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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____ to _____
Commission File Number: 000-24007
BALANCE BAR COMPANY
(Exact name of registrant as specified in its charter)
Delaware 77-0306617
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1015 Mark Avenue, Carpinteria, California 93013
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (805) 566-0234
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class
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Common Stock, $0.01 Par Value
_______________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At March 8, 1999, the Registrant had outstanding 11,778,406 shares of its
common stock. The aggregate market value of the Registrant's voting stock held
by non-affiliates at this date was approximately $58,304,000, based on the
closing price of $10.625 as reported on the NASDAQ National Market. Shares of
common stock known by the Registrant to be beneficially owned by directors and
officers of the Registrant subject to the reporting and other requirements of
Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") are not
included in the computation. The Registrant, however, has made no determination
that such persons are "affiliates" within the meaning of Rule 12b-2 under the
Exchange Act.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the 1998 Annual Report to Stockholders - Part II and
Part IV of this Report.
Selected portions of the 1999 Proxy Statement - Part III of this Report.
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BALANCE BAR COMPANY
SEC FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1998
INDEX
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PART I
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Item 1. Business................................................................................. 3
Item 2. Properties............................................................................... 12
Item 3. Legal Proceedings........................................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders...................................... 12
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 13
Item 6. Selected Financial Data.................................................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation..... 13
Item 7A. Quantitative and Qualitative Disclosure About Market Risk................................ 13
Item 8. Financial Statements and Supplementary Data.............................................. 13
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 13
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PART III
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Item 10. Directors and Executive Officers of the Registrant....................................... 14
Item 11. Executive Compensation................................................................... 14
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 14
Item 13. Certain Relationships and Related Party Transactions..................................... 14
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PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 15
Signatures
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PART I
Item 1. BUSINESS
Company Overview
Balance Bar Company (the "Company") develops and markets branded natural food
and beverage products in convenient, good-tasting, balanced nutritional
formulations. The Company's 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, sports,
and drug stores. The Company's existing product lines, the Balance Bar/TM/ and
the 40-30-30 Balance/TM/ 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 13 flavors of
Balance Bars (in three sizes) and four flavors of powdered drinks (in canisters
and single serving envelopes).
The Company's sales have grown to $81.7 million in 1998 from $39.6 million in
1997, $10.5 million in 1996 and $1.3 million in 1995. From 1992 to late 1995,
the Company marketed the Balance Bar to the weight loss and sports performance
market and relied heavily on direct sales to consumers through network marketing
and direct response advertising. In 1995, the Company obtained its first major
wholesale customer, a national natural foods distributor. By 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, the Company expanded its broker network
and distribution into mass merchandise, club, grocery, convenience, sports, and
drug stores. In June 1998, the Company completed an initial public offering of
2,760,000 shares of common stock, of which the Company sold 1,003,372 shares.
In 1998, the Company released three new nutraceutically-enhanced Balance
Bars under the Balance+/TM/ brand. The Company began shipping these new bars
beginning in November 1998. The Company also began shipping a larger version of
the popular Honey Peanut Balance Bar flavor, called the Balance Big Bar, in
September 1998. In early-March 1999, the Company launched a new product line of
ready-to-drink natural beverages, in four flavors, under the Total Balance/TM/
brand. The Company expects to ship this product line beginning in late-March
1999.
Industry Overview
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 the foods they eat. 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. 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 at any time or place.
The Company has responded to these consumer trends by developing and marketing
natural food and beverage products for the healthy snack and meal replacement
market. The Company 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. The Company's
objective is to make its products available wherever people shop.
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.
Natural foods are products that contain no artificial flavors, colors or
preservatives. Healthy foods include products that contain low or no amounts of
unhealthy ingredients such as harmful fat or sodium. In addition, healthy foods
include vitamin and mineral fortified products and products such as granola and
grain-based snacks, rice cakes and dried fruit. Nutraceutical products are
products that contain ingredients that may be health-promoting or functional
(e.g., promote energy, endurance and vitality) such as Echinacea, Ginkgo Biloba
and St. John's Wort. Snacks include salted snacks, baked snacks, candy and
other specialty snacks.
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According to ACNielsen ScanTrack : SPINS NaturalTrack ("SPINS NaturalTrack"),
dollar sales of nutrition bars by grocery, mass merchandise and drug stores in
the United States increased approximately 54%, 174% and 66%, respectively, in
1998. The Company believes that consumer trends towards health and nutrition
will continue to drive the broad distribution of convenient, healthy snacks and
meal replacements.
Growth Strategy
The Company's goal is to become a recognized leader in providing nutritious,
good tasting and convenient natural 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. Many of the Company's products are 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 has increased consumer awareness of and
demand for its products by increasing its advertising and promotional activities
in 1998. The Company anticipates that its 1999 advertising and marketing
expenditures will increase over 1998 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
products 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. 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 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
health organization 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 the introduction of powdered drink mixes
in 1997. In late 1997, the Company introduced three new Balance Bar flavors and
in November 1998, introduced three nutraceutical bars. In September 1998, the
Company began shipping the Balance Big Bar, a one and one-half size version of
the honey peanut flavor. In early-March 1999, the Company launched a new
product line of ready-to-drink natural beverages. The Company intends to
continue to introduce new products in the future.
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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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.
Balance Bar Company Branded Products
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Estimated Retail
Product Flavors Description Price Range (1)
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BARS
Balance Bar Honey Peanut, Chocolate, 1.76 ounces; sold both $0.99 to $1.99
Yogurt Honey Peanut, Almond individually and in 6 per bar
Brownie, Toasted Crunch, and 15 bar packs
Chocolate Raspberry Fudge,
Almond Butter Crunch,
Mocha, Banana Coconut and
Cranberry
Balance+
Honey Peanut with Ginseng, 1.76 ounces; sold both $0.99 to $1.99
Yogurt Berry with Ginkgo individually and in 15 per bar
Biloba, and Chocolate bar packs
Covered Banana with
Antioxidants
Balance Big Bar Honey Peanut 2.64 ounces; sold both $1.79 to $2.29
individually and in 12 bar per bar
packs
DRINKS
Canister of Chocolate, Vanilla, 15 serving canisters of $10.95 to $18.75
40-30-30 Balance Strawberry and powdered drink mix to be per canister
Powdered Drink Banana Coconut blended with milk or water
Mix
Single Serving Chocolate, Vanilla, Single serving; sold in $1.39 to $1.52
Envelope of Strawberry and individual envelopes and per envelope,
40-30-30 Balance Banana Coconut six pack box, to be $8.34 to $9.09
Powdered Drink blended with milk or water per box
Mix
Total Balance Chocolate, Vanilla, 10 ounces; sold both Estimated at
Strawberry and Mocha individually and 24 to the $1.29 to $1.79
case per can
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(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 bars under a private
label to one of its significant customers.
The recommended maximum shelf life of Balance Bars is nine months, although
factors such as exposure to heat during transportation or storage can cause a
deterioration in the taste or quality of Balance Bars. The recommended maximum
shelf life of 40-30-30 Balance powdered drink mix and Total Balance is 12
months. To date, the Company has not experienced any significant complaints
with respect to product quality or shelf life.
Sales Channels
Natural Foods Channel. Sales to the natural foods channel accounted for 46%
of sales in 1998, 69% of sales in 1997 and approximately 100% of sales in 1996.
According to SPINS data from Spence Information Services, the Balance Bar was
the number one selling nutrition bar brand in the natural foods channel,
achieving a 31% share in 1998. In addition, the Balance Bar accounted for six of
the top ten flavors in 1998. Over 90% of 40-30-30 Balance powdered drink mix
sales in 1998 and 1997 were to this channel. The Company believes that this
channel is nearly fully penetrated with all Balance Bar flavors.
The Company's primary direct natural foods customers are Trader Joe's, GNC,
United Natural Foods and Tree of Life. The two largest natural foods retail
customers in 1998 were Trader Joe's and GNC. Trader Joe's and GNC accounted for
approximately 14% and 7%, respectively, of the Company's 1998 sales. 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. These distributors do not disclose to
the Company their sales to specific retailers. The Company's two largest
natural foods distributors in 1998 were United Natural Foods and Tree of Life.
United Natural Foods and Tree of Life accounted for approximately 9% and 5%,
respectively, of the Company's 1998 sales.
Other Distribution Channels. The Company's other distribution channels
include mass merchandise, club, grocery, convenience, sports, and drug stores.
