms contained in such offer.
3.5 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting
----------------------------------
the restrictions set forth above, the Employee further agrees that he shall in
no event make any disposition of all or any portion of the Shares unless and
until:
<PAGE>
3.5.1 The Employee shall have notified the Company of the
proposed disposition and shall have furnished the Company with (i) a detailed
statement of the circumstances surrounding the proposed disposition, and (ii)
Employee's certification, in form and substance reasonably satisfactory to the
Company, that the proposed purchaser or transferee of such Shares has not,
directly or indirectly, engaged in any competition against the Company, or owned
any interest in any business competitive with the Company, in either case within
three years prior to the date of the proposed disposition;
3.5.2 If requested by the Company, the Employee shall have
furnished the Company with an opinion of the Employee's counsel to the effect
that such disposition will not require registration of such Shares under the
Securities Act of 1933, as amended (the "Act") or qualification under any
applicable state securities laws; and
3.5.3 Such opinion of the Employee's counsel shall have been
concurred in by counsel for the Company and the Company shall have advised the
Employee of such concurrence.
3.6 TERMINATION OF RESTRICTIONS. The provisions of Sections 3.1,
---------------------------
3.2, 34 and 3.5 shall terminate on (i) the effective date of a Registration
Statement filed by the Company under the Act, with respect to an underwritten
public offering of Common Stock of the Company, or (ii) the closing date of a
sale of assets or a merger of the Company duly approved by the shareholders of
the Company pursuant to which shareholders of this Company receive cash or
securities of a buyer whose shares are publicly traded; provided, however, that
the restrictions set forth in Section 3.1 shall terminate no later than five
years after the date of this Agreement. The provisions of Section 32 shall not
apply to a transfer of any Shares by Employee on death by will or intestate to
his ancestors, descendants or spouse, or any custodian or trustee for the
account of Employee's ancestors, descendants or spouse, provided, in each such
case, a transferee shall receive and hold such Shares subject to the provisions
of Sections 3.1, 32, 33, 34 and 3.5, shall execute a copy of this Agreement if
so requested by the Company, and there shall be no further transfer of such
Shares in accordance with this Agreement.
3.7 VIOLATION OF RESTRICTIONS. With respect to any Shares which
-------------------------
shall have been sold or transferred in violation of any of the provisions set
forth in this Agreement, the Company shall not be required (i) to reflect such
transfer on its books, or (ii) to treat as owner of such Shares or to accord the
right to vote as such owner or to pay dividends to any transferee to whom such
Shares shall have been so transferred.
4. LEGENDS. All certificates representing any of the Shares subject to
-------
the provisions of this Agreement shall have endorsed thereon the following
legends:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND
<PAGE>
RIGHTS OF FIRST REFUSAL AS SET FORTH IN AN EMPLOYEE RESTRICTED STOCK
AGREEMENT DATED ________________, ______, BETWEEN THE COMPANY AND THE
REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF
THE COMPANY."
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND APPROPRIATE
QUALIFICATION UNDER SUCH LAWS, UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SAID REGISTRATION AND
QUALIFICATION ARE NOT REQUIRED."
In addition, the certificates shall bear any other legend which the Company
deems to be necessary or appropriate under the securities laws of any state.
5. EMPLOYEE'S REPRESENTATIONS. In connection with his purchase of the
--------------------------
Shares, the Employee hereby represents and warrants to the Company as follows:
5.1 INVESTMENT INTENT; CAPACITY TO PROTECT INTERESTS. The Employee
------------------------------------------------
is purchasing the Shares solely for his own account for investment and not with
a view to or for sale in connection with any distribution of the Shares or any
portion thereof and not with any present intention of selling, offering to sell
or otherwise disposing of or distributing the Shares or any portion thereof.
The Employee also represents that the entire legal and beneficial interest of
the Shares is being purchased, and will be held, for the Employee's account
only, and neither in whole or in part for any other person. Employee either has
a preexisting business or personal relationship with the Company or any of its
officers, directors or controlling persons or by reason of Employee's business
or financial experience or the business or financial experience of Employee's
professional advisers who are unaffiliated with and who are not compensated by
the Company or any affiliate or selling agent of the Company, directly or
indirectly, could be reasonably assumed to have the capacity to evaluate the
merits and risks of an investment in the Company and to protect Employee's own
interests in connection with this transaction.
5.2 RESIDENCE. The Employee's principal residence is within the
---------
State of California and is located at the address indicated beneath the
Employee's signature below.
