<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1998
REGISTRATION NO. 333-50771
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DELICIOUS BRANDS, INC.*
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 5149 06-1255882
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2070 MAPLE STREET
DES PLAINES, ILLINOIS 60018
(847) 699-3200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MICHAEL J. KIRBY
CHIEF EXECUTIVE OFFICER
DELICIOUS BRANDS, INC.
2070 MAPLE STREET
DES PLAINES, ILLINOIS 60018
(847) 699-3200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN WOLOSKY, ESQ. DAVID ALAN MILLER, ESQ.
JEFFREY S. SPINDLER, ESQ. PETER M. ZIEMBA, ESQ.
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP GRAUBARD MOLLEN & MILLER
505 PARK AVENUE 600 THIRD AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10016
(212) 753-7200 (212) 818-8800
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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* The Registrant was formerly known as The Delicious Frookie Company, Inc. and
initially filed this Registration Statement under such name.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two prospectuses.
The first prospectus is to be used in connection with the underwritten
public offering of 1,500,000 shares of the Registrant's Common Stock, all of
which will be sold by the Registrant, as well as 225,000 additional shares that
may be sold upon exercise of the Underwriters' over-allotment option.
The second prospectus is to be used in connection with the sale from time
to time by certain securityholders of the Company of 1,042,000 shares of the
Registrant's Common Stock. Such second prospectus will consist of (i) the cover
page and inside cover page immediately following the first prospectus, (ii)
pages 2 through 48 of the first prospectus (other than the legend on page 2,
"The Offering" subsection of the "Prospectus Summary" and the sections entitled
"Use of Proceeds," "Concurrent Offering" and "Underwriting") and pages F-1
through F-44 of the first prospectus, and (iii) pages A-1 through A-5 and the
back cover page, which immediately follow the inside cover page of the second
prospectus.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 18, 1998
1,500,000 SHARES
[DELICIOUS BRANDS LOGO]
COMMON STOCK
All of the 1,500,000 shares of common stock, $.01 par value per share (the
"Common Stock"), of Delicious Brands, Inc., a Delaware corporation (the
"Company"), offered hereby are being sold by the Company.
Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price of the
Common Stock will be between $10.50 and $11.50 per share. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price of the shares. The Company has applied for quotation of the
Common Stock on the Nasdaq SmallCap Market under the symbol "DBSI."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A SUBSTANTIAL
DEGREE OF RISK. PERSONS WHO PURCHASE THE SECURITIES WILL INCUR IMMEDIATE AND
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 6 HEREOF AND
"DILUTION" ON PAGE 15 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.................................. $ $ $
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Total(3)................................... $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. Does not reflect additional compensation to Gaines, Berland Inc.
(the "Representative") in the form of (i) a non-accountable expense
allowance of $495,000 (at an assumed initial public offering price of $11.00
per share) ($569,250 if the over-allotment option is exercised in full) and
(ii) warrants to purchase an aggregate of 150,000 shares of Common Stock at
150% of the Price to Public for four years beginning one year after the
effective date of the Registration Statement of which this Prospectus is a
part. For additional information with respect to the arrangements between
the Company and the Representative see "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated to be
$ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 225,000 shares of Common Stock solely to cover
over-allotments, if any, on the same terms and conditions as the shares
offered hereby. If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of such
shares will be made at the offices of Gaines, Berland Inc., New York, New York,
on or about , 1998.
------------------------
GAINES, BERLAND INC.
The date of this Prospectus is , 1998
<PAGE> 4
[INSIDE COVER OF PROSPECTUS]
[This page contains photos of the Company's products]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
This Prospectus includes trademarks of entities other than the Company,
which have reserved all rights with respect to their respective trademarks.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. All
references in this Prospectus to the term "Company" refer to Delicious Brands,
Inc. and its predecessors. Unless otherwise indicated, all information contained
in this Prospectus gives effect to (i) the conversion of the Company's Class B
Common Stock into Class A Common Stock and the reclassification of the Class A
Common Stock as Common Stock on December 18, 1997 and (ii) a 1-for-2 reverse
stock split effected on July 14, 1998 (decreasing the number of issued and
outstanding shares from 6,565,656 to 3,282,842). Where indicated, information
contained in this Prospectus gives pro forma effect ("Pro Forma") to the
acquisition of Salerno Foods, L.L.C. ("Salerno") on April 3, 1998. Certain
industry information contained in this Prospectus is based on information
reported by Information Resources Inc. ("IRI"), a service that provides the
Company with cookie and cracker industry data. This IRI data excludes retail
sales through convenience stores and club stores and vending sales. Investors
should carefully consider the information set forth under "Risk Factors"
beginning on page 6.
THE COMPANY
Delicious Brands, Inc. develops, markets and sells cookies, crackers and
related food products under the Delicious(R), Salerno(R), Mama's(R) and
Frookie(R) labels, as well as licensed names including Skippy(R), Land O'
Lakes(R), Butterfinger(TM), Chiquita(TM), Heath(R), Chuck E. Cheese(R), Eskimo
Pie(R), Raisinets(TM) and Ringling Bros. and Barnum & Bailey(TM) ("Ringling
Bros."). Pro Forma, the Company is the seventh largest cookie company in the
United States based on retail sales for the 52 weeks ended December 28, 1997
according to IRI. The Company's product lines include more than 17 different
cookie, cracker and snack categories comprising more than 260 stock keeping
units ("SKUs"). These products are sold primarily in the United States to
independent direct-store delivery distributors for resale to supermarkets and
other retail outlets, through large wholesalers to natural food stores and also
directly to supermarkets and other retail outlets. For the year ended December
31, 1997 and the six months ended June 30, 1998, the Company had Pro Forma net
sales of approximately $70 million and $31.4 million, respectively. For the year
ended December 31, 1997 and the six months ended June 30, 1998, the Company had
a Pro Forma net loss of $5.0 million and $1.9 million, respectively.
The Company was founded in 1989 originally to market the Frookie cookie
product, one of the first all-natural, low-fat cookies produced with fruit juice
sweeteners. Through the acquisition of Delicious Cookie Company, Inc.
("Delicious") in 1994, the Company broadened its product offering into three
lines: (i) high-quality, value priced snack products ("Value-Oriented"), (ii)
licensed and co-branded snack products (i.e., packaged under both a licensed
label and the Delicious label) ("Co-Branded") and (iii) all-natural snack
products ("All-Natural"). All of the Company's products are produced by
independent food processors ("co-packers") using the Company's proprietary
specifications and formulations.
On April 3, 1998, the Company completed the purchase of substantially all
of the assets of Salerno for $3.3 million in cash, a $1.5 million promissory
note and the assumption of substantially all of the liabilities of Salerno (the
"Salerno Acquisition"). Salerno's cookie, cracker and other snack products are
targeted to value-oriented customers and are regionally focused with sales
concentrated in supermarkets in the mid-western United States. Salerno was the
tenth largest cookie company in the United States based on retail sales for the
52 weeks ended December 28, 1997 according to IRI.
The Company was incorporated under the laws of the State of Delaware in
1989. Its principal executive offices are located at 2070 Maple Street, Des
Plaines, Illinois 60018 and its telephone number is (847) 699-3200.
3
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......... 1,500,000 shares
Common Stock to be outstanding after
the offering.............................. 4,782,842 shares(1)
Use of proceeds............................. To repay certain outstanding indebtedness
and trade payables and for general corporate
purposes including acquisitions and working
capital. See "Use of Proceeds."
Risk factors................................ An investment in the Common Stock offered
hereby involves certain risks and immediate
substantial dilution. See "Risk Factors" and
"Dilution."
Proposed Nasdaq SmallCap Market symbol...... "DBSI"
</TABLE>
- ---------------
(1) All references in this Prospectus to the number of shares of Common Stock
outstanding do not include (i) 500,000 shares of Common Stock reserved for
issuance upon exercise of options that may be granted under the Company's
1995 Stock Option Plan, pursuant to which options to purchase 282,500 shares
of Common Stock have been granted; (ii) 625,000 shares of Common Stock
reserved for issuance upon exercise of options that may be granted under the
Company's 1989 Stock Option Plan, pursuant to which options to purchase
157,285 shares of Common Stock have been granted; (iii) 75,000 shares of
Common Stock reserved for issuance upon exercise of options that may be
granted under the Company's 1994 Formula Stock Option Plan, pursuant to
which options to purchase 49,000 shares of Common Stock have been granted;
(iv) 443,750 shares of Common Stock reserved for issuance upon exercise of
other outstanding options; (v) 190,188 shares of Common Stock reserved for
issuance upon exercise of outstanding common stock purchase warrants to
purchase such shares of Common Stock; (vi) 195,834 shares of Common Stock
reserved for issuance upon conversion of the 195,834 shares of Series A
Convertible Preferred Stock, $.01 par value per share ("Series A Preferred
Stock"), issued in exchange for approximately $1.57 million aggregate
principal amount of the Company's outstanding 9% Subordinated Convertible
Notes (the "9% Notes"); (vii) 225,000 shares of Common Stock to be sold by
the Company reserved for issuance upon exercise of the Underwriters'
over-allotment option; and (viii) 150,000 shares of Common Stock issuable
upon exercise of the Representative's Warrant.
4
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
The following table sets forth certain historical and pro forma financial
data for the Company. The historical statement of operations data for the years
ended December 31, 1996 and 1997 are derived from, and are qualified by
reference to, the Company's financial statements audited by Altschuler, Melvoin
and Glasser LLP, independent certified public accountants, included elsewhere in
this Prospectus. The statement of operations data for the year ended December
31, 1995 are derived from, and are qualified by reference to, the Company's
financial statements audited by Cooper, Selvin & Strassberg, LLP, independent
certified public accountants, included elsewhere in this Prospectus. The
statement of operations data for the years ended December 31, 1993 and 1994 are
derived from the Company's audited financial statements not included in this
Prospectus. The statement of operations data for the six months ended June 30,
1997 and 1998 and the balance sheet data as of June 30, 1998 are derived from
the Company's unaudited financial statements. The unaudited financial statements
have been prepared by the Company on a basis consistent with the Company's
audited financial statements and include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the information set forth therein. The historical results are
not necessarily indicative of the results of operations to be expected in the
future. The financial data below should be read in conjunction with all the
historical and pro forma financial statements, including the notes thereto,
appearing elsewhere in this Prospectus and the information under "Selected
Historical Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The pro forma information is not
necessarily indicative of what the Company's results of operations or financial
condition would have been for the period or the dates indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1993 1994(1) 1995 1996 1997 1997 1997 1998 1998(3)
------- ------- ------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $15,856 $50,823 $52,722 $36,848 $30,665 $69,812 $15,322 $22,331 $31,436
Gross profit....................... 5,152 13,242 10,469 7,011 5,472 16,206 3,214 4,884 7,700
Restructuring charge(2)............ -- -- -- -- 1,548 1,548 -- -- --
Income (loss) from operations...... 697 296 (5,857) (492) (2,947) (3,488) 160 (945) (1,218)
Net income (loss).................. 543 (493) (6,955) (898) (3,398) (4,966) (26) (1,422) (1,897)
Earnings (loss) per share.......... $ 0.26 $ (0.20) $ (2.57) $ (0.32) $ (1.16) $ (1.69) $ (0.01) $ (0.44) $ (0.58)
Weighted average number of common
shares outstanding............... 2,087 2,405 2,704 2,814 2,934 2,934 2,928 3,255 3,255
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................... $(13,098) $ 887
Total assets................................................ 19,428 20,458
Long-term debt.............................................. 1,567 --
Stockholders' equity (deficit).............................. $ (5,514) $10,037
</TABLE>
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(1) In March 1994, the Company acquired all of the outstanding capital stock of
Delicious in a transaction accounted for as a purchase.