The Company's principal customers within these distribution channels include
grocery stores (i.e., Albertsons, Fred Meyer and Kroger), mass merchandise and
club stores (Costco, Sam's Club, and WalMart) and convenience stores (Circle-K
and 7-Eleven). The two largest customers in the other distribution channels in
1998 were Costco Wholesale and McLane Distribution. Costco Wholesale and McLane
Distribution accounted for approximately 16% and 13%, respectively, of the
Company's 1998 sales.
According to SPINS NaturalTrack, the Balance Bar achieved a 21%, 49% and
14% share of the grocery, mass merchandise and drug markets, respectively, in
1998. According to SPINS NaturalTrack, the Balance Bar was the number one
selling nutrition bar brand in the mass merchandise channel. The Company also
believes that it had the leading market share in the club distribution channel
in 1998, but third-party data is not available to verify share data in this
distribution channel. At December 31, 1998, the Company had at least one Balance
Bar flavor in approximately 45% of grocery stores, 51% of mass merchandise
stores, 37% of club stores (based on Company estimates), 14% of convenience
stores (based on Company estimates) and 39% of drug stores in the United States.
In addition, the Balance Bar accounted for four of the top ten flavors in
grocery, mass merchandise and drug stores in 1998. 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.
Non-U.S. Sales. Sales to customers outside of the United States amounted to
approximately 1% of 1998 sales. These sales were made primarily to Canadian and
Japanese customers.
Backlog. The Company generally quotes ten-day lead times when orders are
taken and attempts to ship products as soon as practical or on the date
requested, as appropriate. Accordingly, backlog is not material to the
Company's business.
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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 March 1, 1999, the Company had 10 brokers in the
natural foods channel and 34 brokers in other distribution channels. These 44
brokers have approximately 65 offices across the United States.
As of March 1, 1999, the Company's internal regional sales force and sales
support staff consisted of 24 employees responsible for direct selling efforts
to its retail customers and for supervising and assisting its commissioned
brokers and distributors in sales activities.
Marketing
The Company markets its products as "nutritious snacks that taste great."
Its 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 uses 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 diverse 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.
Promotions and Sponsorships. 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 and 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, leverage working capital, transfer risk,
and focus its energy and resources on marketing and sales, while substantially
reducing capital expenditures and avoiding the costs of managing a production
work force. Because the Company has four third-party contract manufacturers,
two on each coast of North America, the Company can deliver its products quickly
with lower freight costs.
One manufacturer supplies the Company with Balance Bars and 40-30-30 Balance
powdered drink mixes from a facility in Quebec, Canada. This company produces
the Company's products under formulations that the Company owns and may not
produce products for any other customers using these formulas. In addition,
this manufacturer 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
this manufacturer expires December 31, 2003, subject to automatic annual
extensions during each year the contract remains in effect. Most Balance Bars
produced by this manufacturer are shipped to locations east of the Mississippi
River and in Canada while drink mixes are distributed nationwide.
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The second manufacturer supplies the Company with Balance Bars from a facility
in Irwindale, California. This manufacturer uses formulations owned by the
Company, subject to reversion 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 this manufacturer's obligations to produce 40-30-
30 bars exclusively for the Company subject to an exception for one small
customer. This manufacturer is contractually prohibited from producing
nutritional food products based on the 40-30-30 concept for any other customer
through December 31, 2002. This contract expires December 31, 2003 subject to
automatic annual extensions during each year the contract remains in effect.
Most of the Balance Bars produced by this manufacturer are shipped to locations
west of the Mississippi River.
In early-March 1999, the Company entered into an informal supply arrangement
with a company that owns two ready-to-drink manufacturers. One of these
manufacturers is located in Visalia, California and the other is located in New
Holland, Pennsylvania. These manufacturers use formulations owned by the
Company to manufacture Total Balance. The Company anticipates formalizing the
supply arrangement with these two contract manufacturers by April 1999.
These four manufacturers supply the Company's products at a fixed price per
unit. The prices are subject to increase upon 75 - 90 days notice if raw
material prices, labor rates or exchange rates rise. The Company provides no
raw materials to the contract manufacturers. The Company provides all packaging
materials to the two contract manufacturers that manufacture Balance Bars and
40-30-30 Balance powdered drink mixes. 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. The manufacturers are required to comply with all legal requirements
applicable to the production of food products.
The Company believes that its contract manufacturers have the capacity to
fulfill the Company's planned production needs for at least the next 12 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 any of them were 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.
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 quality assurance
contract manufacturer employees to verify adherence to the Company's
formulations and ensure taste consistency. After each production run, samples
are analyzed to test the product for micro-impurities and to ensure accurate
labeling.
Competition
The Company's principal competitors in the nutrition bar category are
PowerBar, Inc. ("PowerBar") (Performance, Harvest and Essentials brands),
ClifBar, Inc., Met-Rx USA, Inc. ("Met-Rx"), Slim Fast Nutritional Foods
International ("Slim Fast"), and Abbot Laboratories Ross Products Division
("Ensure"), none of which currently produces products formulated on a 40-30-30
basis, as well as Twinlab Corporation and Prozone, each of which sell products
produced 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 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, Ensure, and Nestle U.S.A., Inc.,
none of which currently produce products formulated on a 40-30-30 basis. These
products also contain artificial flavors, colors or preservatives.
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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 foods.
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 and greater market share 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.
Trademarks
The names of the Company's current products are "Balance, The Complete
Nutritional Food" bar, "40-30-30 Balance, Complete Nutritional Drink Mix" and
"Total Balance The Complete Nutritional Drink". As of March 1, 1998, the
Company held two federally registered trademarks "Balance, The Complete
Nutritional Food" and "Balance", and had 23 trademark applications pending at
the United States Patent and Trademark Office. In addition, the Company has
four trademark registrations as well as 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 the "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 "40-30-30" for any new
products or product lines it may introduce. In addition, certain of the
Company's competitors use "balanced" or "complete nutrition" or variations
thereof in the names of their products or on product packaging. There can be no
assurance that the Company will be able to prevent consumer confusion between
products using these terms.
The Company and one of its largest distributors, 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.
Government Regulation
The manufacturing, packaging, labeling, advertising, distribution, and sale of
the Company's products are subject to regulation by 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 ensure 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
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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.
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
National Advertising Division of the Council of Better Business Bureaus, Inc.
("NAD"). The NAD 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. The Company does not believe that such changes have adversely
affected its marketing success.
The Company may be subject to additional laws or regulations administered by
the FDA or other regulatory authorities or more stringent interpretations of
current laws or regulations 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 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.
Employees
As of March 1, 1999, the Company had a total of 78 employees, including 6 who
are temporary-to-hire staff. The Company's employees are not covered by a
collective bargaining agreement and the Company believes that its relationship
with its employees is good. The Company does not have an employment agreement
with any employee.
Officers of the Registrant
Officers of the Company and their ages as of March 1, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
James A. Wolfe 57 President, Chief Executive Officer and Director
Richard G. Lamb 52 Executive Vice President, Secretary and Director
Thomas J. Flahie 41 Senior Vice President of Finance and Administration
Patrick J. Lee 32 Senior Vice President of Sales and Marketing
Kristina M. Eriksen 40 Vice President of Finance
Lara A. Jackle 29 Vice President of Marketing
Mark E. Fox 46 Vice President of Event Marketing
Eileen E. Fox 33 Vice President of Operations
</TABLE>
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.
10
<PAGE>
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. He is a Certified Public Accountant.
Patrick J. Lee joined the Company in January 1997 and served as Senior Vice
President of Sales through November 1998 and as Senior Vice President of Sales
and Marketing since that time. From October 1995 to December 1996, he was the
Western Division Manager of PowerBar (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 A. 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 worked in marketing for Reckitt & Colman, a worldwide consumer
products marketing company. From 1992 to 1994 Ms. Jackle was a student at
Cornell University where she earned her MBA.
Mark E. Fox joined the Company in January 1997 and has served as Vice
President of Event Marketing since December 1997. From 1994 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. Eileen Fox is Mark Fox's wife.
Eileen E. Fox joined the Company in February 1996 and has served as Vice
President of Operations since April 1998. From June 1993 to December 1995, she
held a product development position with Wheeler Springs Resorts, Inc., a spa
resort company. From December 1990 to January 1992, Ms. Fox worked for
Blackburn & Company, a radio and television station property broker and from
June 1988 to July 1989 with Metro Advertising, an advertising agency. Mark Fox
is Eileen Fox's husband.
Officers serve the Company at the discretion of the Board of Directors.