5.3 INFORMATION CONCERNING COMPANY. The Employee has heretofore
------------------------------
discussed the Company and its plans, operations and financial condition with the
Company's officers and has heretofore received all such information as the
Employee has deemed necessary and appropriate to enable the Employee to evaluate
<PAGE>
the financial risk inherent in making an investment in the Shares and the
Employee has received satisfactory and complete information concerning the
business and financial condition of the Company in response to all inquiries in
respect thereof.
5.4 ECONOMIC RISK. The Employee realizes that the purchase of the
-------------
Shares is a highly speculative investment and involves a high degree of risk,
and the Employee is able, without impairing his or her financial condition, to
hold the Shares for an indefinite period of time and to suffer a complete loss
of the investment.
5.5 RESTRICTED SECURITIES. The Employee understands and
---------------------
acknowledges that:
5.5.1 The sale of the Shares has not been registered under the
Act, and the Shares must be held indefinitely unless the Shares are subsequently
registered under the Act or an exemption from such registration is available,
and the Company is under no obligation to register the Shares; the Employee is
familiar with the provisions of Rules 701 and 144, each promulgated under the
Act, which, in substance, permit limited public resale of "restricted
securities" acquired, directly or indirectly from the issuer thereof, in a
nonpublic offering, subject to the satisfaction of certain conditions;
5.5.2 The share certificate representing the Shares will be
stamped with the legends specified in Section 4; and
5.5.3 There are significant restrictions on Employee's ability
to transfer the Shares imposed by this Agreement; the Company will make a
notation in its records of the aforementioned restrictions on transfer and
legends.
5.6 VALUATION OF COMMON STOCK. The Employee understands that the
-------------------------
Shares have been valued by the Board of Directors of the Company in connection
with the Plan based on the best information available to the Board at the time
of grant. The Employee also understands that the Company can give no assurances
regarding the fair market value of the Shares and that it is possible that, with
the benefit of hindsight, the Internal Revenue Service would successfully assert
that the fair market value of the Shares on the date of purchase or the date the
option was granted is greater than may be determined by the Employee or the
Company. Any additional taxes (and interest) resulting from such determination
would be payable by the Employee. There is no provision for the Company to
reimburse Employee for that tax liability, and the Employee assumes all
responsibility for such potential tax liability.
6. MISCELLANEOUS.
-------------
6.1 FURTHER INSTRUMENTS. The parties agree to execute such further
-------------------
instruments and to take such further action as may reasonably be necessary to
carry out the intent of this Agreement.
6.2 NOTICES. Any notice required or permitted hereunder shall be
-------
<PAGE>
given in writing and shall be deemed effectively given upon personal delivery or
upon deposit in the United States Post Office, by registered or certified mail
with postage and fees prepaid, addressed to Employee at his address shown on the
Company's employment records and to the Company at the address of its principal
corporate offices (Attention: President) or at such other address as such party
may designate by ten days' advance written notice to the other party hereto.
6.3 ASSIGNMENT OF RIGHTS. The Company may assign its rights
--------------------
(including the Purchase Option) and delegate its duties under this Agreement.
If any such assignment or delegation requires consent of any state securities
authorities, the parties agree to cooperate in requesting such consent. This
Agreement shall inure to the benefit of the successors and assigns of the
Company and, subject to the restrictions on transfer herein set forth, be
binding upon Employee, his heirs, executors, administrators, successors and
assigns.
6.4 TRANSFER AUTHORIZATION. Employee hereby authorizes and directs
----------------------
the Secretary or Transfer Agent of the Company to transfer the Shares as to
which either (i) the Purchase Option has been exercised or (ii) the right of
first refusal has been exercised, in either case from Employee to the Company or
its assignee.
6.5 RIGHT OF TERMINATION. Nothing in this Agreement shall affect in
--------------------
any manner whatsoever the right or power of the Company, or a parent or
subsidiary of the Company, to terminate Employee's employment, for any reason,
with or without cause.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
"Company"
BIO-ENGINEERED FOODS, INC.
By:
-----------------------
James Wolfe, President
Address:
1015 Mark Avenue
Carpinteria, CA 93013
"Employee"
---------------------------
Address:
---------------------------
---------------------------
<PAGE>
EXHIBIT 10.12
BIO-ENGINEERED FOODS, INC.