(2) Represents a restructuring charge recognized by the Company for the year
ended December 31, 1997 primarily consisting of the expensing of consulting
and non-competition agreements the Company entered into with former
executive officers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."
(3) Pro forma to give effect to the Salerno Acquisition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(4) As adjusted to reflect (i) the exchange of $1,566,668 aggregate principal
amount of 9% Notes for 195,834 shares of Series A Preferred Stock as of
August 1, 1998 and (ii) the receipt by the Company of estimated net proceeds
from the sale of 1,500,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $11.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
5
<PAGE> 8
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," as well as
those discussed elsewhere in this Prospectus.
RISK FACTORS
An investment in the Common Stock offered hereby involves certain risks.
Prospective investors should carefully consider the risk factors set forth
below, as well as the other information set forth in this Prospectus, prior to
making any investment in the Common Stock.
STOCKHOLDERS' DEFICIT; HISTORICAL AND PROJECTED FUTURE LOSSES; ACCUMULATED
DEFICIT
At June 30, 1998, the Company had a stockholders' deficit (i.e., the amount
by which liabilities exceed assets) of $5.5 million, which includes $8.9 million
of goodwill, and an accumulated deficit of $13.1 million. Since 1994, the
Company has not operated profitably and incurred a Pro Forma net loss of $5.0
million and $1.9 million for the year ended December 31, 1997 and the six months
ended June 30, 1998, respectively (the Pro Forma net loss gives effect to the
Salerno Acquisition). The Company expects to incur additional net losses through
1998. There can be no assurance that profitability will ever be achieved or, if
it is achieved, that it can be sustained or increased on a quarterly or annual
basis in the future. Future operating results will depend on many factors,
including the demand for the Company's products, the level of product and price
competition, the Company's success in expanding its distribution channels, the
ability of the Company to develop and market products and to control costs and
general economic conditions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements
beginning at page F-1.
COMPETITION
The marketing and sale of cookies, crackers and related snack foods is
highly competitive. In particular, the Company competes with numerous
well-established companies such as Nabisco Biscuit Co., Keebler Foods Company,
Pepperidge Farm, Inc., President Baking Co., Archway Cookies, Inc. and Mother's
Cake & Cookies, each of which has substantially greater product development,
marketing, financial and human resources than the Company, as well as stronger
relationships with local, regional, private label and generic manufacturers.
Many of the Company's competitors have developed nationally and regionally
recognized brand names. In addition, competitors may succeed in developing new
or enhanced products that are more popular than any that may be sold or
developed by the Company, and competitors may also be more successful than the
Company in marketing and selling their respective products, obtaining premium
shelf space and entering into arrangements with independent distributors. No
assurance can be given that the Company will be able to compete successfully
against current and future competitors, maintain its current market share or
achieve a greater market share than it currently possesses. See
"Business -- Competition."
INTEGRATION OF ACQUISITIONS
On April 3, 1998, the Company completed the Salerno Acquisition. The
Company's future success is dependent upon its ability to integrate Salerno and
its brands effectively into the Company's existing operations. There can be no
assurance as to the timing or number of marketing opportunities or amount of
cost savings that may be realized as the result of the integration process.
Further, there can be no assurance that the Company will not experience
difficulties with customers, personnel or other parties as a result of this and
future acquisitions, that these acquisitions will enhance the Company's
competitive position and business prospects or that the combination of the
Company and these acquisitions will be successful. See "Business -- Turnaround
Initiatives."
6
<PAGE> 9
RISKS OF ACQUISITION STRATEGY
The Company's acquisition strategy is based on identifying and acquiring
businesses with products and/or brands that complement the Company's existing
product positioning. The Company will evaluate specific acquisition
opportunities based on prevailing market and economic conditions. There can be
no assurance that the Company will be able to successfully identify suitable
acquisition candidates, obtain necessary financing, complete acquisitions or
integrate acquired businesses into its operations. The outstanding indebtedness
under the Company's bank facility is secured by a first lien on substantially
all of the assets of the Company. Such lien may make it more difficult for the
Company to obtain additional financing. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Acquisitions also
involve special risks, including risks associated with unanticipated problems,
liabilities and contingencies, diversion of management attention and possible
adverse effects on earnings resulting from increased goodwill amortization,
increased interest costs, the issuance of additional securities and difficulties
related to the integration of the acquired business. The Company may encounter
increased competition for acquisitions in the future, which could result in
acquisition prices the Company does not consider acceptable. The Company may
effect acquisitions without giving stockholders the ability to review, or vote
on, such acquisitions. Further, management will have broad discretion over the
use of proceeds of this offering allocated to general corporate purposes for
such acquisitions. See "Use of Proceeds." The Company is unable to predict
whether or when any prospective acquisition candidate will become available or
the likelihood that any acquisition will be completed. See
"Business -- Turnaround Initiatives."
RELIANCE ON MAJOR DISTRIBUTORS
The Company relies on more than 30 third-party distributors to sell and
deliver certain of its products to supermarkets, mass merchandisers, club
stores, drug stores and convenience stores. While the Company currently enjoys
satisfactory relationships with its distributors, no assurance can be given that
such relationships will continue on terms favorable to the Company, or that if
the Company needed to change any of its distributors it would be able to do so
on a timely or effective basis. For the year ended December 31, 1997, sales to
the Company's largest distributor, Milwaukee Biscuit Company, accounted for
approximately 13% of the Company's Pro Forma net sales. The Company anticipates
that this distributor will continue to serve as a major distributor of the
Company's products in the foreseeable future. However, the loss of this
distributor could have a material adverse effect on the business, results of
operations and financial condition of the Company. See "Business -- Marketing,
Distribution and Sales."
RELIANCE ON OUTSIDE PRODUCT MANUFACTURING
The Company relies exclusively on outside manufacturers to produce and
deliver its products to its distributors. For the year ended December 31, 1997,
purchases from the Company's four largest suppliers, Mrs. Alison's Cookie
Company, Sugar Kake Cookies, Inc., Pate's Bakery LLC ("Pate's") and The Wortz
Company, accounted for approximately 13.7%, 12.3%, 10.5% and 10.4%,
respectively, of the Company's Pro Forma purchases. The Company does not have
any long-term contracts with its manufacturers. While the Company currently
enjoys satisfactory relationships with its outside manufacturers, no assurance
can be given that such relationships will continue on terms favorable to the
Company, or that if the Company needed to change manufacturers, it would be able
to do so on a timely or effective basis. Additionally, production problems
encountered by these outside manufacturers could have a material adverse effect
on the business, results of operations and financial condition of the Company.
Any such production problems could have a greater adverse effect on the Company
as it streamlines its supplier base. See "Business -- Manufacturing."
INCREASES IN PRICES OF MAIN INGREDIENTS AND OTHER MATERIALS
The main ingredients that the Company's co-packers use to manufacture the
Company's products are flour, sugar, chocolate, shortening and milk. The
Company's co-packers also use paper products, such as corrugated cardboard, as
well as films and plastics, to package its products. The prices of these
materials have been, and the Company expects them to continue to be, subject to
significant volatility, which could result in
7
<PAGE> 10
co-packers increasing the prices that the Company pays for its products. The
Company may not be able to pass price increases on to its customers. See
"Business -- Manufacturing."
DEPENDENCE UPON KEY PERSONNEL
The Company is dependent on the experience, abilities and continued
services of Michael J. Kirby, who became the Company's Chief Executive Officer
and President on August 13, 1997, and Jeffry W. Weiner, the Company's Chief
Financial Officer. Mr. Kirby was not involved in the business of the Company
prior to August 13, 1997. Messrs. Kirby and Weiner are employed by the Company
under employment agreements that expire on December 31, 2001 and on December 31,
1999, respectively. The loss of the services of Messrs. Kirby or Weiner could
have a material adverse effect on the Company. The Company has key-person life
insurance policies on the life of each of Mr. Kirby and Mr. Weiner in the amount
of $1 million. The Company's ability to continue to develop and market its
products also depends, in large part, on its ability to attract and retain
qualified personnel. Competition for such personnel is intense and no assurance
can be given that the Company will be able to retain and attract such personnel.
See "Management."
COLLECTION AND CREDIT RISKS
The Company's net trade accounts receivable at June 30, 1998 were $5.5
million. Of the Company's gross accounts receivable at June 30, 1998,
approximately $3.1 million, or 47%, were due from a total of 10 customers.
Delays in collection or uncollectability of accounts receivable could have a
material adverse effect on the Company's liquidity and working capital position.
For the year ended December 31, 1997 and the six months ended June 30, 1998,
substantially all of the Company's sales were made on standard credit terms. The
Company generally offers its customers a 1% discount if invoices are paid in
full within 10 days of delivery; otherwise, invoices are payable in full within
20 to 30 days of delivery. In the future, the Company may offer open account
terms to additional customers, which will subject the Company to increased
credit risks and could require the Company to increase its allowance for
doubtful accounts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ALL NET PROCEEDS ALLOCATED TO REPAY DEBT AND FOR GENERAL CORPORATE PURPOSES;
BROAD DISCRETION IN USE OF PROCEEDS ALLOCATED TO GENERAL CORPORATE PURPOSES
At July 31, 1998, the total indebtedness of the Company was $10.7 million
(including approximately $1.6 million of subordinated debt that was exchanged
for shares of Series A Preferred Stock as of August 1, 1998) and substantially
all of the Company's assets were subject to one or more liens. Approximately
92.9% ($13.0 million) of the net proceeds to be received by the Company in this
offering have been allocated to the repayment of indebtedness and related fees
and trade payables. Assuming such allocation, the total indebtedness of the
Company upon consummation of this offering will be approximately $2.5 million.
In addition, the balance of approximately 7.1% ($1.0 million) of the net
proceeds received by the Company in this offering have been allocated to general
corporate purposes including acquisitions and working capital. The proceeds
allocated to general corporate purposes may be utilized in the discretion of the
Board of Directors of the Company. See "Use of Proceeds."