Forward-Looking and Other Statements
This Report on Form 10-K and the 1998 Annual Report contain various "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements, which represent the Company's expectations
or beliefs concerning various future events, are included in "Business - Growth
strategy", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other sections of this report. Except for the
historical information contained herein any other statement may be deemed to be
a forward-looking statement. These statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "intends," "plans,"
"may," "will," "should," or "anticipation" or comparable terminology. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. These statements, by their nature, involve
substantial risks and uncertainties, certain of which are not within the
Company's control. These risks include developing and selling new products,
maintaining acceptance in new distribution channels, avoiding volatility in
sales and earnings, anticipating changes in dietary trends, avoiding adverse
publicity, maintaining sales to significant customers and other risk factors.
The Company's actual results could differ materially from those discussed here.
11
<PAGE>
Item 2. PROPERTIES
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. The Company intends to rent additional office space in late 1999 to
satisfy anticipated additional staffing needs. The Company does not expect
difficulties in obtaining additional space on reasonable terms. The Company
uses independent contract warehousing services for the storage of certain
products pending shipment to retailers or distributors.
Item 3. LEGAL PROCEEDINGS
On April 8, 1998, PowerBar filed a complaint against the Company and its
Senior Vice President of Sales and Marketing in U.S. District Court for the
Northern District of California. The complaint alleges, in general, that the
Company engaged in false advertising, unfair competition, and, with its Senior
Vice President of Sales and Marketing who previously worked for PowerBar,
misappropriated trade secrets. PowerBar also alleges that the sales executive
interfered with PowerBar's business relationships by inducing distributors,
brokers, athletes and sponsors to terminate their business relationships with
PowerBar. The factual allegations against the Company's advertising are similar
to those already reviewed by the National Advertising Division of the Better
Business Bureaus, Inc. at PowerBar's request.
On August 18, 1998, the Company filed a complaint against PowerBar in U.S.
District Court for the Northern District of California. The complaint alleges
that PowerBar engaged in false advertising about its own products and those of
the Company's and in unfair competition. The Company seeks, among other things,
injunctive relief prohibiting the allegedly false advertising, corrective
advertising in various print media, compensatory damages in an unspecified
amount, disgorgement of the company's profits, and treble and punitive damages
as to certain claims and attorneys' fees.
In January 1999, the Company and PowerBar settled both suits. The Company
agreed to pay PowerBar $140,000 and the Company and PowerBar each agreed to not
make certain advertising claims in the future. The settlement agreement was
signed in early-March, 1999.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information required by this item is incorporated by reference from "Common
Stock Data" on page 7 of the 1998 Annual Report.
Item 6. SELECTED FINANCIAL DATA
Information required by this item is incorporated by reference from
"Selected Income Statement Data" and "Selected Balance Sheet Data" on page 7 of
the 1998 Annual Report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Information required by this item is incorporated by reference from
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" on pages 8 to 11 of the 1998 Annual Report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to interest rate risk for marketable securities and
its revolving line of credit and to exchange rate risk for accounts receivable
denominated in Canadian Dollars. In addition, the Company is exposed to changes
in the purchase price of finished inventory as a result of exchange rate changes
and commodity price changes realized by the Company's contract manufacturers.
At December 31, 1998, the Company had $697,000 of investments in commercial
paper maturing in 1999. The commercial paper's interest rate was 5.47%. At
December 31, 1998, the Company had a $15 million revolving line of credit with a
bank, of which no amounts were outstanding. The line of credit bears interest
at the bank's reference rate, which was 7.75% at December 31, 1998, or
alternatively at LIBOR plus 2.00%.
At December 31, 1998, the Company had $103,000 (U.S.) of accounts
receivable denominated in Canadian Dollars.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Notes to Financial Statements listed in Item
14(A)(1) are incorporated by reference from pages 12 to 24 of the 1998 Annual
Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
13
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In addition to the information set forth under the caption "Officers of the
Registrant" in Part I of this Report, the information concerning the directors
of the Company required by this item is incorporated by reference from "Election
of Directors" as set forth in the 1999 Proxy Statement filed by the Registrant
pursuant to Regulation 14A.
Item 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from
"Director Compensation," "Compensation and Other Information Concerning
Executive Officers" and "Stock Performance Graph" as set forth in the 1999 Proxy
Statement filed by the Registrant pursuant to Regulation 14A.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference from "Stock
Ownership" as set forth in the 1999 Proxy Statement filed by the Registrant
pursuant to Regulation 14A.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from
"Certain Relationships and Related Transactions" as set forth in the 1999 Proxy
Statement filed by the Registrant pursuant to Regulation 14A.
14
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) Exhibits and Financial Statement Schedules:
(1) Financial Statements
The following financial statements included on pages 12 to 24 of the
1998 Annual Report are incorporated by reference:
Balance Sheets at December 31, 1998 and 1997
Income Statements - Years Ended December 31, 1998, 1997 and 1996
Statements of Stockholders' Equity - Years Ended December 31, 1998,
1997 and 1996
Statements of Cash Flows - Years Ended December 31, 1998, 1997 and
1996
Notes to Financial Statements
Report of Arthur Andersen LLP, Independent Public Accountants
(2) Financial Statement Schedules
All schedules set forth in the applicable accounting regulations of
the Commission either are not required under the related instructions or
are not applicable and, therefore, have been omitted.
(3) Exhibits
A list of the exhibits that are included in or incorporated by
reference in this Report is found in the Exhibit Index beginning on page 17
of this Report, and are incorporated by reference.
(B) Reports on Form 8-K filed in the fourth quarter of 1998
Not applicable.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BALANCE BAR COMPANY
Date: March 8, 1999 By: /s/ JAMES A. WOLFE
-----------------------
James A. Wolfe
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
- --------- -------- ----
<S> <C> <C>
/s/ Thomas R. Davidson Chairman of the Board of Directors March 8, 1999
- ------------------------------------
Thomas R. Davidson
/s/ James A. Wolfe Chief Executive Officer (Principal March 8, 1999
- ------------------------------------ Executive Officer) and Director
James A. Wolfe
/s/ Richard G. Lamb Executive Vice President and Director March 8, 1999
- ------------------------------------
Richard G. Lamb
/s/ Thomas J. Flahie Senior Vice President of Finance March 8, 1999
- ------------------------------------ and Administration (Principal
Thomas J. Flahie Financial and Accounting Officer)
/s/ Adelle M. Demko Director March 8, 1999
- ------------------------------------
Adelle M. Demko
/s/ Barry D. Goss Director March 8, 1999
- ------------------------------------
Barry D. Goss
/s/ John Hale Director March 8, 1999
- ------------------------------------
John Hale
/s/ Dennis Ryan McCarthy Director March 8, 1999
- ------------------------------------
Dennis Ryan McCarthy
/s/ George F. Raymond Director March 8, 1999
- ------------------------------------
George F. Raymond
</TABLE>
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit to the Registrants'
Registration Statement on Form S-1 (No. 333-49651))
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit to the Registrants' Registration Statement
on Form S-1 (No. 333-49651))
10.1 Form of Indemnification Agreement between the Company and each of
its executive officers and directors (incorporated by reference
to Exhibit to the Registrants' Registration Statement on Form S-1
(No. 333-49651))
10.2(1) Production Agreement between the Company and Bariatrix
International, Inc. (incorporated by reference to Exhibit to the
Registrants' Registration Statement on Form S-1 (No. 333-49651))
10.3(1) Production Agreement between the Company and Nellson
Nutraceutical, Inc. - formerly Nelson Candies, Inc. (incorporated
by reference to Exhibit to the Registrants' Registration
Statement on Form S-1 (No. 333-49651))
10.5 1993 Stock Incentive Plan (incorporated by reference to Exhibit
to the Registrants' Registration Statement on Form S-1 (No.
333-49651))
10.6 1997 Stock Incentive Plan (incorporated by reference to Exhibit
to the Registrants' Registration Statement on Form S-1 (No.
333-49651))
10.7 1998 Performance Award Plan (incorporated by reference to Exhibit
to the Registrants' Registration Statement on Form S-1 (No.