--------------------------
INCENTIVE STOCK OPTION AGREEMENT
--------------------------------
BIO-ENGINEERED FOODS, INC., a Delaware corporation (the "Company"), has
granted to _________________ (the "Optionee"), an option (the "Option") to
purchase a total of ________________ shares (the "Shares") of its common stock
("Common Stock"), at the price set forth below, and in all respects subject to
the terms, definitions and provisions of the 1997 Stock Incentive Plan (the
"Plan") adopted by the Company, which is incorporated by reference. Unless
otherwise defined in this Agreement, the terms defined in the Plan shall have
the same defined meanings Agreement.
1. Nature of the Option. This Option is intended to qualify as an
--------------------
Incentive Stock Option as defined in Section 422 of the Internal Revenue code
of 1986, as amended (the "Code")
2. Exercise Price. The exercise prices is $2.50 for each share of
--------------
Common Stock ("Exercise Price"), which price is not less than the Fair Market
Value per share of the Common Stock on the date of grant, as determined pursuant
to Section 4 of the Plan.
3. Exercise of Option. This Option shall be exercisable during its
-----------------
term in accordance with the provisions of Section 6.6 of the Plan as follows:
3.1 Right to Exercise.
-----------------
3.1.1 Subject to Sections 3.1.2, 3.1.3, 3.1.4, and 3.1.5
below, and to Section 6.12 of the Plan, this Option shall become exercisable,
cumulatively, fifty percent (50%) of the Shares subject to the Option, at any
time after December 31, 1997; and fifty percent (50%) of the Shares at any time
after December 31, 1998.
3.1.2 Subject to Section 3.1.1, this Option may be exercised
in whole or in part. This Option may not be exercised for a fraction of a
Share.
3.1.3 This Option shall not be exercisable during the lifetime
of the Optionee by any person other than the Optionee. In the event of
Optionee's death, disability or other termination of employment, the
exercisability of the Option is governed by Sections 7, 8 and 9 below, subject
to the limitations contained in Sections 3.1.4 and 3.1.5.
3.1.4 This Option may not be exercised more than ten (10)
years from the date of grant of this Option, and may be exercised during such
term only in accordance with the Plan and the terms of this Option.
-1-
<PAGE>
3.1.5 In the event that this Option shall become exercisable at
a time or times such that Shares having an aggregate fair market value
(determined as of the date of grant of the option covering such Share) in excess
of $100,000 shall first become available for purchase during any calender year,
under this Option or any other Incentive Stock Option agreement between the
Company and the Optionee, then that portion of such Shares corresponding to the
excess of such aggregate fair market value over $100,000 shall not be treated as
Incentive Stock Options pursuant to the Code.
3.2 Method of Exercise.
------------------
3.2.1 This Option shall be exercisable by written notice which
shall state the election to exercise the Option, the number of shares in respect
of which the Option is being exercised, and such other representations and
agreements as to the holder's investment intent with respect to such shares of
Common Stock as may be required by the Company pursuant to the provisions of the
Plan. Such written notice shall be signed by the Optionee and shall be delivered
in person or by certified mail to the Secretary of the Company. The written
notice shall be accompanied by payment of the exercise price. This option shall
be deemed to be exercised upon receipt by the Company of such written notice
accompanied by the exercise price.
3.2.2 No Shares will be issued pursuant to the exercise of an
Option unless such issuance and such exercise shall comply with all relevant
provisions of the law and the requirements of any stock exchange upon which the
Common Stock may then be listed. Assuming such compliance, for income tax
purposes the Shares shall be considered transferred to the Optionee on the date
on which the Option is exercised with respect to such Shares.
4. Optionee's Representations. In the event the Shares purchasable
--------------------------
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, concurrently with the exercise of all or any portion of this
Option, deliver to the Company an executed Employee Restricted Stock Agreement
in the form attached as Exhibit A.
---------
5. Method of Payment. Payment of the exercise price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Optionee:
5.1 cash;
5.2 check; or
5.3 surrender of other shares of Common Stock of the Company having a
Fair Market Value on the date of exercise equal to the exercise price of the
Shares as to which the Option is being exercised.
-2-
<PAGE>
6. Restrictions on Exercise. This Option may not be exercised if the
------------------------
issuance of such Shares upon such exercise or the method of payment of
consideration for such Shares would constitute a violation of any applicable
federal of state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as the Administrator may deem to be necessary or appropriate
under any applicable law or regulation.