CONCENTRATION OF STOCK OWNERSHIP; CONTROL BY MANAGEMENT
Edward R. Sousa, a director of the Company, as trustee (the "Voting
Trustee") of a voting trust (the "Voting Trust") containing all of the shares of
Common Stock owned by Richard and Randye Worth, former principal stockholders,
officers and directors of the Company, currently controls an aggregate of
1,011,000 shares of Common Stock (the "Trust Shares"), or 30.8% of the
outstanding Common Stock (21.1% upon consummation of the offering). See
"Principal Stockholders." Pursuant to a voting agreement with the Company (the
"Voting Agreement"), the Voting Trustee has agreed, at any meeting of the
stockholders of the Company, however called, or in any written consent of the
stockholders of the Company, to vote the Trust Shares, and any other shares of
Common Stock that may be deposited in such trust, in accordance with the
specific direction of the Board of Directors of the Company or the
recommendation of the Board of Directors to the stockholders of the Company
generally; provided, however, that the Voting Trustee shall be entitled to
8
<PAGE> 11
vote for the removal of a director of the Company for Cause (as defined in the
Voting Agreement) as permitted by the Delaware General Corporation Law despite a
contrary direction or recommendation of the Board of Directors. Thus, management
of the Company will likely be able to influence significantly the election of
all the members of the Board of Directors of the Company and control the outcome
of any issues which may be subject to a vote of the Company's stockholders. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See "Certain Transactions" and "Principal
Stockholders."
RELATED PARTY TRANSACTIONS; POSSIBLE CONFLICTS OF INTEREST
The Company has engaged in transactions with certain of its officers,
directors and principal stockholders, and is a party to consulting agreements
with two of its principal stockholders which will continue after the
consummation of this offering. Although the Company does not believe there are
any conflicts, the terms of such transactions could create, or appear to create,
potential conflicts of interest which may not necessarily be resolved in the
Company's favor. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Transactions."
GOVERNMENT REGULATION
The Company's products are subject to federal regulations administered by
the United States Food and Drug Administration (the "FDA"). The FDA enforces the
statutory prohibitions against misbranded and adulterated foods, establishes
ingredients and/or manufacturing procedures for certain standard foods,
establishes standards of identity for food, and determines the safety of food
substances. Although the Company believes that its recipes and the facilities
and practices used by its manufacturers and distributors are sufficient to
maintain compliance with applicable laws and regulations, and, as of the date of
this Prospectus, the Company has not been subject to any fines or penalties for
violations of such laws and regulations, there can be no assurance that the
Company, its manufacturers and distributors will continue to be able to comply
with such laws and regulations in the future or that new laws and regulations
will not be introduced that could result in possible compliance costs, seizures,
confiscation or recall, or monetary fines, any of which would prevent or inhibit
the development, distribution and sale of the Company's products. See
"Business -- Government Regulation."
PRODUCT LIABILITY
As a marketer of food products, the Company is subject to a risk of claims
for product liability, including personal injury claims. The Company maintains
product liability insurance and generally requires that its manufacturers and
distributors maintain product liability insurance with the Company as a
co-insured. The Company maintains a general liability insurance policy that is
subject to a $1 million per occurrence limit with a $2 million aggregate limit
and a $10 million umbrella liability policy. There is no assurance that such
coverage will be sufficient to insure against claims which may be brought
against the Company, or that the Company will be able to maintain such insurance
or obtain additional insurance covering existing or new products or that an
adequate level of coverage will be available in the future at a reasonable cost.
A partially insured or completely uninsured successful claim against the Company
could have a material adverse effect on the business, results of operations and
financial condition of the Company. See "Business."
CHANGING CONSUMER PREFERENCES
The Company is subject to changing consumer preferences for the cookies,
crackers and related food products it markets. A significant shift in consumer
demand away from such products would have a material adverse effect on the
business, results of operations and financial condition of the Company. See
"Business -- Industry Opportunity" and "-- Products."
9
<PAGE> 12
INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS
While the Company intends to enforce its trademark and licensing rights
against infringement by third parties, no assurance can be given that the
trademarks and licenses or the Company's trademark and license rights will be
enforceable or provide the Company with meaningful protection from competitors.
Even if a competitor were to infringe on trademarks or licenses held by the
Company, enforcing the Company's rights would likely be costly and would divert
funds and resources that could otherwise be used to operate the Company. No
assurance can be given that the Company would be successful in enforcing such
rights. Although the Company believes it is not infringing on intellectual
property rights of third parties, no assurance can be made that the Company's
products do not infringe on the patent or intellectual property rights of a
third party. See "Business -- Intellectual Property."
ABSENCE OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY
OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop
in the Common Stock or, if developed, be sustained after this offering. The
initial public offering price of the shares of Common Stock offered hereby will
be determined by negotiation between the Company and the Representative and will
not necessarily relate to or reflect the Company's assets or book value, results
of operations or any other established criteria of value. See "Underwriting" for
a discussion of the factors to be considered in determining the initial public
offering price of the shares of Common Stock offered hereby. The market price of
the Common Stock could fluctuate substantially after this offering due to a
variety of factors, including quarterly operating results of the Company or
other pre-packaged snack food companies, changes in general conditions in the
economy, the financial markets or the pre-packaged snack food industry, changes
in financial analysts' recommendations or earnings estimates, natural disasters
or other developments affecting the Company or its competitors. In addition, in
recent years the stock market has experienced wide price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to the operating
performance of these companies. These market fluctuations also may adversely
affect the market price of the Common Stock.
POTENTIALLY LIMITED TRADING MARKET
While the Company will satisfy the Nasdaq SmallCap Market listing and
maintenance standards upon completion of the offering, the failure to meet the
maintenance criteria in the future may result in the Common Stock no longer
being eligible for quotation on the Nasdaq SmallCap Market and trading, if any,
of the Common Stock would thereafter be conducted in the over-the-counter
market. Under recently implemented Nasdaq rules, in order for the Company to
remain eligible for listing on the Nasdaq SmallCap Market, among other things,
(i) the Company's Common Stock must have a minimum bid price of $1.00 and (ii)
the Company must have minimum tangible net assets of $2 million or a market
capitalization of $35 million or net income of $500,000 in two of the three
prior years. As a result of such ineligibility for quotations, an investor may
find it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, the Common Stock. Furthermore, the regulations of the
Securities and Exchange Commission ("Commission") promulgated under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), require additional
disclosure relating to the market for penny stocks. Commission regulations
generally define a penny stock to be an equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. A disclosure
schedule explaining the penny stock market and the risks associated therewith is
required to be delivered to a purchaser and various sales practice requirements
are imposed on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally institutions). In
addition, the broker-dealer must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. If the Company's
securities become subject to the regulations applicable to penny stocks, the
market liquidity for the Company's securities could be severely affected. In
such an event, the regulations on penny stock could limit
10
<PAGE> 13
the ability of broker-dealers to sell the Company's securities and thus the
ability of purchasers of the Company's securities to sell their securities in
the secondary market. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the offering, the Company will have 4,782,842 shares
of Common Stock outstanding. All of the 1,500,000 shares of Common Stock offered
hereby will be freely tradable unless acquired by "affiliates" of the Company as
defined in Rule 144 promulgated under the Securities Act of 1933, as amended
(the "Securities Act"). The remaining 3,282,842 shares are "restricted"
securities as defined in Rule 144 and may not be sold unless they are registered
under the Securities Act or are sold pursuant to an exemption from registration
including an exemption contained in Rule 144. Of these restricted shares,
2,035,842 shares are currently eligible for sale under Rule 144, subject
however, to any applicable requirements of Rule 144. 1,042,000 of the restricted
shares not currently available for resale under Rule 144 have been registered
for resale in the Concurrent Offering (as defined herein) under the registration
statement of which this Prospectus is a part. Each of the directors and officers
of the Company and beneficial owners of more than 2,500 shares of Common Stock,
who hold in the aggregate shares of Common Stock, has agreed not to
offer, sell or otherwise dispose of any shares of Common Stock without the prior
consent of the Representative until 12 months after the date of this Prospectus
(and various longer periods for two principal stockholders of the Company).
Sales of substantial amounts of Common Stock, or the perception that such sales
could occur, may adversely affect the market price of the Common Stock
prevailing from time to time. See "Shares Eligible for Future Sale."
IMMEDIATE SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will incur
immediate, substantial dilution of 100% of their investment in the Common Stock
because the net tangible book value (deficit) of the Common Stock after the
offering will be approximately $(0.14) per share as compared with the assumed
initial public offering price of $11.00 per share. See "Dilution."
NO DIVIDENDS ON COMMON STOCK ANTICIPATED; RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company does not intend to pay cash dividends on its Common Stock in
the foreseeable future. The Company instead intends to retain any earnings to
support the growth of the Company. Any future cash dividends on the Common Stock
will depend on the Company's future earnings, capital requirements, financial
condition and other factors deemed relevant by the Company's Board of Directors.
In addition, under the terms of the Company's financing agreement, as amended,
with U.S. Bancorp Republic Commercial Finance, Inc. ("Republic"), the Company
may not pay dividends without Republic's prior written consent. Lastly, the
holders of shares of Series A Preferred Stock are entitled to receive in
preference and prior to the Common Stock, semi-annual dividends of five percent
of the aggregate stated value of the Series A Preferred Stock. Any accrued but
unpaid dividends on the Series A Preferred Stock must be paid by the Company
prior to paying a dividend on the Common Stock. See "Dividend Policy" and
"Description of Capital Stock."
EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES
After the offering, the Company will have reserved 1,468,557 shares of
Common Stock for issuance upon the exercise of outstanding options and warrants
and conversion of outstanding convertible securities. The existence of the
outstanding options, warrants and convertible securities may hinder future
financings by the Company. In addition, the exercise of any such options or
warrants or the conversion of any such convertible securities in the future
could dilute the net tangible book value per share of the Common Stock. Further,
the holders of such options, warrants and convertible securities may exercise or
convert them at a time when the Company would otherwise be able to obtain
additional equity capital on terms more favorable to the Company. See
"Management -- Stock Option Plans" and "Description of Capital Stock."
11
<PAGE> 14
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, $.01 par value per share (the "Preferred Stock"), of which 245,000 shares
have been designated as Series A Preferred Stock, 195,834 of which are issued
and outstanding. The Preferred Stock may be issued in one or more series, on
such terms and with such rights, preferences and designations as the Board of
Directors of the Company may determine, without action by stockholders. However,
the issuance of any Preferred Stock could adversely affect the rights of the
holders of Common Stock, and therefore reduce the value of the Common Stock. In
particular, specific rights granted to future holders of Preferred Stock could
be used to restrict the Company's ability to merge with or sell its assets to a
third party, thereby preserving control of the Company by present owners. See
"Description of Capital Stock."
LIMITED LIABILITY FOR DIRECTORS
The Company's Certificate of Incorporation provides that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, with certain
exceptions prescribed by Delaware law. This may discourage stockholders from
bringing suit against a director for breach of fiduciary duty and may reduce the
likelihood of derivative litigation brought by stockholders on behalf of the
Company against a director. See "Management -- Indemnification of Officers and
Directors."
ANTI-TAKEOVER PROVISIONS
The Company, as a Delaware corporation, is subject to the Delaware General
Corporation Law, and, upon consummation of this offering, will be subject to
Section 203 thereof. In general, the law restricts the ability of a public
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless certain
conditions are met. As a result of the application of Section 203, potential
acquirors of the Company may find it more difficult or be discouraged from
attempting to effect an acquisition transaction with the Company, thereby
possibly depriving holders of the Company's securities of certain opportunities
to sell or otherwise dispose of such securities. See "Description of Capital
Stock."