333-49651))
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
10.9(1) Letter Agreement between the Company and Trader Joe's
(incorporated by reference to Exhibit to the Registrants'
Registration Statement on Form S-1 (No. 333-49651))
10.10(1) Agreement between the Company and Tree of Life (incorporated by
reference to Exhibit to the Registrants' Registration Statement
on Form S-1 (No. 333-49651))
10.11 Registration Rights Agreement among Balance Bar Company, Thomas
Davidson and Davidson Family Limited Partnership (incorporated by
reference to Exhibit to the Registrants' Registration Statement
on Form S-1 (No. 333-49651))
11.1 Statement of Computation of Per Share Earnings
13.1 Pages 7 through 24 of the Annual Report of Balance Bar Company
for the year ended December 31, 1998
23.1 Consent of Independent Public Accountants
27.1 Financial Data Schedule
</TABLE>
(1) The SEC has granted confidential treatment for portions of these
agreements.
17
<PAGE>
EXHIBIT 10.8.1
SANTA BARBARA BANK & TRUST
LOAN AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$15,000,000.00 12-01-1998 04-01-2001 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>
Borrower: 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
================================================================================
THIS LOAN AGREEMENT between 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 December 1, 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 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) $15,000,000.00; or (b) 80.000% of the
aggregate amount of Eligible Accounts and 25% of Eligible Inventory as
defined in Addendum #1.
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:
(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
<PAGE>
12-01-1998 LOAN AGREEMENT Page 2
Loan No 16450 (Continued)
================================================================================
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.
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
<PAGE>
12-01-1998 LOAN AGREEMENT Page 3
Loan No 16450 (Continued)
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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 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.
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: Quarterly.
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.
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,
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12-01-1998 LOAN AGREEMENT Page 4
Loan No 16450 (Continued)
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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 determine 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 of a hazardous waste or substance on the properties.
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 changes 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.
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 wiring 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,
lists 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 form time to time.
Financial Covenants and Ratios. Comply with the following covenants and
ratios:
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12-01-1998 LOAN AGREEMENT Page 5
Loan No 16450 (Continued)
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Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than 2.50 to 1.00.
Current Ratio. Maintain a ratio of Current Assets to Current
Liabilities in excess of 1.75 to 1.00.
Cash Flow Requirements. Maintain Cash Flow at not less than the
following level: greater than or equal to 1.25 to 1.00 defined as Net
Income plus Depreciation and other Non-Cash Charges divided by current
maturities of Long Term Debt and Capital Leases. 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 form time to
time the policies of 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 costs 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 however, Borrower will not be required to pay
and discharge any 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
Quarterly 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 laws, 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
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Loan No 16450 (Continued)
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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 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) any Lender in good faith deems itself insecure,
even though no Event of Default shall have occurred.
ADDITIONAL COVENANTS. Borrower covenants and agrees with lender that while this
agreement is in effect, borrower shall provide the following:
1. Accounts Receivables 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.
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 of 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 of 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 Borrower 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 Event of Default of the type
described in the "Insolvency" subsection 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 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
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 of parties sought to be charged or bound by the alteration or
amendment.
<PAGE>
12-01-1998 LOAN AGREEMENT Page 7
Loan No 16450 (Continued)
================================================================================
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.
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 that 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.
<PAGE>
12-01-1998 LOAN AGREEMENT Page 8
LOAN NO 16450 (CONTINUED)
================================================================================
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND
BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF DECEMBER 1, 1998.
BORROWER:
Balance Bar Company
By: /s/ James A. Wolfe
-------------------------------
James A. Wolfe, Chief Executive Officer
By: /s/ Thomas J. Flahie
-------------------------------
Thomas J. Flahie, Senior Vice President, Finance & Adminstration
LENDER:
Santa Barbara Bank & Trust
By:
-------------------------------
Authorized Officer
===============================================================================
<PAGE>
EXHIBIT 10.8.2
SANTA BARBARAA BANK & TRUST
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$15,000,000.00 12-01-1998 04-01-2001 16450 4a 910 14492 JDL
- ----------------------------------------------------------------------------------------------------
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>
Borrower: 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
================================================================================
THIS COMMERICAL SECURITY AGREEMENT is entered into between 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 Commerical 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 Defaults."
Grantor. The word "Grantor" means 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 December
1, 1998, in the principal amount of $15,000,000.00 from 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 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
<PAGE>
12-01-1998 COMMERCIAL SECURITY AGREEMENT Page 2
Loan No 16450 (Continued)
================================================================================
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, its 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 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) 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,
<PAGE>
12-01-1998 COMMERCIAL SECURITY AGREEMENT Page 3
Loan No 16450 (Continued)
================================================================================
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.
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 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 of Forfeiture Proceedings. Commencement of foreclosure of
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
<PAGE>
12-01-1998 COMMERCIAL SECURITY AGREEMENT Page 4
Loan No 16450 (Continued)
================================================================================
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 paid.
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.
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
<PAGE>
12-01-1998 COMMERCIAL SECURITY AGREEMENT Page 5
LOAN NO 16450 (Continued)
===============================================================================
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 provision 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 relinquishs 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.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED DECEMBER 1,
1998.
GRANTOR:
Balance Bar Company
By: /s/ James A. Wolfe
-----------------------------------------
James A. Wolfe, Chief Executive Officer
By: /s/ Thomas J. Flahie
-----------------------------------------
Thomas J. Flahie, Senior Vice President, Finance & Administration
===============================================================================
<PAGE>
EXHIBIT 10.8.3
SANTA BARBARA BANK & TRUST
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$15,000,000.00 12-01-1998 04-01-2001 16450 4a 910 14492 JDL
- ----------------------------------------------------------------------------------------------------
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.
- ----------------------------------------------------------------------------------------------------
Borrower: 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
====================================================================================================
Principal Amount $15,000,000.00 Initial Rate: 7.750% Date of Note: December 1, 1998
</TABLE>
PROMISE TO PAY. 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 Fifteen Million & 00/100 Dollars
($15,000,000.00) 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 of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on April 1, 2001. In addition, Borrower will
pay regular monthly payments of accrued unpaid interest beginning January 1,
1999, 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 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 7.750%. The interest rate to be applied to the
unpaid principal balance of this Note will be at a rate equal to the Index,
resulting in an initial rate of 7.750%. 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. In any event, even upon full prepayment of
this Not, 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.
<PAGE>
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.
LENDER'S RIGHTS. Upon defaults, 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 and 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 December 1, 1998,
a UCC-1 Financing Statement dated February 10, 1997, which filed March 3, 1997
as File No. 9706660259, and a UCC-2 Amendment dated March 23, 1998, which filed
April 17, 1998 as File No. 98110C0384.
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
<PAGE>
12-01-1998 PROMISSORY NOTE Page 2
LOAN NO 16450 (Continued)
================================================================================
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.
PREPAYMENT PENALTY. Privilege is reserved to make additional payments on the
principal of this loan without penalty except as to prepayments that are tied to
the Libor based funding option. Borrower agrees to pay for acceptance of the
prepayment calculated at 1/2% per annum, prorated on the amount prepaid for the
remaining term of the rate lock. Regular scheduled principal and interest
payments will not be subject to prepayment penalty.
FIXED RATE OPTION. Borrower has the option to fix the current outstanding
principal balance of the term loan for periods of 30-180 days at the then
current life maturity Libor Rate plus 2.00% on minimum advances of $500,000.00.
The interest rate on this fixed rate option is available to borrower in an
independent index which is the Libor Rate as published in the Wall Street
Journal. Lender will tell the borrower the current index rate upon Borrower's
request.