7. Termination of Status as an Employee. In the event of termination of
------------------------------------
Optionee's employment with the Company for any reason other than the disability
or death of the Optionee, Optionee may, but only within thirty (30) days after
the date of such termination (but in no event later than the date of expiration
of the term of this Option as set forth in Section 3.1.4), exercise this Option
to the extent that Optionee was entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise this
Option at the date of such termination, or if Optionee does not exercise this
Option within the time specified herein, the Option shall terminate. Nothing
contained in this Option or in the Plan shall confer upon the Optionee any right
to continue in his or her position with the Company or shall interfere in any
way with the rights of the Company, which are hereby reserved, to reduce the
Optionee's compensation from the rate in existence on the date of grant or to
terminate the Optionee's relationship with the Company for any reason.
8. Disability of Optionee. In the event of termination of Optionee's
----------------------
employment with the Company as a result of Optionee's disability, Optionee may,
but only within one (1) year from the date of the termination of employment (but
in no event later than the date of expiration of the term of this Option as set
forth in Section 3.1.4), exercise this Option to the extent Optionee was
entitled to exercise it at the date of such termination; provided, however, that
if such disability is not a "disability" as such term is defined in Section
22(e)(3) of the Code, this Option shall cease to be an Incentive Stock Option
and shall automatically convert to a nonstatutory stock option on the day three
months and one day following such termination. To the extent that Optionee was
not entitled to exercise this Option at the date of termination, or if Optionee
does not exercise such Option within the time specified herein, the Option shall
terminate. An individual shall not be considered disabled unless he or she
furnishes proof of the existence of such disability in such form and manner, and
at such times, as the Administrator may require.
9. Death of Optionee. In the event of death of Optionee:
-----------------
9.1 during the term of this Option and while an employee of the
Company and having been in continuous status as an Employee since the date of
grant of this Option, the Option may be exercised
-3-
<PAGE>
at any time within one (1) year following the date of death (but in no event
later than the date of expiration of the term of this Option as set forth in
Section 3.1.4), by Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent of the
right to exercise that had accrued at the date of death; or
9.2 within thirty (30) days after the termination of Optionee's
continuous status as an employee, the Option may be exercised, at any time
within three (3) months following the date of death (but in no event later than
the date of expiration of the term of this Option as set froth in Section
3.1.4), by Optionee's estate or by a person who acquired the right to exercise
the Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
10. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
11. Optionee not a Shareholder. neither the Optionee nor any other person
--------------------------
entitled to exercise the Option shall have any of the rights or privileges of a
shareholder of the Company with respect to any of the Shares until the date of
issuance of a stock certificate for such Shares. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued, except as provided in Section 6.8 of
the Plan.
12. Early Disposition of Stock. Optionee understands that if Optionee
--------------------------
disposes of any Shares received under this Option within two (2) years after the
date of grant, or within one (1) year after such Shares were transferred to him,
Optionee will be treated for federal income tax purposes as having received
ordinary income at the time of such disposition in an amount generally measured
by the difference between the price paid for the Shares and the lower of the
fair market value of the Shares at the date of the exercise or the fair market
value of the Shares at the date of disposition. The amount of such ordinary
income may be measured differently if Optionee is an officer, director or 10%
shareholder of the Company, or if the Shares were subject to a substantial risk
of forfeiture at the time they were transferred to Optionee. Optionee agrees to
notify the Company in writing within 30 days after the date of any such
disposition. Optionee understands that if Optionee disposes of such Shares at
any time after the expiration of such two-year and one-year holding periods, any
gain on such sale will be taxed as long-term capital gain.
-4-
<PAGE>
13. Stock Splits, Combinations, Recapitalizations, etc. The number of
---------------------------------------------------
Shares subject to this Option shall be subject to adjustment as set forth in
Section 6.8 of the Plan.
DATE OF GRANT: December 5, 1996
BIO-ENGINEERED FOODS, INC., a
California Corporation
By:
--------------------------
James Wolfe, President
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION
3.1 IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES).
OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN
THE COMPANY'S 1997 STOCK INCENTIVE PLAN WHICH IS INCORPORATED HEREIN BY
REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF
EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S
RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT AT ANY TIME,
WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and certain information
related thereto and represents that Optionee is familiar with the terms and
provisions thereof, and accepts this Option subject to all of the terms and
provisions. Optionee has reviewed the Plan and this Option in their entirety,
has had an opportunity to obtain the advice of counsel prior to executing this
Option and fully understands all provisions of the Option. Optionee agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan.
Date:
--------------------
------------------------------------
-5-
<PAGE>
EXHIBIT A
---------
BIO-ENGINEERED FOODS, INC.