12
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered by the Company hereby (at an assumed initial public
offering price of $11.00 per share) are estimated to be approximately $14.0
million (approximately $16.2 million if the Underwriters' over-allotment option
is exercised in full) after deducting underwriting discounts and estimated
offering expenses.
The Company intends to apply the net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT PERCENT OF
APPLICATION OF PROCEEDS (IN MILLIONS) NET PROCEEDS
- ----------------------- ------------- ------------
<S> <C> <C>
Repayment of Indebtedness to Third Parties(1)...... $ 5.8 41.5%
Repayment of Trade Payables(2)..................... 4.2 30.0
Reduction of Bank Indebtedness(3).................. 3.0 21.4
General Corporate Purposes(4)...................... 1.0 7.1
----- -----
Total.................................... $14.0 100.0%
===== =====
</TABLE>
- ---------------
(1) The Company expects to use approximately $5.2 million of the net proceeds to
repay indebtedness ($4.7 million) incurred to pay a portion of the purchase
price for the Salerno Acquisition, interest accrued thereon and related
fees. Such indebtedness bears interest at a rate of 12% per annum through
August 3, 1998 and 15% per annum thereafter and matures on the earlier of
(i) October 16, 1998, (ii) consummation of an initial public offering of
Common Stock or other recapitalization (whether through one transaction or a
series of transactions) of the Company (whether through a private placement
or otherwise) from which the Company receives gross proceeds of at least
$7.0 million or (iii) a sale or other transfer of all or substantially all
of the assets or equity interests in the Company. The related fees of
$195,000 do not bear interest and are payable contemporaneously with the
aforementioned indebtedness. The Company expects to use approximately
$555,000 of the net proceeds to repay the Acquisition Loan ($500,000),
interest accrued thereon and related fees incurred to pay a portion of the
purchase price for the Salerno Acquisition. Such indebtedness bears interest
at a rate of 12% per annum and matures on the earlier of (i) October 31,
1998 or (ii) consummation of an initial public offering of Common Stock from
which the Company receives gross proceeds of at least $7.0 million. The
related fees of $25,000 do not bear interest and are payable
contemporaneously with the Acquisition Loan.
(2) The Company expects to use approximately $4.2 million of the net proceeds
for the payment of outstanding trade payables.
(3) The Company expects to use approximately $3.0 million to reduce the
outstanding principal amount of its revolving credit facility with Republic.
Borrowings under the financing agreement are due upon demand and bear
interest at 1.50% per annum above the reference rate of interest publicly
announced from time to time by U.S. Bank National Association (8.5% at June
30, 1998).
(4) The Company expects to use the balance of the net proceeds, approximately
$1.0 million, for general corporate purposes and working capital including
the expansion of existing product lines, the development of new product
categories, including the commission of marketing studies, and the upgrading
of the Company's facilities. A portion of the net proceeds allocated to
general corporate purposes may also be used to acquire one or more
companies. The Company may seek to acquire, when feasible, companies whose
businesses are compatible with those of the Company. The Company does not
currently have any agreements, commitments or arrangements with respect to
any proposed acquisitions, and no assurance can be given that any
acquisition opportunity will be consummated in the future.
Any additional net proceeds realized from the exercise of the Underwriters'
over-allotment option will be allocated to the Company's general corporate
purposes.
The initial allocation of the net proceeds of this offering set forth above
represents the Company's best estimate based upon its present plans and certain
assumptions regarding general economic and industry conditions and the Company's
future revenues and expenditures. The Company reserves the right to reallocate
13
<PAGE> 16
these proceeds within the above-mentioned categories in response to, among other
things, changes in its plans, industry or general economic conditions and the
Company's future revenues and expenditures. The Company believes the amount
available under its revolving credit facility, together with the net proceeds
from the offering, will be sufficient for at least the next 12 months to finance
its operations, service interest payments on its debt and fund capital
expenditures.
Pending application of the net proceeds as described above, the Company
will invest the net proceeds in United States government securities, short-term
certificates of deposit, money market funds or other short-term,
investment-grade, interest-bearing investments.
DIVIDEND POLICY
The Company does not intend to pay cash dividends on its Common Stock in
the foreseeable future. The Company instead intends to retain any earnings to
support the growth of the Company. Any future cash dividends on the Common Stock
will depend on the Company's future earnings, capital requirements, financial
condition and other factors deemed relevant by the Company's Board of Directors.
In addition, under the terms of the Company's financing agreement, as amended,
with Republic, the Company may not pay dividends without Republic's prior
written consent. Lastly, the holders of shares of Series A Preferred Stock are
entitled to receive in preference and prior to the Common Stock, semi-annual
dividends of five percent of the aggregate stated value of the Series A
Preferred Stock. Any accrued but unpaid dividends on the Series A Preferred
Stock must be paid by the Company prior to paying a dividend on the Common
Stock. See "Description of Capital Stock." For a description of the financing
agreement, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
14
<PAGE> 17
DILUTION
The difference between the initial public offering price per share of
Common Stock and the net tangible book value per share of Common Stock after the
offering constitutes the dilution per share of Common Stock to investors in the
offering. Net tangible book value per share is determined by dividing the net
tangible book value (total tangible assets less total liabilities) by the number
of outstanding shares of Common Stock. As of June 30, 1998, based on 3,282,842
shares of Common Stock outstanding, the Company had a net tangible book value
(deficit) of $(14.7 million), or $(4.46) per share of Common Stock. After giving
effect to the sale of the 1,500,000 shares of Common Stock offered by the
Company hereby (at an assumed initial public offering price of $11.00 per share)
and after the deduction of underwriting discounts and estimated offering
expenses payable by the Company and the application of the net proceeds
therefrom, the net tangible book value (deficit) at that date would have been
approximately ($668,000), or $(0.14) per share. This represents an immediate
increase in net tangible book value of $4.32 per share to existing stockholders
and an immediate dilution in net tangible book value of $11.14 per share or 100%
to investors in this offering. The following table sets forth such per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Net tangible book value (deficit) per share as of June 30,
1998 before the offering............................... $(4.46)
Increase in net tangible book value (deficit) per share
attributable to new investors.......................... 4.32
------
Net tangible book value (deficit) per share as of June 30,
1998 giving effect to the offering........................ (0.14)
------
Dilution per share to new investors......................... $11.14
======
</TABLE>
The following table summarizes, as of June 30, 1998, the number of shares
of Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid by the existing stockholders and
the new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 3,282,842 69% $ 8,349,459 34% $ 2.54
New investors.................. 1,500,000 31 16,500,000 66 11.00
--------- --- ----------- -----
Total................ 4,782,842 100% $24,849,459 100%
========= === =========== =====
</TABLE>
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the total capitalization of the Company at
June 30, 1998, (i) actual and (ii) pro forma as adjusted to give effect to the
exchange of an aggregate principal amount of $1,566,668 of 9% Notes for 195,834
shares of Series A Preferred Stock and the sale of 1,500,000 shares of Common
Stock offered by the Company hereby and the application of the estimated net
proceeds to the Company therefrom, after deducting the underwriting discounts
and commissions and estimated offering expenses (at an assumed initial public
offering price of $11.00 per share of Common Stock). The following table should
be read in conjunction with all the financial statements, including the notes
thereto, and other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
---------------------------
PRO FORMA
ACTUAL AS ADJUSTED
---------- -------------
(IN THOUSANDS, EXCEPT SHARE
INFORMATION)
<S> <C> <C>
Short-term debt............................................. $ 9,232 $ 1,032
-------- --------
Long-term debt.............................................. $ 1,567 --
-------- --------
Stockholders' equity (deficit):
Preferred Stock $.01 par value; 755,000 shares authorized,
no shares issued and outstanding....................... -- --
Series A Convertible Preferred Stock, $.01 par value;
245,000 shares authorized; no shares issued and
outstanding actual; 195,834 shares issued and
outstanding pro forma as adjusted liquidation value
$1,567................................................. -- 2
Common Stock, $.01 par value; 25,000,000 shares
authorized; 3,282,842 shares issued and outstanding,
actual; 4,782,842 shares issued and outstanding pro
forma, as adjusted..................................... 33 48
Additional paid-in capital................................ 7,503 23,038
Accumulated deficit....................................... (13,051) (13,051)
-------- --------
Total stockholders' equity (deficit)................... (5,514) 10,037
-------- --------
Total capitalization.............................. $ (3,947) $ 10,037
======== ========
</TABLE>
16
<PAGE> 19
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
The following selected financial data of the Company are qualified by
reference to and should be read in connection with the financial statements,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus. The statement of operations data for the years ended December 31,
1996 and 1997 and the balance sheet data as of December 31, 1996 and 1997 are
derived from, and are qualified by reference to, the Company's financial
statements audited by Altschuler, Melvoin and Glasser LLP, independent certified
public accountants, included elsewhere in this Prospectus. The statement of
operations data for the year ended December 31, 1995 are derived from, and are
qualified by reference to, the Company's financial statements audited by Cooper,
Selvin & Strassberg, LLP, independent certified public accountants, included
elsewhere in this Prospectus. The statement of operations data for the years
ended December 31, 1993 and 1994 and the balance sheet data as of December 31,
1993, 1994 and 1995 are derived from the Company's audited financial statements
not included in this Prospectus. The statement of operations data for the six
months ended June 30, 1997 and 1998 and the balance sheet data as of June 30,
1998 are derived from the Company's unaudited financial statements. The
unaudited financial statements have been prepared by the Company on a basis
consistent with the Company's audited financial statements and include, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein. The historical results are not necessarily indicative of the results of
operations to be expected in the future.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------- -----------------
1993 1994(1) 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................... $15,856 $50,823 $52,722 $36,848 $30,665 $15,322 $22,331
Cost of sales............... 10,704 37,581 42,253 29,837 25,193 12,109 17,447
------- ------- ------- ------- ------- ------- -------
Gross profit................ 5,152 13,242 10,469 7,011 5,472 3,213 4,884
Operating expenses:
Promotion and selling..... 3,060 10,559 12,381 3,172 3,932 1,578 3,322
General and
administrative......... 1,395 2,387 3,945 4,331 2,939 1,475 2,507
Restructuring charge(2)... -- -- -- -- 1,548 -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................ 697 296 (5,857) (492) (2,947) 160 (945)
Other (income) expense:
Interest expense.......... (63) (269) (597) (409) (417) (186) (515)
Other, net................ 17 151 161 3 (34) -- 38
------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes..................... 651 178 (6,293) (898) (3,398) (26) (1,422)
Provision for income
taxes..................... 247 86 662 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before
cumulative effect of
change in accounting
principle................. 404 92 (6,955) (898) (3,398) (26) (1,422)
Cumulative effect of change
in
accounting principle...... 139(3) (585)(4) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)........... $ 543 $ (493) $(6,955) $ (898) $(3,398) $ (26) $(1,422)
======= ======= ======= ======= ======= ======= =======
Earnings (loss) per share... $ 0.26 $ (0.20) $ (2.57) $ (0.32) $ (1.16) $ (0.01) $ (0.44)
======= ======= ======= ======= ======= ======= =======
Weighted average number of
common shares
outstanding............... 2,087 2,405 2,704 2,814 2,934 2,928 3,255
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------- AS OF
1993 1994(1) 1995 1996 1997 JUNE 30, 1998
------ ------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......... $ (186) $ 3,163 $(2,870) $(2,451) $ (4,363) $(13,098)
Total assets...................... 2,988 11,701 9,719 7,592 6,487 19,428
Long-term debt, excluding current
portion........................ -- 3,428 2,151 2,110 1,960 1,567
Stockholders' equity (deficit).... 971 4,258 (2,798) (2,349) (4,788) (5,514)
</TABLE>
- ---------------
(1) In March 1994, the Company acquired all of the outstanding capital stock of
Delicious in a transaction accounted for as a purchase.