GENERAL PROVISIONS. 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 his 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:
Balance Bar Company
By: /s/ James A Wolfe
--------------------------------------------
James A. Wolfe, Chief Executive Officer
By: /s/ Thomas J. Flahie
--------------------------------------------
Thomas J. Flahie, Senior Vice President, Finance & Administration
===============================================================================
<PAGE>
EXHIBIT 11.1
Balance Bar Company
Statement of Computation of Per Share Earnings
(amounts in 000's, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ------------------ -----------------
<S> <C> <C> <C>
Net income $ 5,112 $ 1,660 $1,615
Less - preferred stock dividends -- -- --
------- ------- ------
Income available to stockholders $ 5,112 $ 1,660 $1,615
======= ======= ======
Weighted average number of shares
Outstanding for basic earnings per share 10,634 9,302 8,410
Effect of dilutive securities (shares issuable upon
exercise of stock options determined by the
treasury stock method) 1,806 1,741 933
------- ------- ------
Weighted average number of shares outstanding
for diluted earnings per share 12,440 11,043 9,343
======= ======= ======
Earnings per share:
Basic $ 0.48 $ 0.18 $ 0.19
======= ======= ======
Diluted $ 0.41 $ 0.15 $ 0.17
======= ======= ======
</TABLE>
<PAGE>
EXHIBIT 13.1
FINANCIAL DATA
[LOGO OF BALANCE BAR COMPANY]
SELECTED INCOME STATEMENT DATA
- ------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994* 1994**
------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Sales $81,656 $39,634 $10,544 $1,262 $ 576 $ 692
Gross profit 39,334 19,833 5,272 669 357 475
Income (loss) before income taxes 8,602 2,876 1,840 (84) 7 (312)
Net income (loss) 5,112 1,660 1,615 (85) 6 (313)
Basic earnings (loss) per share 0.48 0.18 0.19 (0.01) -- (0.04)
Diluted earnings (loss) per share 0.41 0.15 0.17 (0.01) -- (0.04)
* Seven months ended December 31, 1994. (amounts in 000's, except per share data)
** Twelve months ended May 31, 1994.
</TABLE>
SELECTED BALANCE SHEET DATA
- ---------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $18,792 $ 2,974 $ 2,087 $ (39) $ (50)
Total assets 26,981 10,796 3,374 185 139
Long-term debt, net of current portion -- 228 -- -- 5
Total stockholders' equity 19,927 4,104 2,162 3 16
(amounts in 000's, except per share data)
</TABLE>
COMMON STOCK DATA
- -----------------
The Company's common stock is traded on the NASDAQ National Market under the
symbol BBAR. There were approximately 900 beneficial owners and 90 shareholders
of record at December 31, 1998. The range of trading prices of the Company's
common stock, since its initial public offering in June 1998, was as follows:
<TABLE>
<CAPTION>
1998
----
Quarter Low High
------- ---- ----
<S> <C> <C>
Second 11 3/4 14 3/8
Third 7 5/8 16 9/16
Fourth 8 1/8 11 7/8
</TABLE>
The Company has not paid a cash dividend since its inception.
[LOGO OF BALANCE BAR] 7
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
STATEMENT OF FORWARD-LOOKING INFORMATION
The Company has made and will continue to make forward-looking statements.
Certain forward-looking statements are contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", including statements
about the expected adequacy of available funds to meet foreseeable needs, the
impact of price reductions on certain products from contract manufacturers, the
expected level of capital investments, and other sections of this report. Except
for the historical information contained herein, the following discussion and
analysis contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, goals, 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 comparable terminology. These risks include
developing and selling new products, maintaining acceptance in new distribution
channels, avoiding volatility in sales and earnings, anticipating changes in
dietary trends, avoiding adverse publicity, maintaining sales to significant
customers and other risk factors. 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 the Company's Annual Report on Form
10-K, as well as those discussed elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income
statement data expressed as a percentage of sales:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 51.8 50.0 50.0
----- ----- -----
Gross profit 48.2 50.0 50.0
----- ----- -----
Expenses:
Advertising 10.9 18.9 10.3
Selling and marketing 20.3 18.1 14.6
General and administrative 6.5 5.8 7.5
Interest (income) expense (0.1) (0.1) 0.1
----- ----- -----
Total expenses 37.6 42.7 32.5
----- ----- -----
Income before income taxes 10.6 7.3 17.5
Income taxes 4.3 3.1 2.2
----- ----- -----
Net income 6.3% 4.2% 15.3%
===== ===== =====
</TABLE>
Comparison of 1998 to 1997
Sales. Sales increased 106% to $81.7 million in 1998 from $39.6 million in
1997. The increase was primarily attributable to increased distribution and
consumer sales at grocery, club and mass merchandise stores. Sales also
increased at natural foods stores. Several significant customers ran special
sales promotions in 1998 and approximately $7.8 million of the increase was due
to increased sales to those customers. The addition of three new Balance Bar
flavors in December 1997 favorably impacted sales in 1998, and the introduction
of powdered drink mixes in April 1997 also favorably impacted sales in 1998. The
introduction of Balance Big Bar, a larger version of the honey peanut Balance
Bar and Balance+, three nutraceutically-enhanced Balance Bar flavors in the 1998
fourth quarter also favorably impacted 1998 sales.
Sales to customers other than natural foods distributors and retailers were
54% of sales in 1998 compared to 31% in 1997. Sales to the Company's six largest
1998 customers were 64% of sales in
8 [LOGO OF BALANCE BAR]
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
1998 compared to 66% in 1997. Sales to Costco Wholesale, Trader Joe's and McLane
Distribution were 16%, 14% and 13%, respectively, of sales in 1998. Sales to
Trader Joe's were 25% of sales in 1997. Sales to customers in the United States
were 99% of sales in 1998 and 97% of sales in 1997. Sales of the Balance Bar
product line were 94% of sales in 1998 compared to 92% in 1997.
Gross Profit. Gross profit dollars increased to $39.3 million in 1998 from
$19.8 million in 1997. The gross profit margin declined to 48.2% in 1998 from
50.0% in 1997. The decline in gross profit margin was due to a change in product
and sales channel mix, and additional packaging and freight costs. In addition,
initial sales prices of the Balance Big Bar and Balance+ Bars were discounted to
stimulate initial orders. The Company has obtained purchase price reductions of
certain products manufactured by its two contract manufacturers. These price
reductions should favorably impact 1999 cost of sales.
Advertising. Advertising expenses increased to $8.9 million in 1998 from $7.5
million in 1997. Advertising expenses as a percentage of sales declined to 10.9%
in 1998 compared to 18.9% in 1997. The dollar increase in 1998 was due to
increases in television, print and radio advertising to build brand awareness
and increase sales. As a percentage of sales, advertising expenses were higher
in 1997 to support the Company's strategic decision to begin selling to sales
channels other than natural foods stores with additional print and radio
advertising and the introduction of television advertising.
Selling and Marketing. Selling and marketing expenses increased to $16.6
million in 1998 from $7.2 million in 1997. The increase was due to higher
personnel-related costs as the Company expanded its sales and marketing
organization, and higher broker commissions and retailer marketing support
expenses related to the increase in sales. The increase was also due to higher
expenditures for special events and product sampling to build customer awareness
of the Company's products. Selling and marketing expenses as a percentage of
sales increased to 20.3% of sales in 1998 from 18.1% in 1997.
General and Administrative. General and administrative expenses increased to
$5.3 million in 1998 from $2.3 million in 1997. General and administrative
expenses as a percentage of sales increased to 6.5% of sales in 1998 from 5.8%
in 1997. The dollar and percentage increases in 1998 were due to higher payroll-
related costs as the Company hired additional personnel to support the increase
in sales and higher facility rentals related to the increase in sales, marketing
and general and administrative personnel. The Company also recorded a $140,000
provision in 1998 to settle all outstanding litigation with a competitor.
Interest (Income) Expense. Interest (income) expense increased to $62,000 of
net interest income in 1998 from $27,000 of net interest income in 1997. The
interest expense in 1998 was due to increased borrowings under the Company's
line of credit and term loan agreements. The Company also earned $196,000 in
interest income in 1998 from the investment of the net proceeds from the
Company's initial public offering of common stock.
Provision for Income Taxes. The effective tax rate was 40.6% in 1998 and
42.3% in 1997. The decline in the effective tax rate was due to lower non-
deductible expenses in 1998.
Comparison of 1997 to 1996
Sales. Sales increased 276% to $39.6 million in 1997 from $10.5 million in
1996. The increase was primarily attributable to increased sales at natural
foods and mass merchandise stores and to a lessor extent at club and grocery
stores. Sales also increased in 1997 by gaining more retail shelf space and
increasing 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 near
the end of 1997 did not have a significant effect on sales in 1997.
Gross Profit. Gross profit dollars increased to $19.8 million in 1997 from
$5.3 million in 1996. Gross profit margin was 50.0% in 1997 and 1996 and,
therefore, gross profit dollars increased as sales increased.
[LOGO OF BALANCE BAR] 9
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
Advertising. Advertising expenses increased to $7.5 million in 1997 from $1.1
million in 1996. This increase was due to the Company's strategic decision to
build customer 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 to $7.2
million in 1997 from $1.5 million in 1996. 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 higher expenditures for special events and product sampling to
build customer awareness of the Company's products. Selling and marketing
expenses as a percentage of sales increased to 18.1% of sales in 1997 from 14.6%
in 1996.
General and Administrative. General and administrative expenses increased to
$2.3 million in 1997 from $797,000 in 1996. 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 increased sales.