FORM OF
EMPLOYEE RESTRICTED STOCK AGREEMENT
This Employee Restricted Stock Agreement (the "Agreement") is made as of
this day of , by and between BIO-ENGINEERED FOODS, INC.,
-------- ------------
a California corporation (the "Company") and ("Employee"). In
----------------
consideration of the mutual covenants and representations herein set forth, the
Company and Employee agree as follows:
1. Issuance of Restricted Stock. Subject to the terms and conditions of
----------------------------
this Agreement and the Incentive Stock Option Agreement between the Company and
Employee dated December 5, 1996, the Company agrees to issue to Employee as of
the date of this Agreement, shares (the "Shares") of the Company's
---------
common stock (the "Common Stock") at a purchase price of $2.50 per share.
2. Stock Splits, Etc. If, from time to time during the term of this
------------------
Agreement there is any stock dividend or liquidating reclassification or other
change in the character or amount of any of the outstanding securities of the
Company; or there is any consolidation, merger or sale of all, or substantially
all, of the assets of the Company; then, and in such event, all new, substituted
or additional securities or other property to which Employee is entitled by
reason of his ownership of the Shares shall be immediately subject to this
Agreement and be included in the term "Shares" for all purposes and with the
same force and effect as the Shares of Common Stock to be issued on the date of
this Agreement.
3. Restrictions of Transfer.
------------------------
3.1 Purchase Option.
---------------
3.1.1 The Shares shall be subject to the right and option of the
Company to repurchase the Shares (the "Purchase Option") as set forth in this
Section 3.1. In the event Employee shall cease to be employed by the Company
(including a parent or subsidiary of the Company) for any reason (a
"Termination"), the Purchase Option shall come into effect. Following a
Termination, the Company shall have the right, as provided in Section 3.1.3, to
purchase the Shares from the Employee at the purchase price per Share set forth
in Section 3.1.2 (the "Option Price").
-1-
<PAGE>
3.1.2 If the Termination is for cause, as defined hereinafter, the
Option Price shall be the purchase price per Share originally paid as set forth
in Section 1 (the "Cause Option Price"); provided however, that the portion of
the Shares repurchased at the Cause Option Price shall lapse at a rate of twenty
percent (20%) per year starting with the first annual anniversary date of the
grant date set forth in the Option Agreement (so that as of the fifth annual
anniversary date of the grant date set forth in the Option Agreement, the Cause
Option Price shall equal the Non-Cause Option Price defined below). To the
extent such Cause Option Price lapses, as described above, the applicable Option
Price shall be the Non-Cause Option Price. In the event of a Termination for any
reason other than cause, the Option Price shall be the Fair Market Value (as
that term is defined in Section 4 of the Company's 1997 Stock Incentive Plan;
the "Plan") for a share of the Company's Common Stock on the date of the
Termination (the "Non-Cause Option Price"). For purposes of this Section 3.1.2
only, "cause" shall mean Employee's commission of any material act of
dishonesty, fraud or misrepresentation or any act of moral turpitude; default in
the performance of Employee's material obligations, services or duties to the
Company; or Employee's failure to execute specific instructions from the
Company's officers, which failure is not corrected by Employee upon notice from
the Company.
3.1.3 Within 60 days following a Termination, the Company shall notify
Employee by written notice delivered or mailed as provided in Section 6.2, as to
whether it wishes to purchase the Shares pursuant to exercise of the Purchase
Option. If the Company (or its assignee) elects to purchase the Shares
hereunder, it shall set a date for the closing of the transaction at a place
specified by the Company not later than 15 days from the date of such notice. At
such closing, the Company (or its assignee) shall tender payment for the Shares
and Employee shall tender the certificates representing the Shares so purchased
for cancellation or transfer, as the case may be. The Option Price may be
payable, at the option of the Company, in cancellation of all or a portion of
any outstanding indebtedness of Employee to the Company or in cash (by check),
or both; provided that to the extent the Option Price payable by the Company is
the Cause Option Price, the Option Price shall be payable in cash.
3.2 Right of First Refusal. Other than as set forth in Section 3.1 or
----------------------
3.4, Employee shall not sell, transfer, pledge, hypothecate or otherwise dispose
of any of the Shares (including transfer by operation of law) until such Shares
are first offered to the Company in accordance with the following terms and
conditions:
3.2.1 The Employee shall deliver a notice ("Notice") to the Company
stating (i) his bona fide intention to sell or transfer such Shares, (ii) the
number of Shares to be sold or transferred, (iii) the price for which he
proposes to sell or
-2-
<PAGE>
transfer such Shares, (iv) the name of the proposed purchaser or transferee, and
(v) the payment terms proposed.