(2) Represents a restructuring charge recognized by the Company for the year
ended December 31, 1997 primarily consisting of the expensing of consulting
and non-competition agreements the Company entered into with former
executive officers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."
(3) Represents a change in accounting principle for income taxes whereby the
Company adopted the provisions of FASB 109 "Accounting for Income Taxes."
(4) Represents a change in accounting principle whereby slotting, product
development and packaging design costs which were previously deferred and
amortized are now expensed as incurred.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the
Company's historical financial position at December 31, 1995, 1996 and 1997 and
June 30, 1998, and results of operations and cash flows for each of the years
ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997
and 1998. The Company's historical financial statements and notes thereto
included elsewhere in this Prospectus contain detailed financial information
that should be referred to in conjunction with the following discussion.
GENERAL
The Company is a marketer of pre-packaged cookies, crackers and snacks
which are sold primarily in the United States under the Company's own Delicious,
Salerno, Mama's and Frookie labels. The products are distributed through
independent direct-store-delivery distributors, directly to retailers and
through large wholesalers.
The Company was incorporated in 1989. In March 1994, the Company acquired
all of the stock of Delicious, an Illinois corporation. Effective December 29,
1995, Delicious was merged with and into the Company with the Company remaining
as the surviving entity.
Effective August 13, 1997, Richard Worth, the Company's former Chairman,
Chief Executive Officer and President, and Randye Worth, a former Executive Vice
President and Director of the Company, resigned and entered into agreements,
pursuant to which the Worths were obligated to provide consulting services to
the Company. These consulting agreements required the Worths to be available to
provide such services to the Company through August 1998 and include a
non-competition clause. The agreements cumulatively provide for: (i) consulting
fees aggregating $200,000 per year for five years; (ii) automobile and office
allowances aggregating $83,600 per year for three years; (iii) life and health
insurance coverage for five years; and (iv) forgiveness of debts aggregating
$88,030. In addition, the Company exchanged with Richard Worth its Cool Fruits
Fruit Juice Freezers product line (the "Cool Fruits Product Line") and assigned
the Company's license agreement for the Chiquita Tropical Freezers product line
(together with the Cool Fruits Product Line, the "Freezer Pop Lines") for the
cancellation of options to purchase 250,000 shares of Common Stock held by him.
The cost of the benefits being paid to the former executives was charged to
expense and reflected as part of the restructuring charge in 1997 and accrued
using a present value method over the expected term of the agreements.
On April 3, 1998, the Company completed the Salerno Acquisition for $3.3
million in cash, a $1.5 million promissory note and the assumption of
substantially all of the liabilities of Salerno. The Salerno Acquisition has
been accounted for as a purchase and the results of Salerno's activities will be
included in the Company's financial statements subsequent to the date of
acquisition. Management believes that the Salerno Acquisition will favorably
impact the Company's future financial condition by enabling the Company to
reduce duplicate selling and administrative expenses. Additionally, the Salerno
Acquisition resulted in an increase in the Company's purchases from co-packers
by more than 100%, which the Company believes will enable it to negotiate more
favorable pricing with some of its co-packers.
Prior to January 23, 1996, the Salerno and Mama's brands were owned by
Sunshine Biscuits, Inc. ("Sunshine"), the manufacturer and distributor of the
nationally advertised Sunshine brand cookies and crackers. Sunshine manufactured
the Salerno and Mama's brands and marketed and distributed them on a regional
basis along with its nationally advertised products using shared sales,
marketing, finance and administrative resources. On January 23, 1996, Salerno
Foods L.L.C. purchased the Salerno and Mama's brands and related formulations
from Sunshine, leased an independent facility, established relationships with
co-packers to manufacture products and recruited staff for sales, marketing,
finance and distribution and began operations in a manner substantially
different than Sunshine.
The financial statements of Salerno Foods L.L.C. for the period January 23,
1996 through December 31, 1996 and the year ended December 31, 1997 are included
in this Prospectus. There was not sufficient continuity between the operations
by Sunshine prior to the acquisition and the operations by Salerno Foods L.L.C.
and the Company thereafter. The disclosure of prior financial information would
not be meaningful to
19
<PAGE> 22
the understanding of the Company's operations, accordingly, financial
information prior to January 23, 1996 has not been presented.
PRODUCT PRICING
Following a broad industry trend, on March 1, 1998, the Company implemented
its first price increases in over two years on a majority of its products. The
price increases ranged from 1% - 3% on the majority of Delicious products, but
has had no material effect on sales volume. The Company expects that it will
continue to follow the industry's trend with respect to pricing changes.
PRODUCT MIX
The Company's current product mix is 37% Co-Branded, 6% All-Natural and 57%
Value-Oriented. Last year, the cookie industry grew at a rate of 1%, and,
according to Natural Foods Merchandiser, the natural products industry has
experienced over 13% annual growth since 1994. The Company expects that its
future product mix will reflect these and other industry trends that develop.
The Company intends to capitalize on the growth in the natural products
industry through expansion of its Frookie cookie and cracker line. The Company
expects to introduce a new line of wheat-free and gluten-free cookies in the
fourth quarter of 1998 in order to capitalize on a growing natural products
market niche. The Company believes that the Frookie brand equity can be
transferred to other products beyond cookies and crackers that also can be sold
in the natural foods marketplace and intends to identify and pursue these
opportunities. The Company expects to selectively expand both its Co-Branded and
Value-Oriented product lines to reflect the diversification of the public's
appetite for cookies and crackers.
YEAR 2000 PROGRAM
Many computer systems used in the current business environment were
designed to use only two digits in the date field and thus may experience
difficulty processing dates beyond the year 1999 and, as such, some computer
hardware and software will need to be modified prior to the Year 2000 to remain
functional. The Company's core internal systems that have been recently
implemented are Year 2000 compliant. The Company is also completing a
preliminary assessment of Year 2000 issues not related to its core systems,
including issues with third-party suppliers and warehouse communications. Based
on its initial evaluation, the Company does not believe that the cost of
remedial actions will have a material adverse effect on the Company's results of
operations, liquidity or financial condition. However, due to the general
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Company believes that, with
the implementation of new business systems and completion of projects as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared with Six Months Ended June 30, 1997
Net Sales. Net sales increased 45.7% to $22.3 million for the six months
ended June 30, 1998 from $15.3 million for the six months ended June 30, 1997.
The increase in sales is primarily related to the result of the inclusion of
$8.5 million of sales that resulted from the Salerno Acquisition. Frookie sales
declined by approximately $1.1 million in anticipation of the introduction of a
new reformulated Frookie product line during 1998.
Gross Profit. Gross profit increased 53.1% to $4.9 million for the six
months ended June 30, 1998 from $3.2 million for the six months ended June 30,
1997. The increase is primarily due to the recognition of gross profit of $2.6
million that resulted from the Salerno Acquisition. Gross profit as a percentage
of sales, excluding Salerno's gross profit, decreased from 21% in 1997 to 16.7%
in 1998. The decline was caused by lower sales in the higher margin Frookie
product line discussed above combined with higher promotional allowances
required to dispose of discontinued inventory and to introduce new products.
These lower margins
20
<PAGE> 23
were partially offset by higher margins on the Value-Oriented product line and
the price increase discussed above.
Promotions and Selling. Promotion and selling expense increased 106% to
$3.3 million for the six months ended June 30, 1998 from $1.6 million for the
six months ended June 30, 1997. The increase is primarily due to $2.1 million of
promotional selling expenses related to the product lines acquired in the
Salerno Acquisition. A $400,000 reduction in promotion and selling expenses
resulted from reduced Frookie marketing and promotion efforts and increased
allowances as discussed above.
General and Administrative. General and administrative expenses increased
67% to $2.5 million for the six months ended June 30, 1998 from $1.5 million for
the six months ended June 30, 1997. $500,000 of such costs were related to the
Salerno Acquisition. The remaining increase was primarily due to a $130,000
increase in personnel and travel and entertainment expenses, $60,000 for market
research expense and $100,000 of financing costs to fund the Salerno
Acquisition.
Other Income (Expense). Other expenses for the six months ended June 30,
1998 increased 150% to $500,000 from $200,000 for the six months ended June 30,
1997. The increase was primarily due to higher interest expense incurred to
finance the Salerno Acquisition.
Provision for Income Tax. The provision for income taxes for the six
months ended June 30, 1998 was zero as a result of there being a net operating
loss for the period for which a valuation allowance was provided to reduce the
tax benefit of this loss. The valuation allowance increased $480,000 primarily
due to the uncertainty of the future utilization of the net operating loss
generated during the six months ended June 30, 1998.
Net Loss. Net loss increased to $1.4 million for the six months ended June
30, 1998 from a net loss of $26,000 for the six months ended June 30, 1997. The
increase in the net loss is the result of a net loss of $156,000 of Salerno in
addition to the factors discussed above.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Net Sales. Net sales decreased 16.8% to $30.7 million for the year ended
December 31, 1997 from $36.8 million for the year ended December 31, 1996. This
decline in sales was solely due to a decline in sales volume. This reduction of
sales occurred ratably between Delicious and Frookie product categories.
Increased competition in all product categories coupled with an industry-wide
slow down in pre-packaged baked goods resulted in a decrease in sales. In
addition, the Company's 1997 results were also adversely impacted by a change in
the Company's marketing strategy to an outside commissioned broker network from
an internal sales force which resulted in certain operational inefficiencies and
lower sales. Also, production problems at a key supplier resulted in missed
sales.
Gross Profit. Gross profit decreased 22.0% to $5.5 million for the year
ended December 31, 1997 from $7.0 million for the year ended December 31, 1996.
This decrease was primarily a result of reduced sales. Gross profit as a
percentage of sales decreased from 19.0% in 1996 to 17.8% in 1997 due primarily
to a $300,000 charge for the write-off of discontinued packaging.
Promotions and Selling. Promotions and selling expenses increased 24.0% to
$3.9 million for the year ended December 31, 1997 from $3.2 million for the year
ended December 31, 1996 primarily due to a $700,000 increase in marketing
expenditures to compensate for the elimination of the Company's internal sales
force.