Provision for income Taxes. The effective tax rate in 1997 was 42.3% compared
to 12.2% in 1996. The lower tax rate in 1996 was 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.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of cash flows for all periods has been from Balance Bar
product line sales. For 1998 and 1997, cash generated from operations was not
sufficient to fund increases in accounts receivable and inventory, prepaid
advertising expenses and purchase property and equipment. The Company entered
into credit agreements that were used to finance the shortfall. For 1996, cash
generated from operations was sufficient to fund increases in accounts
receivable and inventory, prepaid advertising expenses and purchase property and
equipment. In June 1998, the Company sold 1,003,372 shares of common stock and
realized proceeds of $9,478,000, net of $320,000 of offering costs. The net
proceeds were used, in part, to repay outstanding short and long-term debt.
The increase in accounts receivable, inventory and prepaid advertising
expenses of $9.3 million in 1998 was offset by increased accounts payable of
$879,000. 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. The increase in accounts receivable and inventory of $1.9 million
in 1996 was offset by increased accounts payable of $505,000. Cash flow provided
by (used in) operating activities was $(588,000), $(1.2) million and $935,000 in
1998, 1997 and 1996, respectively.
Cash used in investing activities was for the purchase of property and
equipment and marketable securities. Purchases of property and equipment were
$761,000, $1.1 million and $51,000 in 1998, 1997 and 1996, respectively. The
higher level of expenditures in 1997 reflects the Company's 1997 facility and
personnel expansion to support higher sales volume. The 1998 capital investments
were for computer hardware and software, office furniture and equipment,
leasehold improvements and packaging design plates and drums. The Company
expects to make a similar level of capital investments in 1999 as were made in
1998. A portion of the initial public offering proceeds was used to purchase
$3.9 million of marketable securities. $3.2 million of this amount matured in
1998. Cash used in investing activities was $1.4 million, $1.1 million and
$51,000 in 1998, 1997 and 1996, respectively.
Cash provided by financing activities was from the net proceeds of the
initial public offering, short-term borrowings, net of repayments and the
proceeds from the exercise of stock options. In June 1998, the Company sold
1,003,372 shares of common stock and realized proceeds of $9.8 million. In
connection with the initial public offering of common stock, the Company
incurred offering costs of $320,000 and the selling shareholders reimbursed the
Company for offering costs paid in 1998 and 1997. In 1998, the Company borrowed
$3.4 million under a line of credit and $4.8 million of the proceeds from the
initial public offering was used to repay short and long-term debt. In 1998
10 [LOGO OF BALANCE BAR]
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
and 1997, 991,000 and 58,000 shares of common stock, respectively, were issued
in connection with the exercise of stock options. Cash provided by financing
activities was $8.4 million, $1.3 million and $201,000 in 1998, 1997 and 1996,
respectively.
As of December 31, 1998, the Company had a $15 million revolving line of
credit of which $9.6 million was available (based upon 80% of eligible accounts
receivable and 25% of eligible inventories), none of which was outstanding. The
line of credit is secured by all of the Company's assets. The line of credit
bears interest at the bank's prime rate (7.75% at December 31,1998), and expires
in April 2001.
To date, the Company has considered the acquisition of several companies, but
no purchase transactions have occured. 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 operations or financial
condition.
The Company expects to use the net proceeds from the initial public offering,
over the next two to three quarters, to fund increases in accounts receivable,
inventory, prepaid advertising expenses and purchase property and equipment.
When the net proceeds are expended, the Company expects to fund increases in
accounts receivable, inventory, prepaid advertising expenses and purchase
property and equipment from borrowings under the revolving line of credit. The
Company believes that it has adequate capital resources and liquidity to meet
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" and SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". These new
accounting standards will not have any effect on the Company's financial
statements or financial reporting.
SEASONALITY OF SALES
The Company has not observed seasonality in sales in 1998, 1997 or 1996 due
to the significant expansion of distribution and resulting sales increases for
the periods. The Company believes that there may be some seasonally reduced
sales in the fourth quarter due to retailers' emphasis on holiday foods in that
quarter. In addition, the Company believes that there may be seasonally
increased sales in the first quarter due to retailers' emphasis on diet and
nutrition foods in that quarter and seasonally increased sales in the second and
third quarters due to retailers' emphasis on fitness foods with increased
outdoor activities in those quarters.
YEAR 2000 COMPLIANCE
The Company has installed a new sales, inventory and accounting system that
the vendor has represented to be Year 2000 compliant. The Company does not
anticipate any significant expenses with Year 2000 compliance problems. The
Company's two contract manufacturers have informed the Company that they are
each Year 2000 compliant. The Company has requested information from certain of
its major distributors and retailers about Year 2000 compliance issues, if any,
they are facing. The responding customers have plans to address the business
risks they face. The process of obtaining this information is ongoing. The
Company is also exposed, as all companies are to some extent, to Year 2000
compliance issues facing the banking system, the stock exchange, advertisers and
other significant vendors used by the Company. The Company intends to modestly
increase inventory levels late in 1999 to create a contingent supply of
inventory. This step is being taken to mitigate the risk of an unforeseen
disruption in the supply of inventories.
[LOGO OF BALANCE BAR] 11
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(amounts in 000's, except par value)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,475 $ 89
Marketable securities 697 -
Accounts receivable, net of allowance
of $30 in 1998 and $46 in 1997 10,686 3,444
Income taxes receivable 32 374
Inventories 5,002 3,806
Prepaid and other 2,330 1,381
Deferred taxes 624 344
-------- -------
Total current assets 25,846 9,438
-------- -------
PROPERTY AND EQUIPMENT, net 1,105 1,011
OTHER ASSETS 30 347
-------- -------
Total assets $ 26,981 $10,796
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ - $ 85
Short-term borrowings - 1,100
Accounts payable 5,080 4,201
Accrued payroll 1,069 249
Accrued commissions 404 121
Other accrued expenses 501 708
-------- -------
Total current liabilities 7,054 6,464
-------- -------
LONG-TERM DEBT, net - 228
-------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value
Authorized - 24,000 shares
Issued and outstanding - 11,339 shares in
1998 and 9,345 shares in 1997 113 93
Additional paid-in capital 13,115 2,424
Retained earnings 6,699 1,587
-------- -------
Total stockholders' equity 19,927 4,104
-------- -------
Total liabilities and stockholders' equity $ 26,981 $10,796
======== =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
12 [LOGO OF BALANCE BAR]
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(amounts in 000's, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
SALES $81,656 $39,634 $10,544
COST OF SALES 42,322 19,801 5,272
------- ------- -------
Gross profit 39,334 19,833 5,272
------- ------- -------
EXPENSES:
Advertising 8,932 7,481 1,083
Selling and marketing 16,570 7,204 1,536
General and administrative 5,292 2,299 797
Interest (income) expense (62) (27) 16
------- ------- -------
Total expenses 30,732 16,957 3,432
------- ------- -------
Income before income taxes 8,602 2,876 1,840
INCOME TAXES 3,490 1,216 225
------- ------- -------
Net income $ 5,112 $ 1,660 $ 1,615
======= ======= =======
EARNINGS PER SHARE:
Basic $ 0.48 $ 0.18 $ 0.19
======= ======= =======
Diluted $ 0.41 $ 0.15 $ 0.17
======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 10,634 9,302 8,410
======= ======= =======
Diluted 12,440 11,043 9,343
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
[LOGO OF BALANCE BAR] 13
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
(amounts in 000's)
<TABLE>
<CAPTION>
Common Stock Add'l
------------------- Paid-In Retained
Shares Amount Capital Earnings Total
-------- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 8,253 $ 83 $ 1,608 $(1,688) $ 3
Exercise of stock options 15 - - - -
Issuance of common stock as
compensation for services 196 2 65 - 67
Conversion of convertible bonds 804 8 193 - 201
Compensation expense in connection
with issuance of stock options - - 276 - 276
Net income - - - 1,615 1,615
------ ---- ------- ------- -------
BALANCE, December 31, 1996 9,268 93 2,142 (73) 2,162
Exercise of stock options 58 - 13 - 13
Issuance of common stock as
compensation for services 19 - 60 - 60
Compensation expense in connection
with issuance of stock options - - 209 - 209
Net income - - - 1,660 1,660
------ ---- ------- ------- -------
BALANCE, December 31, 1997 9,345 93 2,424 1,587 4,104
Exercise of stock options 991 10 1,019 - 1,029
Proceeds from initial public offering 1,003 10 9,468 - 9,478
Compensation expense in connection
with issuance of stock options - - 204 - 204
Net income - - - 5,112 5,112
------ ---- ------- ------- -------
BALANCE, December 31, 1998 11,339 $113 $13,115 $ 6,699 $19,927
====== ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
14 [LOGO OF BALANCE BAR]
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(amounts in 000's)
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,112 $ 1,660 $ 1,615
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 631 175 17
Compensation expense in connection with common stock
and stock options 204 269 343
Other 14 - 11
Changes in operating assets and liabilities:
Accounts receivable (7,242) (2,009) (1,385)
Inventories (1,196) (3,223) (558)
Prepaid and other (947) (1,371) (17)
Accounts payable 879 3,595 505
Accrued liabilities 1,041 679 180
Income taxes 916 (942) 224
------- ------- -------
Net cash provided by (used in) operating activities (588) (1,167) 935
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (761) (1,114) (51)
Purchases of marketable securities (3,885) - -
Maturities of marketable securities 3,210 - -
------- ------- -------
Net cash used in investing activities (1,436) (1,114) (51)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering 9,798 - -
Initial public offering costs, net of reimbursement (161) (159)
Increase (decrease) in short-term borrowings (1,100) 1,100 -
Proceeds (repayment) from long-term debt (302) 297 -
Proceeds from issuance of convertible bonds - - 201
Proceeds from exercise of stock options 175 13 -
------- ------- -------
Net cash provided by financing activities 8,410 1,251 201
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 6,386 (1,030) 1,085
CASH AND CASH EQUIVALENTS, beginning of year 89 1,119 34
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year $ 6,475 $ 89 $ 1,119
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
[LOGO OF BALANCE BAR] 15
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. The Company
Balance Bar Company, a Delaware corporation, (the Company) develops and
markets branded natural food products in convenient, good tasting, balanced
nutritional formulations. The Company's current products, Balance - the complete
nutritional food bar and 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, more than 90% of the Company revenue was derived
from sales of its Balance Bar (in 13 flavors and three sizes).