3.2.2 Within thirty (30) days after receipt of the Notice, the
Company or its assignee may elect to purchase all Shares to which the Notice
refers, at the price per Share specified in the Notice. The Company shall
purchase the Shares on the payment terms specified in the Notice; provided,
however, that the Company may elect to pay up to 75% of the purchase price to be
paid for the Shares by delivery of a promissory note for a fixed term (not to
exceed two years) to be determined by the Board of Directors of the Company,
with interest thereon payable at the prime rate in effect as of the date of the
Notice. The principal amount of such note shall not exceed the difference
between the fair market value of the Shares purchased by the Company less the
aggregate exercise price paid for such Shares by Employee. The remainder of the
purchase price shall be paid by cash or check payable to the Employee at the
time of sale.
3.2.3 If the Shares to which the Notice refers are not elected
to be purchased as provided in Section 3.2.2, the Employee must offer the Shares
to the other shareholders of the Company at the price and payment terms
specified in the Notice.
3.2.4 If the Shares to which the Notice refers are not elected
to be purchased, as provided in Sections 3.2.2 and 3.2.3, the Employee may sell
the Shares to any person named in the Notice at the price, and on the payment
terms, specified in the Notice, or at a higher price or upon payment terms less
favorable to the proposed transferee, provided that such sale or transfer is
consummated within ninety (90) days of the date of said Notice to the Company,
and provided, further, that any such sale is in accordance with all the terms
and conditions hereof, including Section 3.5 below.
3.3 Market Stand-Off. Employee agrees that, in connection with an
----------------
initial public offering by the Company of its equity securities pursuant to a
registration statement filed under the Act, the Employee will not sell, make any
short sale or loan, hypothecate, pledge, grant any option for the purchase of or
otherwise dispose of any Common Stock without the prior written consent of the
Company and its underwriters, for such period of time from the effective date of
such registration as may be requested by the Company or such underwriters.
3.4 Drag-Along Rights. Employee agrees that, if a person who is not
-----------------
affiliated with the Company or any of its controlling persons makes a bona fide
offer to all shareholders of the Company to acquire all of their shares of
Common Stock (whether by cash purchase, or in exchange for securities of such
person, or any combination thereof, or by merger or consolidation with such
person or an entity affiliated with such person), and the holders of a majority
of the then-outstanding shares of Common Stock elect
-3-
<PAGE>
to accept such offer, then the Employee shall be deemed to have accepted such
offer and shall transfer the Shares to the person making such offer on the terms
contained in such offer.
3.5 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the restrictions set forth above, the Employee further agrees that he shall in
no event make any disposition of all or any portion of the Shares unless and
until:
3.5.1 The Employee shall have notified the Company of the
proposed disposition and shall have furnished the Company with (i) a detailed
statement of the circumstances surrounding the proposed disposition, and (ii)
Employee's certification, in form and substance reasonably satisfactory to the
Company, that the proposed purchaser or transferee of such Shares has not,
directly or indirectly, engaged in any competition against the Company, or owned
any interest in any business competitive with the Company, in either case within
three years prior to the date of the proposed disposition;
3.5.2 If requested by the Company, the Employee shall have
furnished the Company with an opinion of the Employee's counsel to the effect
that such disposition will not require registration of such Shares under the
Securities Act of 1933, as amended (the "Act") or qualification under any
applicable state securities laws; and
3.5.3 Such opinion of the Employee's counsel shall have been
concurred in by counsel for the Company and the Company shall have advised the
Employee of such concurrence.
3.6 Termination of Restrictions. The provisions of Sections 3.1, 3.2,
---------------------------
3.4 and 3.5 shall terminate on (i) the effective date of a Registration
Statement filed by the Company under the Act, with respect to an underwritten
public offering of Common Stock on the Company, or (ii) the closing date of a
sale of assets or a merger of the Company duly approved by the shareholders of
the Company pursuant to which shareholders of this Company receive cash or
securities of a buyer whose shares are publicly traded; provided, however, that
the restrictions set forth in Section 3.1 shall terminate no later than five
years after the date of this Agreement. The provisions of Section 3.2 shall not
apply to a transfer of any Shares by Employee on death by will or intestate to
his ancestors, descendants or spouse, or any custodian or trustee for the
account of Employee's ancestors, descendants or spouse, provided, in each such
case, a transferee shall receive and hold such Shares subject to the provisions
of Sections 3.1, 3.2, 3.3, 3.4 and 3.5, shall execute a copy of this Agreement
if so requested by the Company, and there shall be no further transfer of such
Shares in accordance with this Agreement.