General and Administrative. General and administrative expenses decreased
32.2% to $2.9 million for the year ended December 31, 1997 from $4.3 million for
the year ended December 31, 1996. This decrease was primarily due to a $379,000
reduction in personnel and travel and entertainment costs and $250,000 of lower
professional fees. In 1996, the Company incurred a charge-off of $246,000
related to goodwill associated with a discontinued business venture. Further,
1996 results included a $500,000 bad-debt provision for the potential expensing
of a customer's indebtedness.
21
<PAGE> 24
Restructuring Charge. The Company recognized a one-time $1.5 million
restructuring charge primarily consisting of the expensing of consulting
agreements the Company entered into with former executive officers, Richard and
Randye Worth.
Provision for Income Tax. The provision for income taxes for the year
ended 1997 was zero as a result of there being a net operating loss for the
period for which a valuation allowance was provided to reduce the tax benefit of
this loss. The valuation allowance increased $1.4 million primarily due to the
uncertainty of the future utilization of the net operating loss generated in
1997.
Net Loss. Net loss increased to $3.4 million for the year ended December
31, 1997 from a net loss of $898,134 for the year ended December 31, 1996, as a
result of the factors discussed above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. Net sales decreased 30.1% to $36.8 million for year ended
December 31, 1996 from $52.7 million for the year ended December 31, 1995
primarily due to management's decision to reduce promotional and marketing
expenditures. This decline in net sales was solely due to a decline in sales
volume. In 1995, the Company aggressively spent funds to gain additional product
distribution which resulted in greater sales but significantly less
profitability. In 1996, promotion and selling expenditures were reduced by
approximately $9.2 million which resulted in a significant loss of product
distribution and lower sales. During the second half of 1995, the Company
realized that its strategy of aggressive promotions was not successful and sales
had not increased as anticipated. Because promotions commitments for the second
half of 1995 had been finalized, promotional expenses were not reduced in 1995.
A reduction in promotions and selling expenses was planned and executed in 1996.
Increases in sales of the Company's products occur at the time of the retail
promotion, and, therefore, no significant lag time exists between promotions and
related sales.
Gross Profit. Gross profit decreased 33.0% to $7.0 million for the year
ended December 31, 1996 from $10.5 million for the year ended December 31, 1995
primarily due to lower sales volumes. Gross profit as a percentage of sales
decreased to 19.0% for 1996 from 19.9% for 1995 due to the Company's inability
to pass along certain supplier price increases to its customers, as well as a
slight shift in the Company's sales mix to lower margin items.
Promotions and Selling. Promotions and selling expenses decreased 74.4% to
$3.2 million for the year ended December 31, 1996 from $12.4 million for the
year ended December 31, 1995. This decrease was due to the Company's decision to
significantly reduce promotional allowances, market development funds and
package design expenditures.
General and Administrative. General and administrative expenses increased
9.8% to $4.3 million for the year ended December 31, 1996 from $3.9 million for
the year ended December 31, 1995. While general and administrative expenses did
not vary significantly between periods, 1996 included a $500,000 bad debt
provision.
Provisions for Income Tax. In 1995, although the Company incurred a loss,
a provision for income taxes of $662,000 was recorded consisting primarily of a
reduction in deferred tax assets established in a previous year. The provision
for income taxes for the year ended 1996 was zero as a result of there being a
net operating loss for the period for which a valuation allowance was provided
to reduce the tax benefit of this loss. The valuation allowance increased
$600,000 primarily due the uncertainty of the future utilization of the net
operating loss generated in 1996.
Net Loss. Net loss decreased to $898,134 for the year ended December 31,
1996 from a net loss of $7.0 million for the year ended December 31, 1995, as a
result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
In recent periods, the Company has utilized its working capital to cover
operating deficits. At June 30, 1998, the Company had accumulated a working
capital deficit of $14.7 million. Because the Company purchases its products
from co-packers, it does not intend to invest in plant or equipment relating to
the manufacture of products for sale. Further, the Company believes that its
existing fleet of leased trucks is sufficient for the foreseeable future. In
addition, the introduction by the Company of new products is an immaterial
capital expenditure for the Company because co-packers are responsible for the
research,
22
<PAGE> 25
development and ingredients costs. The only costs incurred by the Company are
packaging design costs, which did not exceed $50,000 in 1996 or 1997 and are not
expected to increase significantly in the future. Consequently, additions to
property and equipment are not expected to be material in future periods. The
Company believes that the large number of small to mid-size ($5-$50 million in
annual sales) cookie and snack food companies present a significant opportunity
for the Company to achieve its acquisition strategy. The Company will be
required to obtain additional debt or equity financing to achieve its
acquisition strategy. There can be no assurance that any additional financing,
if required, will be available to the Company on acceptable terms, if at all.
The Company has also begun to expand, and intends to investigate further
opportunities to expand, into non-supermarket channels, including mass
merchandisers, club stores, convenience stores and drug stores. See
"Business -- Turnaround Initiatives." The Salerno Acquisition negatively
impacted the liquidity of the Company. As of June 30, 1998, the Company had
incurred $5.2 million of short-term debt plus interest accrued thereon at either
12% or 15% per annum. The Company believes the amount available under its
revolving credit facility, together with the net proceeds from the offering,
will be sufficient for at least the next 12 months to finance its operations,
service interest payments on its debt and fund capital expenditures.
On July 2, 1996, holders of 8% Subordinated Promissory Notes aggregating
$1.3 million converted such notes plus accrued interest of approximately $87,000
into a total of 224,528 shares of Common Stock.
On December 22, 1997, the Company consummated the first closing of a
private placement (the "First Closing") of a minimum of 87,500 shares of Common
Stock and a maximum of 350,000 shares of Common Stock (the "October Private
Placement"). At the First Closing, the Company issued an aggregate of 210,000
shares of Common Stock for an aggregate price of $1.3 million. The net proceeds
of $956,171 from the First Closing were applied by the Company to increase cash
balances and reduce outstanding trade payables balances. On February 6, 1998,
the Company consummated a second closing of the October Private Placement (the
"Second Closing") pursuant to which it issued an aggregate of 140,000 shares of
Common Stock for an aggregate price of $840,000. The net proceeds of $696,700
from the Second Closing were applied by the Company to increase cash balances
and reduce outstanding trade payables balances. Network 1 Financial Securities,
Inc. acted as placement agent for the October Private Placement. The shares of
Common Stock issued and sold in the October Private Placement are being
registered for resale under the Securities Act in the registration statement of
which this Prospectus is a part; provided, however, that the holders of such
shares have agreed not to sell such shares for a period of 12 months after the
date of this Prospectus without the prior written consent of the Representative.
On March 30, 1998, the Company borrowed $500,000 (the "Acquisition Loan").
Such indebtedness bears interest at the rate of 12% per annum and matures on the
earlier of (i) October 31, 1998 or (ii) consummation of an initial public
offering of Common Stock from which the Company receives gross proceeds of at
least $7.0 million. Upon default of repayment of the Acquisition Loan, such loan
is convertible into such number of shares of Common Stock as is equal to the
principal amount of the Acquisition Loan, plus all interest accrued thereon,
divided by $6.00. The Company expects to repay the Acquisition Loan, interest
accrued thereon and related fees with a portion of the net proceeds of this
offering. See "Use of Proceeds."
On April 3, 1998, the Company entered into an amendment to a revolving
credit facility with Republic for a revolving line of credit of up to $7.0
million. Borrowings under the revolving credit facility are due upon demand and
bear interest at 1.50% per annum above the reference rate of interest publicly
announced from time to time by U.S. Bank National Association (8.5% at June 30,
1998). Borrowings under the revolving credit facility in 1996 and 1997 were $1.9
million and $1.5 million, respectively. Borrowings under the revolving credit
facility are collateralized by a first lien on substantially all of the assets
of the Company.
On April 3, 1998, the Company consummated the Salerno Acquisition. The
purchase price for Salerno consisted of (i) $3.3 million in cash, (ii) a $1.5
million promissory note from the Company to Salerno (the "Salerno Promissory
Note"), bearing interest at a rate of 12% per annum, secured by a second lien on
substantially all of the Company's assets, and (iii) the assumption of
substantially all of the liabilities of Salerno. The Company assigned its
obligations under the Salerno Promissory Note to American Pacific Financial
Corporation ("APFC") and its principal stockholder, Larry Polhill. In connection
therewith, the Company entered into a loan agreement with APFC pursuant to which
the Company borrowed $4.6 million,
23
<PAGE> 26
bearing interest at a rate of 12% per annum through August 3, 1998 and 15% per
annum thereafter, from APFC (the "APFC Loan") consisting of $3.0 million in cash
used by the Company to fund a portion of the cash purchase price for Salerno,
$1.5 million in the form of APFC assuming primary liability under the Salerno
Promissory Note and $100,000 as a fee for the APFC Loan. In addition, the
Company issued to APFC a promissory note in the principal amount of $100,000,
bearing interest at a rate of 12% per annum, as a fee for assuming the Salerno
Promissory Note (the "Fee Note"). The Salerno Promissory Note and the Fee Note
each mature on the earlier of (i) October 16, 1998 or (ii) consummation of an
initial public offering of Common Stock or other recapitalization (whether
through one transaction or a series of transactions) of the Company (whether
through a private placement or otherwise) from which the Company receives
(whether from such one transaction or on a cumulative basis from such series of
transactions) gross proceeds of at least $7.0 million or (iii) a sale or other
transfer of all or substantially all of the assets or equity interests in the
Company. The APFC Loan matures on the earlier of (i) October 16, 1998, or (ii)
consummation of an initial public offering of Common Stock or other
recapitalization (whether through one transaction or a series of transactions)
of the Company (whether through a private placement or otherwise) from which the
Company receives (whether from such one transaction or on a cumulative basis
from such series of transactions) gross proceeds of at least $7.0 million or
(iii) a sale or other transfer of all or substantially all of the assets or
equity interests of the Company. The APFC Loan is secured by a third lien on
substantially all of the Company's assets. The Company expects to repay the APFC
Loan, interest accrued thereon and related fees with a portion of the net
proceeds of this offering. See "Use of Proceeds."
As of August 1, 1998, holders of approximately $1.6 million aggregate
principal amount of 9% Notes exchanged such notes for an aggregate of 195,834
shares of Series A Preferred Stock pursuant to an offer to exchange made by the
Company. Annual dividends of 10% paid semi-annually are payable on the shares of
Series A Preferred Stock out of the assets of the Company legally available for
payment therefor. The expiration date of warrants to purchase 107,730 shares of
Common Stock collectively held by the holders of the 9% Notes exchanged for the
Series A Preferred Stock was extended to April 27, 2001 from April 27, 1999.
SEASONALITY
The Company has generally experienced reduced sales of pre-packaged cookies
during the fourth quarter due primarily to the increase in holiday home baking
during this period. As a result of the Salerno Acquisition, on an ongoing basis,
the Company believes it will have limited seasonality influences.
INFLATION
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented.