2. Summary of Significant Accounting Policies
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.
Marketable Securities - Marketable securities consist of commercial paper
with maturities extending through January 1999. The Company classifies
marketable securities as available for sale and records them at fair value.
Unrealized holding gains and losses, which were not significant at December 31,
1998, net of the related tax effect are excluded from earnings. Realized gains
and losses on disposition are determined on the specific identification basis.
Dividend and interest income is recognized when earned. A decline in the value
of available for sale securities below cost, that is deemed to be other than
temporary, results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis is established.
Inventories - Inventories are valued at the lower of cost (first-in, first-
out) or market and consist of the following at December 31, 1998 and 1997 (in
000's):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Balance Bars $3,555 $2,074
Powdered drink mix 486 473
Packaging material and other 961 1,259
------- ------
$5,002 $3,806
======= ======
</TABLE>
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization is 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.
Deferred Offering Costs - In connection with its initial public offering of
common stock, the Company capitalized $315,000 of related costs as of December
31, 1997. These costs were included in long-term other assets in the
accompanying balance sheet and were charged to additional paid-in capital upon
completion of the offering.
Coupons - The Company provides for coupon redemption costs at the time of
coupon distribution. As of December 31, 1998 and 1997, costs related to
distributed but unredeemed coupons were not material.
16 [LOGO OF BALANCE BAR]
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
Revenue Recognition - The Company recognizes revenue at the time of shipment.
The Company provides for estimated returns and allowances at the time of
shipment.
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,
1998 and 1997, prepaid and other current assets in the accompanying balance
sheets includes $1,846,000 and $1,015,000, respectively, of prepaid advertising
and marketing.
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
$134,000, $24,000 and $23,000 for the years ended December 31, 1998, 1997 and
1996, respectively. Cash payments for taxes were $2,575,000, $2,159,000 and
$1,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Non-cash transactions excluded from the statements of cash flows consist of
$854,000 of tax benefit from the exercise of stock options in 1998 and the
conversion into common stock of $201,000 of convertible bonds in 1996.
Earnings Per Share - Earnings per share is computed under the provisions of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". Earnings
per share are based on the weighted average number of common shares outstanding
plus the dilutive effect of stock options.
The weighted average number of common shares outstanding for the years ended
December 31, 1998, 1997 and 1996 was 10,634,000, 9,302,000 and 8,410,000,
respectively. The dilutive effect of stock options for the years ended December
31, 1998, 1997 and 1996 was 1,806,000, 1,741,000 and 933,000, respectively.
Fair Value of Financial Instruments - Based on borrowing rates currently
available for bank loans, the terms of the Company's line of credit bank credit
agreement approximate fair value. The fair value of other financial instruments,
consisting of cash and cash equivalents, and short-term trade receivables and
payables also approximate carrying values.
New Authoritative Pronouncements - The Financial Accounting Standards Board
has issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" and SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". These new accounting standards will not
have any effect on the Company's financial statements or financial reporting.
3. Concentrations of Risk
Accounts receivable are unsecured and the Company is at risk to the extent
such amounts become uncollectable. As of December 31, 1998, two customers
comprised 23% and 14% of accounts receivable, respectively. As of December 31,
1997, two customers comprised 18% and 17% of accounts receivable, respectively.
During the year ended December 31, 1998, the Company had sales to three
customers that represented approximately 16%, 14% and 13%, 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.
During the year ended December 31, 1996, the Company had sales to two customers
that represented approximately 26% and 14%, respectively, of sales. The
Company's customers are comprised primarily of distributors and retailers and
are located throughout the United States, Canada and Japan. Sales to customers
outside the United States were less than 10% of sales for all periods presented.
[LOGO OF BALANCE BAR] 17
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
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 minimum 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.
4. Property and Equipment
Property and equipment consist of the following at December 31, 1998 and 1997
(in 000's):
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
Furniture and fixtures $ 457 $ 264
Machinery and equipment 859 835
Leasehold improvements 214 142
------ ------
1,530 1,241
Less: Accumulated depreciation and amortization (425) (230)
------ ------
$1,105 $1,011
====== ======
</TABLE>
5. Short-Term Borrowings and Long-Term Debt
In 1997, the Company obtained a bank line of credit, that is due on demand,
that expires in April 2000. The line-of-credit provides the Company with maximum
borrowings of $9.0 million. Advances are limited to 75% of eligible accounts
receivable and are secured by all of the Company's assets. Interest accrues at
the bank's prime rate (8.5% at December 31, 1997) plus 3/4% (1% through March
1998). The agreement requires the maintenance of financial covenants of which
the Company was in compliance with as of December 31, 1998, and prohibits the
payment of dividends. The line of credit was repaid in June, 1998. As of
December 31, 1997, there was $1,100,000 outstanding under this agreement.
In December 1998, the Company increased the amount available under the line
of credit to $15.0 million, extended the maturity date to April 2001, eliminated
the due on demand provision and reduced the interest rate to the bank's
reference rate (7.75% at December 31, 1998). In addition to advances based on
80% of eligible accounts receivable, advances are also based on 25% of eligible
inventories.
Selected information regarding borrowings under the line of credit for the
years ended December 31, 1998 and 1997 is as follows (dollars in 000's):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Average amount outstanding $2,818 $ 208
Maximum amount outstanding $4,500 $1,100
Weighted average interest rate during period 9.5% 9.5
</TABLE>
In December 1997, the Company obtained a $300,000 three-year loan from a
bank. The loan was secured by all of the Company's assets. Interest accrued at
the bank's prime rate (8.5% at December 31, 1997) plus 1%. This loan was repaid
in June 1998.
18 [LOGO OF BALANCE BAR]
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
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
changes in deferred income tax assets or liabilities from period to period.
The provision for income taxes for the years ended December 31, 1998, 1997
and 1996 is as follows (in 000's):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -----
<S> <C> <C> <C>
CURRENT:
Federal $2,920 $1,116 $ 227
State 850 305 137
------ ------ -----
3,770 1,421 364
DEFERRED (280) (205) (139)
------ ------ -----
Provision for income taxes $3,490 $1,216 $ 225
====== ====== =====
</TABLE>
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended December 31, 1998, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
Income tax at statutory federal rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 6.2 6.5 4.3
Effect of permanent differences 0.2 2.1 5.0
Net operating loss carryforwards - - (29.7)
Other items, net 0.2 (0.3) (1.4)
---- ---- ------
40.6% 42.3% 12.2%
==== ==== =====
</TABLE>
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, 1998 and 1997 are as
follows (in 000's):
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
State taxes $ 222 $ 109
Accounts receivable 175 68
Inventory reserves 64 23
Depreciation (45) (15)
Accrued liabilities 132 76
Other 76 83
----- -----
$ 624 $ 344
===== =====
</TABLE>
[LOGO OF BALANCE BAR] 19
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
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, 1998, 1997 and 1996 was
$247,000, $131,000 and $29,000 respectively.