3.7 Violation of Restrictions. With respect to any Shares which shall
-------------------------
have been sold or transferred in violation of
-4-
<PAGE>
any of the provisions set forth in this Agreement, the Company shall not be
required (i) to reflect such transfer on its books, or (ii) to treat as owner of
such Shares or to accord the right to vote as such owner or to pay dividends to
any transferee to whom such Shares shall have been so transferred.
4. Legends. All certificates representing any of the Shares subject to
-------
the provisions of this Agreement shall have endorsed thereon the following
legends:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF FIRST REFUSAL AS SET FORTH IN AN
EMPLOYEE RESTRICTED STOCK AGREEMENT DATED _________ , ____ , BETWEEN THE
COMPANY AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICE OF THE COMPANY."
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND APPROPRIATE
QUALIFICATION UNDER SUCH LAWS, UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SAID REGISTRATION AND
QUALIFICATION ARE NOT REQUIRED."
In addition, the certificates shall bear any other legend which the Company
deems to be necessary or appropriate under the securities laws of any state.
5. Employee's Representations. In connection with his purchase of the
-------------------------
Shares, the Employee hereby represents and warrants to the Company as follows:
5.1 Investment Intent; Capacity to Protect Interests. The Employee is
------------------------------------------------
purchasing the Shares solely for his own account for investment and not with a
view to or for sale in connection with any distribution of the Shares or any
portion thereof and not with any present intention of selling, offering to sell
or otherwise disposing of and distributing the Shares or any portion thereof.
The Employee also represents that the entire legal and beneficial interest of
the Shares is being purchased, and will be held, for the Employee's account
only, and neither in whole or in part for any other person. Employee either has
a preexisting business or personal relationship with the Company or any of its
officers, directors or controlling persons or by reason of Employee's business
or financial experience or the business or financial experience of Employee's
professional advisers who are unaffiliated with and who are not compensated by
the Company or any affiliate or selling agent of the Company, directly or
indirectly, could be reasonably assumed to have the capacity to evaluate the
-5-
<PAGE>
merits and risks of an investment in the Company and to protect Employee's own
interests in connection with this transaction.
5.2 Residence. The Employee's principal residence is within the State
---------
of California and is located at the address indicated beneath the Employee's
signature below.
5.3 Information Concerning Company. The Employee has heretofore
------------------------------
discussed the Company and its plans, operations and financial condition with the
Company's officers and has heretofore received all such information as the
Employee has deemed necessary and appropriate to enable the Employee to evaluate
the financial risk inherent in making an investment in the Shares and the
Employee has received satisfactory and complete information concerning the
business and financial condition of the Company in response to all inquiries in
respect thereof.
5.4 Economic Risk. The Employee realizes that the purchase of the
-------------
Shares is a highly speculative investment and involves a high degree of risk,
and the Employee is able, without impairing his or her financial condition, to
hold the Shares for an indefinite period of time and to suffer a complete loss
of the investment.
5.5 Restricted Securities. The Employee understands and acknowledges
---------------------
that:
5.5.1 The sale of the Shares has not been registered under the Act,
and the Shares must be held indefinitely unless the Shares are subsequently
registered under the Act or an exemption from such registration is available,
and the Company is under no obligation to register the Shares; the Employee is
familiar with the provisions of Rules 701 and 144, each promulgated under the
Act, which, in substance, permit limited public resale of "restricted
securities" acquired, directly or indirectly from the issuer thereof, in a
nonpublic offering, subject to the satisfaction of certain conditions;
5.5.2 The share certificate representing the Shares will be stamped
with the legends specified in Section 4; and
5.5.3 There are significant restrictions on Employee's ability to
transfer the Shares imposed by this Agreement; the Company will make a notation
in its records of the aforementioned restrictions on transfer and legends.
5.6 Valuation of Common Stock. The Employee understands that the Shares
-------------------------
have been valued by the Board of Directors of the Company in connection with the
Plan based on the best information available to the Board at the time of grant.
The Employee also understands that the Company can give no assurances regarding
the fair market value of the Shares and that it is possible that, with the
benefit of hindsight, the Internal Revenue
-6-
<PAGE>
Service would successfully assert that the fair market value of the Shares on
the date of purchase or the date the option was granted is greater than may be
determined by the Employee or the Company. Any additional taxes (and interest)
resulting from such determination would be payable by the Employee. There is no
provision for the Company to reimburse Employee for that tax liability, and the
Employee assumes all responsibility for such potential tax liability.