24
<PAGE> 27
BUSINESS
GENERAL
The Company develops, markets and sells cookies, crackers and related food
products under the Delicious, Salerno, Mama's and Frookie labels, as well as
licensed names including Skippy, Land O' Lakes, Butterfinger, Chiquita, Heath,
Chuck E. Cheese, Eskimo Pie, Raisinets and Ringling Bros. Pro Forma, the Company
is the seventh largest cookie company in the United States based on retail sales
for the 52 weeks ended December 28, 1997 according to IRI. The Company's product
lines include more than 17 different cookie, cracker and snack categories
comprising more than 260 SKUs. These products are sold primarily in the United
States to independent direct-store delivery distributors for resale to
supermarkets and other retail outlets, through large wholesalers to natural food
stores and also directly to supermarkets and other retail outlets. For the year
ended December 31, 1997 and the six months ended June 30, 1998, the Company had
Pro Forma net sales of approximately $70 million and $31.4 million,
respectively. For the year ended December 31, 1997 and the six months ended June
30, 1998, the Company had a Pro Forma net loss of $5.0 million and $1.9 million,
respectively.
The Company was founded in 1989 originally to market the Frookie cookie
product, one of the first all-natural, low-fat cookies produced with fruit juice
sweeteners. Through the acquisition of Delicious in 1994, the Company broadened
its product offering into three lines: (i) Value-Oriented, (ii) Co-Branded and
(iii) All-Natural. All of the Company's products are produced by co-packers
using the Company's proprietary specifications and formulations.
On April 3, 1998, the Company completed the Salerno Acquisition. Salerno's
cookie, cracker and other snack products are targeted to value-oriented
customers and are regionally focused with sales concentrated in supermarkets in
the mid-western United States. Salerno was the tenth largest cookie company in
the United States based on retail sales for the 52 weeks ended December 28, 1997
according to IRI.
INDUSTRY OPPORTUNITY
The cookie and cracker market is large and highly fragmented with over 200
companies as of December 31, 1997. According to IRI, the U.S. cookie and cracker
industry had 1997 retail sales of approximately $7.3 billion, with cookie sales
of $4.0 billion and cracker sales of $3.3 billion. While consumption per person
of cookies in the United States has declined, according to IRI, since 1992,
particular product categories, such as crackers and sugar-free, have grown at
rates of over 4% or more per year. The six largest cookie companies represented
approximately 72% of total retail dollar sales of cookies for the 52 weeks ended
December 28, 1997.
The following table provides the estimated retail sales to supermarket
chains of the top 10 cookie companies in the United States, according to IRI,
for the 52 weeks ended December 28, 1997.
<TABLE>
<CAPTION>
COMPANY RETAIL SALES
------- -------------
(IN MILLIONS)
<S> <C>
Nabisco Biscuit Co. ........................................ $1,230
Keebler Foods Company....................................... 571
Pepperidge Farm, Inc. (Campbell Foods)...................... 195
President Baking Co. ....................................... 166
Archway Cookies, Inc. ...................................... 159
Mother's Cake & Cookies (Specialty Foods)................... 144
Stella D'Oro Biscuit Co. (Nabisco).......................... 42
Delicious Brands, Inc. (f/k/a The Delicious Frookie Company,
Inc.) .................................................... 37
Entenmanns (Bestfoods)...................................... 31
Salerno Foods, L.L.C. ...................................... 30
</TABLE>
One of the Company's product lines, All-Natural, is part of the natural
products industry, which industry experienced over 13% annual growth since 1994,
according to Natural Foods Merchandiser. Sales within this
25
<PAGE> 28
industry reached $14.8 billion during 1997. The Company believes this growth is
being propelled by several factors, including consumer trends toward healthier
eating habits, the increasing awareness of the link between diet and health,
concern regarding food purity and safety, an aging population and greater
environmental awareness. The Company believes that companies with strong brand
name recognition, high-quality products and broad distribution are positioned to
increase market share.
TURNAROUND INITIATIVES
In recent periods, the Company has experienced declining product sales and
financial results. In response to these trends, during late 1997, the Company
began to implement turnaround initiatives, including hiring a new management
team, electing a new board of directors, repositioning core product lines and
raising new capital.
In August 1997, Michael J. Kirby, a seasoned executive with over 20 years
of diversified experience in the food industry, was hired to serve as the
Company's Chief Executive Officer. Upon joining, Mr. Kirby undertook an
evaluation of the Company and determined that its competitive strengths include:
(i) strong brand name recognition, (ii) well-established distributor
relationships, (iii) co-branding and licensing agreements and (iv) unique
product niches.
Under the leadership of Mr. Kirby, the Company has developed an operational
strategy designed to utilize the Company's core strengths and increase its
appeal to its existing broad customer base. This operational strategy is
intended to increase the Company's sales volume, improve its financial
performance and enhance its market position. The Company will seek to achieve
these objectives through the following strategies:
- Improve Margins. The Company is one of the largest wholesale purchasers
of cookies and crackers from co-packers in the United States. As a
result, the Company has recently been able to negotiate more favorable
pricing with some of its co-packers and believes there are additional
opportunities for it to lower its purchasing costs. The Company intends
to streamline its supplier base from over 20 co-packers to fewer than 10
during the next 12 months. Additionally, recent industry price increases
have given the Company the opportunity to raise prices on its products.
On March 1, 1998, the Company implemented its first price increases in
over two years on a majority of its products. The Company believes these
initiatives will lead to lower product costs and improved margins without
negatively impacting product volumes.
- Leverage Frookie Brand Name. The Frookie name is associated with
all-natural, high-quality, good tasting products. The Company intends to
leverage this brand equity, as well as the growing demand for all-natural
products, to further expand distribution and product sales. The Company
also plans to introduce additional healthy products that complement the
Frookie line, such as fruit bars, individual-sized fruit pies, energy
bars and wheat-free, sugar-free, gluten-free and organic products.
- Pursue Acquisitions. The cookie and cracker markets as well as the
natural food market is large and highly fragmented. Many of the companies
in these markets have strong positions and retail relationships. The
Company intends to pursue acquisitions of such companies that afford
operational synergies and complement or provide further opportunities to
use its existing brands or product lines. The Salerno Acquisition was the
first step in this strategy.
- Broaden Co-Branding Arrangements. Currently, the Company has licensed
several nationally recognized trademarks including Skippy, Land O' Lakes,
Butterfinger, Chiquita, Heath, Chuck E. Cheese, Eskimo Pie, Raisinets and
Ringling Bros. The Company intends to acquire additional licenses and
further expand its product offering under current co-branding
arrangements.
- Expand Non-Supermarket Sales. Approximately 34% of 1997 retail cookie
and cracker sales were through non-supermarket channels including mass
merchandisers, club stores, convenience stores and drug stores. Until
recently, the Company had targeted its distribution and sales primarily
to the traditional supermarket channel. However, with the addition of the
new management team, the Company has begun to expand its distribution to
these non-supermarket channels, such as the club
26
<PAGE> 29
store PriceCostco ("Costco"). The Company has developed, and continues to
develop, products, packaging and distribution tailored to these
non-supermarket channels.
- Renew Emphasis on Quality Control and Customer Service. Recently, the
Company instituted stricter quality controls and systems and hired new
management to improve its product quality standards and customer service.
PRODUCTS
The Company's product lines, Value-Oriented, Co-Branded and All-Natural,
consist of over 260 SKUs under the labels listed below.
<TABLE>
<CAPTION>
CO-BRANDED
VALUE-ORIENTED (UNDER DELICIOUS LABEL) ALL-NATURAL
-------------- ----------------------- -----------
<S> <C> <C>
Delicious Butterfinger Frookie
Mama's Chiquita
Salerno Chuck E. Cheese
Eskimo Pie
Heath
Land O' Lakes
Raisinets
Ringling Bros.
Skippy
</TABLE>
Value-Oriented
The Company's Value-Oriented products, sold under the Delicious, Mama's and
Salerno labels, are primarily high-quality, value-priced cookies, crackers and
snack products. Typically, these products retail between $0.99 and $1.99 with
package sizes ranging from four ounces to two pounds. The Company distributes
its Value-Oriented products to leading supermarkets with a variety of
value-priced, value-sized products including cookies, crackers, animal crackers,
breadsticks, pretzels and ice cream cones. The Company is also initiating a new
line of Value-Oriented products which will be sold to non-supermarket channels,
primarily discount department stores, with average retail prices below one
dollar. As of December 31, 1997, Value-Oriented product sales represented
approximately 84% of the Company's Pro Forma net sales.
On April 3, 1998, the Company completed the Salerno Acquisition. Salerno's
cookie, cracker and other snack products are targeted to value-oriented
customers and are regionally focused with sales concentrated in supermarkets in
the mid-western United States. As of December 28, 1997, Salerno was the tenth
largest cookie company in the United States based on retail sales for the 52
weeks ended December 28, 1997 according to IRI.
Co-Branded
The Company's Co-Branded products are premium cookie, cracker or related
snack food products which the Company packages under both a licensed label and
the Delicious label. The Company seeks to establish co-branding agreements with
companies which have nationally recognized brand names associated with high
quality. Currently, the Company has licensed several nationally recognized
trademarks including Skippy, Land O' Lakes, Butterfinger, Chiquita, Heath, Chuck
E. Cheese, Eskimo Pie, Raisinets and Ringling Bros. The license agreements are
typically three or more years in length and require the Company to pay a royalty
percentage based on sales. Additionally, many licensor agreements include
provisions that require the Company to use specific licensor-manufactured
products (for example, Land O' Lakes butter, Skippy peanut butter) in the
Company's products. Products under the Co-Branded line include cookies, animal
crackers, crackers and other related snack products. Due to widespread
recognition by consumers of the licensors' brands, the Company can charge higher
wholesale prices and achieve higher margins because consumers will
27
<PAGE> 30
accept higher retail prices. As of December 31, 1997, Co-Branded product sales
represented approximately 8% of the Company's Pro Forma net sales.
The Company seeks to establish new selected licensors and continually
evaluates new licensor arrangements. Additionally, the Company intends to
further broaden its product offering with its current licensors and plans to
introduce new products under the Chuck E. Cheese, Land O' Lakes and Skippy
labels during 1998 and 1999. The Company distributes its Co-Branded product line
primarily to leading supermarkets. The Company has developed new sizes of its
leading products to enable it to expand into non-supermarket channels. As its
first entry into these channels, the Company recently began shipping to Costco
in the northeast. The Company believes initial results from Costco have been
positive, and it has begun expanding into other Costco regions.
All-Natural
The Company develops and markets its All-Natural products under the Frookie
label. The Frookie cookie line was the Company's first product line and one of
the first all-natural, low-fat cookie produced with fruit juice sweeteners. The
Frookie products are "good for you," all-natural, low fat, healthy alternatives
to sweet, high fat snacks. The Frookie line includes products which are made
with organic ingredients and natural sweeteners such as fruit juice, pure
crystalline fructose and unprocessed sugars, as well as fat-free/reduced fat,
cholesterol, additive and preservative free snacks. The Frookie line is targeted
to health and nutrition-conscious consumers looking for lower fat, natural or
organic snacks and special health consumers such as diabetic or sugar-sensitive
consumers. Frookie products include all-natural cookies, crackers and ice cream
cones, organic cookies and crackers, yogurt cream filled cookies, sugar-free
cookies and fat free/ reduced fat cookies and crackers. The Frookie product line
generally has higher price points and margins than the Company's other product
lines due to the higher quality and special ingredients and manufacturing
processes that are necessary to create these products. As of December 31, 1997,
All-Natural product sales represented approximately 8% of the Company's Pro
Forma net sales.