Future minimum lease payments under operating leases are as follows (in
000's):
<TABLE>
<S> <C>
Years ending December 31:
1999 $252
2000 165
2001 13
</TABLE>
In April 1998, one of the Company's competitors sued the Company seeking
damages as a result of allegedly false and misleading advertising. The
competitor also alleged that the Company, with one of the Company's sales
executives, who previously worked for the competitor, misappropriated trade
secrets. In August 1998, the Company sued the competitor seeking damages as a
result of allegedly false and misleading advertising. In January 1999, the
Company and the competitor settled all outstanding litigation. The Company
agreed to pay the competitor $140,000 and the Company and the competitor each
agreed to not make certain advertising claims in the future.
8. Stockholders' Equity
In June 1998, the Company completed an initial public offering of common
stock. The Company sold 1,003,372 shares of common stock and realized proceeds
of $9,478,000, net of $320,000 in costs and expenses.
In April 1998, the Company's stockholders ratified a six-for-one stock split
of the Company's common and preferred stock. The Company's financial statements
have been retroactively adjusted, for all periods presented, to reflect the
effect of the stock split. The Company had 3,806,910 shares of convertible
preferred stock, $0.01 par value, outstanding prior to the initial public
offering of common stock. In connection with the completion of the initial
public offering, all of the convertible preferred stock was converted to common
stock. The Company's financial statements have been retroactively adjusted, for
all periods presented, to reflect the effect of the conversion of the preferred
stock into common stock. Prior to the initial public offering, 12,000,000 shares
of convertible preferred stock were authorized. No preferred stock is currently
authorized or outstanding.
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 were entitled to a liquidation preference of $0.38 per share.
Preferred stock was convertible to common stock, at the rate of one share for
one share. No dividend has ever been declared on the Company's common or
convertible preferred stock.
In 1996, the Company issued $201,000 of 12% convertible bonds. These bonds
were converted into common stock at the rate of $0.25 per share in 1996.
At December 31, 1998, the Company had three 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 4,689,000
shares of common stock (including 2,109,000 shares under two stock option plans
ratified in 1998). At December 31, 1998, the Company had issued 473,508 stock
options outside of these three stock option plans. At December 31, 1998,
1,635,532 shares are available for future grant under these three plans. Options
are generally granted at exercise prices not less than 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 five years.
20 [LOGO OF BALANCE BAR]
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
A summary of the Company's outstanding options and activity follows for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- --------------------- ----------------------
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 2,571,546 $ 0.17 2,609,322 $ 0.17 278,508 $ 0.09
Granted 867,000 8.20 46,800 0.38 2,345,814 0.18
Canceled (9,058) 4.47 (26,088) 0.01 - -
Exercised (990,754) 0.18 (58,488) 0.13 (15,000) 0.38
--------- ---------- ---------
OPTIONS OUTSTANDING,
end of year 2,438,734 $ 3.01 2,571,546 $ 0.18 2,609,322 $ 0.17
========= ========== ========== ======== ========= ========
Options exercisable at end of year 1,661,232 $ 0.83 2,002,656 $ 0.17 1,526,136 $ 0.15
========= ========== ========== ======== ========= ========
Weighted average
fair value of of options
granted during the year $ 8.78 $ 3.29 $ 0.38
========== ======== ========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Weighted Average
Exercise Number Remaining Number
Prices Outstanding Contractual Life Exercisable
---------- ----------- ---------------- -----------
<S> <C> <C> <C>
$ 0.08 144,498 6.2 years 144,498
$ 0.17 1,332,798 7.4 years 1,326,798
$ 0.42 120,936 8.1 years 84,936
$ 1.67-5.50 360,000 9.1 years -
$ 8.38-15.25 480,502 9.4 years 105,000
--------- ---------
2,438,734 1,661,232
========= =========
</TABLE>
[LOGO OF BALANCE BAR] 21
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
The Company accounts for stock based compensation under the provisions of
SFAS No. 123, "Accounting for Stock Based Compensation". As permitted by SFAS
123, the Company also uses Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" 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 stock option 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 recorded
as compensation expense at fair value in the accompanying income statements.
During the years ended December 31, 1998, 1997 and 1996, the Company recorded
compensation expense of $204,000, $209,000 and $276,000, respectively, in
connection with stock option and common stock grants to employees at exercise
prices less than fair market value on the date of grant. During the years ended
December 31, 1997 and 1996, the Company recorded compensation expense of $60,000
and $67,000, respectively, in connection with common stock grants to non-
employees. To estimate the fair market values of stock option and common stock
grants for periods prior to the Company's initial public offering of common
stock, the Company used cash equity transactions, estimated market multiples,
developments in the Company's business (such as the addition of significant
customers, the hiring of key personnel and the introduction of new products) and
changes in levels of profits to value the grants.
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
and earnings per share amounts as follows for the years ended December 31, 1998,
1997 and 1996 (amounts in 000's except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Additional compensation expense $ 965 $ 37 $ 64
Pro forma net income $4,368 $1,635 $1,555
Pro forma earnings per share:
Basic $ 0.41 $ 0.18 $ 0.19
Diluted $ 0.35 $ 0.15 $ 0.17
</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 4.59-5.51% for risk free interest rate, 6 years for expected
life, 40% volatility and no expected dividends were applied to all grants in
1998 after the Company's initial public offering of common stock. Assumptions of
5.48-6.54% for risk free interest rate, 6 years for expected life, zero
volatility and no expected dividends were applied to all grants in 1997 and 1998
prior to the Company's initial public offering of common stock. Assumptions of
6.30% for risk free interest rate, 6 years for expected life, zero volatility
and no expected dividends were applied to all grants in 1996.
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 1998 and 1997, the Company paid $13,000 and $44,000, respectively, to
one member of the board of directors in connection with special services related
to the Company's initial public offering.
22 [LOGO OF BALANCE BAR]
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
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 years ended
December 31, 1998 and 1997 was $117,000 and $42,000, respectively.
11. Quarterly Information (Unaudited)
The following interim financial information presents the 1998 and 1997
quarterly results of operations (in 000's, except per share data):
<TABLE>
<CAPTION>
1998
--------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Sales $17,457 $20,556 $21,498 $22,145
Gross profit 8,443 10,065 10,256 10,570
Net income 1,284 1,202 1,391 1,235
Basic earnings per share 0.13 0.12 0.12 0.11
Diluted earnings per share 0.11 0.10 0.11 0.10
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Sales $ 6,136 $11,095 $10,134 $12,269
Gross profit 3,166 5,596 4,954 6,117
Net income 447 877 (189) 525
Basic earnings per share 0.05 0.09 (0.02) 0.06
Diluted earnings per share 0.04 0.08 (0.02) 0.05
</TABLE>
[LOGO OF BALANCE BAR] 23
<PAGE>
[LOGO OF BALANCE BAR COMPANY]
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, 1998 and 1997, and the related
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
January 29, 1999
24 [LOGO OF BALANCE BAR]
<PAGE>
EXHIBIT 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
of our report dated January 29, 1999, incorporated by reference in this Form
10-K, into the Company's previously filed Registration Statement File No.
333-56443.
Arthur Andersen LLP
Los Angeles, California
March 8, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1998 AND BALANCE
SHEET AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,475
<SECURITIES> 697
<RECEIVABLES> 10,716
<ALLOWANCES> 30
<INVENTORY> 5,002
<CURRENT-ASSETS> 25,846
<PP&E> 1,530
<DEPRECIATION> 425
<TOTAL-ASSETS> 26,981
<CURRENT-LIABILITIES> 7,054
<BONDS> 0
0
0
<COMMON> 113
<OTHER-SE> 19,814
<TOTAL-LIABILITY-AND-EQUITY> 26,981
<SALES> 81,656
<TOTAL-REVENUES> 81,852
<CGS> 42,322
<TOTAL-COSTS> 42,322
<OTHER-EXPENSES> 30,928
<LOSS-PROVISION> 73
<INTEREST-EXPENSE> 134
<INCOME-PRETAX> 8,602
<INCOME-TAX> 3,490
<INCOME-CONTINUING> 5,112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,112
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.41
</TABLE>