6. Miscellaneous.
-------------
6.1 Further Instruments. The parties agree to execute such further
-------------------
instruments and to take such further action as may reasonably be necessary to
carry out the intent of this Agreement.
6.2 Notices. Any notice required or permitted hereunder shall be
-------
given in writing and shall be deemed effectively given upon personal delivery or
upon deposit in the United States Post Office, by registered or certified mail
with postage and fees prepaid, addressed to Employee at his address shown on the
Company's employment records and to the Company at the address of its principal
corporate offices (Attention: President) or at such other address as such party
may designate by ten days' advance written notice to the other party hereto.
6.3 Assignment of Rights. The Company may assign its rights
--------------------
(including the Purchase Option) and delegate its duties under this Agreement.
If any such assignment or delegation requires consent of any state securities
authorities, the parties agree to cooperate in requesting such consent. This
Agreement shall inure to the benefit of the successors and assigns of the
Company and, subject to the restrictions on transfer herein set forth, be
binding upon Employee, his heirs, executors, administrators, successors and
assigns.
6.4 Transfer Authorization. Employee hereby authorizes and directs
----------------------
the Secretary or Transfer Agent of the Company to transfer the Shares as to
which either (i) the Purchase Option has been exercised or (ii) the right of
first refusal has been exercised, in either case from Employee to the Company or
its assignee.
6.5 Right of Termination. Nothing in this Agreement shall affect in
--------------------
any manner whatsoever the right or power of the company, or a parent or
subsidiary of the Company, to terminate Employee's employment, for any reason,
with or without cause.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
"Company"
BIO-ENGINEERED FOODS, INC.
By:
----------------------
James Wolfe, President
Address:
1015 Mark Avenue
Carpinteria, CA 93013
"Employee"
-------------------------
Address:
-------------------------
-------------------------
-8-
<PAGE>
EXHIBIT 11.1
BALANCE BAR COMPANY
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(Amounts In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net income (loss)........................................ $ (85) $1,615 $1,660
Less--Preferred stock dividends.......................... -- -- --
------ ------ ------
Income (loss) available to shareholders.................. $ (85) $1,615 $1,660
====== ====== ======
Weighted average number of shares outstanding for basic
earnings per share...................................... 1,300 1,402 1,550
Effect of dilutive securities (shares issuable upon
exercise of stock options determined by the treasury
stock method)........................................... -- 155 291
------ ------ ------
Weighted average number of shares outstanding for diluted
earnings per share...................................... 1,300 1,557 1,841
====== ====== ======
Earnings (loss) per share:
Basic................................................... $(0.07) $ 1.15 $ 1.07
====== ====== ======
Diluted................................................. $(0.07) $ 1.04 $ 0.90
====== ====== ======
</TABLE>
- --------
Note--In connection with the Company's initial public offering, the Company has
obtained commitments from all of the holders of convertible preferred
stock to convert the preferred stock to common stock. As such, the
preferred shares (634) have been included in the calculation of basic
earnings (loss) per share.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Los Angeles, California
April 7, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE BAR
COMPANY'S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND THE RELATED
STATEMENTS OF OPERATIONS, SHAREHOLDERS' EQUITY AND CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 89 1,119
<SECURITIES> 0 0
<RECEIVABLES> 3,490 1,457
<ALLOWANCES> (46) (22)
<INVENTORY> 3,806 583
<CURRENT-ASSETS> 9,438 3,299
<PP&E> 1,241 111
<DEPRECIATION> (230) (55)
<TOTAL-ASSETS> 10,796 3,374
<CURRENT-LIABILITIES> 6,464 1,212
<BONDS> 1,413 0
0 0
6 6
<COMMON> 9 9
<OTHER-SE> 4,089 2,147
<TOTAL-LIABILITY-AND-EQUITY> 10,796 3,374
<SALES> 39,634 10,544
<TOTAL-REVENUES> 39,684 10,551
<CGS> 19,801 5,272
<TOTAL-COSTS> 36,785 8,688
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 29 10
<INTEREST-EXPENSE> 23 23
<INCOME-PRETAX> 2,876 1,840
<INCOME-TAX> 1,216 225
<INCOME-CONTINUING> 1,660 1,615
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,660 1,615
<EPS-PRIMARY> 1.07 1.15
<EPS-DILUTED> 0.90 1.04
</TABLE>