The Company is focusing new Frookie product introductions on line
extensions which are complementary to the all-natural emphasis of this line,
such as wheat-free products, sugar-free products, energy bars and fruit bars and
individual-sized fruit pies. The Company distributes its All-Natural product
line to leading supermarkets, as well as natural food stores and supermarkets.
MARKETING, DISTRIBUTION AND SALES
Marketing. The Company's advertising and promotional programs include
packaging, trade and consumer advertising, and sales promotion, including
couponing and temporary price reductions. Additionally, the Company emphasizes
the "good for you" aspect of its All-Natural product line as an alternative to
traditional sugary, high fat snacks. The Company's marketing strategy is to
heighten the awareness of its brands by increasing the distribution and
visibility of its products throughout all retail channels. The Company intends
to update its packaging to emphasize healthy characteristics and increase
visibility and create impulse buying through increased end-aisle displays and
advertised features. The Company also intends to increase the number of
cooperative marketing events undertaken with the Company's distributors. The
Company is actively pursuing "cross-couponing" with select co-branding partners.
In "cross-couponing," each co-branding partner places coupons for the other's
products on its respective packaging.
Distribution and Sales. The Company's products are distributed through
independent direct-store delivery distributors, directly to retailers and also
through large wholesalers. For the year ended December 31, 1997, 44%, 50% and
4%, respectively, of the Company's net sales were attributable to these
distribution channels. The greatest amount of the Company's products are sold in
the mid-western (Illinois, Minnesota, Missouri, Ohio and Wisconsin) and
northeastern (New York, Maryland and Pennsylvania) regions of the United States.
The Company's products are also sold in Canada. To distribute the Delicious
(including Co-Branded) products, the Company uses a network of more than 30
independent direct-store delivery distributors that focus primarily on
supermarket sales. While a majority of the Company's Delicious products have
been sold by distributors to supermarkets, the Company is focusing on expanding
its sales into non-
28
<PAGE> 31
supermarket retail channels including drug and club stores. The Company's
All-Natural product line is sold to natural foods retailers through large
wholesalers and through independent direct-store distributors to supermarkets.
The Delicious and Frookie product lines are primarily distributed from one
warehouse location or directly from the Company's co-packers. The Company
employs four regional sales managers for the Delicious and Frookie product
lines, each of whom is responsible for a specific geographic region and for
managing relationships with all of the Company's customers within that region.
The regional sales managers' duties include supporting existing customers,
developing new business and administering any advertising or promotional
programs instituted by the Company. The regional sales managers also serve as
liaisons between the Company and distributors of these product lines.
The Company's Salerno and Mama's product lines are distributed directly to
retailers through Company-owned routes, by independent distributors that
distribute only Salerno and Mama's product lines and by multi-line, independent
direct-store distributors. The Company leases 30 trucks for direct-store
delivery of these product lines. The Salerno and Mama's product lines are
distributed from four strategically-located leased warehouses. The Company
maintains a direct sales staff to market the Salerno and Mama's product lines
for the Company-owned routes.
The Company's largest distributor, Milwaukee Biscuit Company, represented
approximately 13% of the Company's Pro Forma net sales for the year ended
December 31, 1997. The Company does not have any written contracts with
Milwaukee Biscuit Company, or any of its other distributors.
MANUFACTURING
All of the Company's products are manufactured by non-affiliated
co-packers. The co-packers produce, supply or package the Company's products and
must comply with strict ingredient and processing standards established by the
Company. Pursuant to its co-packing arrangements, the Company purchases
substantially all of its products as finished goods. The Company currently uses
over 20 co-packers; however, it intends to establish several key relationships
with a select number of suppliers which will allow it to streamline its supplier
base to fewer than 10 during the next 12 months. The Company has recently
negotiated more favorable pricing with some of its co-packers and believes there
are additional opportunities for it to lower purchasing costs. Packaging
production is outsourced to third-party vendors based upon the Company's designs
and is purchased from such vendors by the manufacturers of the Company's
products. Generally, the Company is required to reimburse the manufacturers for
the costs of such packaging in the event the product is discontinued. For the
year ended December 31, 1997, purchases from the Company's four largest
suppliers, Mrs. Alison's Cookie Company, Sugar Kake Cookies, Inc., Pate's and
The Wortz Company, accounted for approximately 13.7%, 12.3%, 10.5% and 10.4%,
respectively, of the Company's Pro Forma purchases.
RESEARCH AND DEVELOPMENT
The Company's three-person research and development team works to create
new products and line extensions and improve existing products. The Company's
packaging design is created by an in-house design staff. The Company intends to
focus a majority of its research and development efforts to extend and enhance
its All-Natural product line.
QUALITY ASSURANCE AND CONTROL
Recently, the Company has instituted stricter quality controls and systems
and hired new management to further improve its product quality standards. The
Company regularly inspects all co-packing facilities and warehouses to ensure
that they conform to good manufacturing practice standards. The Company uses
code dating on all products and products are retained from product runs.
Systematic procedures are in place and regulated by an experienced technical
staff based on-site at the Company and supplemented by independent laboratory
analysis.
29
<PAGE> 32
COMPETITION
The cookie, cracker and snack food industry is highly competitive and is
based primarily on brand recognition, quality and price. In particular, the
Company competes with large domestic and international companies such as Nabisco
Biscuit Co., Keebler Foods Company, Pepperidge Farm, Inc., President Baking Co.,
Archway Cookies, Inc. and Mother's Cake and Cookies, which have substantially
greater product development, marketing, financial and human resources than the
Company, as well as stronger relationships with local, regional, private label
and generic manufacturers. Many of the Company's competitors have developed
nationally and regionally recognized brand names. The Company's competitors may
succeed in developing new or enhanced products that are more popular than any
that may be sold or developed by the Company, and such competitors may also be
more successful than the Company in marketing and selling such products.
Substantial advertising and promotional expenditures are required to maintain or
improve a brand's market position or to introduce a new product. Consequently,
the Company anticipates much of its competition will come from larger,
well-capitalized businesses that have significantly greater financial and other
resources than the Company. No assurance can be given that the Company will be
able to compete successfully with any of these businesses or maintain or
increase its market share.
The Company competes in the cookie, cracker and snack food industry by (i)
capitalizing on its strengths as a major supplier to independent cookie and
cracker distributors and as a major purchaser of contract-manufactured cookies,
(ii) developing and marketing what it believes are innovative cookie and cracker
products, many of which address health concerns, (iii) filing for patent and
trademark protection in the United States for its proprietary products and
marks, (iv) procuring licenses to use well-known trademarks in co-branded
products and (v) using efficient manufacturing, sales and distribution methods
in an effort to increase productivity and lower costs.
INTELLECTUAL PROPERTY
The Company has filed for and obtained trademark protection for a number of
its products and trade names, including the names "Delicious," "Frookie,"
"Frookies," "Fruitin," "Salerno," "Mama's" and "R.W. Frookies." The Company
generally files its trademark applications in the United States and several
foreign countries, including Canada, France, Great Britain and Japan. In
connection with its Co-Branded product line, the Company has entered into
license agreements with major companies which own the trademarks that are
licensed to the Company.
While the Company intends to enforce its trademark and licensing rights
against infringement by third parties, no assurance can be given that the
trademarks and licenses or the Company's trademark and license rights will be
enforceable or provide the Company with meaningful protection from competitors.
Even if a competitor were to infringe on trademarks or licenses held by the
Company, enforcing the Company's rights would likely be costly and would divert
funds and resources that could otherwise be used to operate the Company. No
assurance can be given that the Company would be successful in enforcing such
rights, or that the Company's products do not infringe on the patent or
intellectual property rights of a third party.
GOVERNMENT REGULATION
The Company's products are subject to the rules and regulations of various
federal, state and local health agencies, including the FDA, governing the
production, sale, advertising, labeling and ingredients of food products. The
Company believes that its recipes and manufacturing techniques and the
facilities and practices used by its subcontracted manufacturers are sufficient
to maintain compliance with applicable regulations, however, there can be no
assurance that the Company and its subcontracted manufacturers will be able to
comply with such laws and regulations in the future or that new governmental
laws and regulations will not be introduced which would prevent or temporarily
inhibit the development, distribution and sale of the Company's products to
consumers. If any of the Company's subcontracted manufacturers were to violate
any such law or regulation, it could result in fines, recalls, seizure or
confiscation of products marketed by the Company. There can be no assurance that
future changes in applicable laws, regulations or the interpretation thereof
will not necessitate significant expenditures or otherwise have a material
adverse impact on the Company.
30
<PAGE> 33
EMPLOYEES
As of June 30, 1998, the Company had 110 full-time employees, 23 of which
are represented by Teamsters Local 734. The Company's collective bargaining
agreements with Teamsters Local 734 expires on May 12, 2001. The Company
believes its relations with its employees to be good.
PROPERTIES
The Company's headquarters is located in 73,600 square feet of leased
office and warehouse space in Des Plaines, Illinois. The Company's annual rent
is approximately $438,000. The Company's lease expires May 31, 2003. The Company
also leases four warehouses (Illinois, Michigan, Minnesota and New York) from
which it distributes the Salerno and Mama's product lines.
LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
From time to time however, the Company may be subject to claims and lawsuits
arising in the normal course of business.
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<PAGE> 34
MANAGEMENT
The following are the members of the Company's Board of Directors and the
Company's executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Donald C. Schmitt............ 67 Chairman of the Board of Directors
Michael J. Kirby............. 49 Chief Executive Officer, President and Director
Jeffry W. Weiner............. 47 Vice President, Chief Financial Officer and Secretary
Jay G. Shoemaker............. 46 Director
Edward R. Sousa.............. 41 Director
John H. Wyant................ 51 Director
</TABLE>
Donald C. Schmitt has been a director of the Company since 1989 and
Chairman of the Board since August 1997. Since 1977, Mr. Schmitt has been the
chairman of the board, president, chief executive officer and a principal
stockholder of The Shur-Good Biscuit Co., Inc. ("Shur-Good"), distributor of
cookies, crackers and salty snack foods. Shur-Good is a distributor of the
Company. See "Certain Transactions." Mr. Schmitt is also vice chairman of the
board of Miller Buckeye Biscuit Co., a director of Core Resources Inc., both of
which are privately-owned, and the former president of the Biscuit and Crackers
Distributor Association. He won the Xavier University Executive Achievement
Award in 1993. Mr. Schmitt was also awarded a Papal appointment to the
Equestrian Order of Holy Sepulchre by the Catholic Church in 1995. Mr. Schmitt
holds a B.A. in Accounting from Xavier University.
Michael J. Kirby has been the Company's Chief Executive Officer and
President and a director since August 1997. From February 1997 to August 1997,
Mr. Kirby was a private consultant. From February 1994 until January 1997, Mr.
Kirby was president of Concorde Brands, a division of Nestle USA. From November
1992 until February 1994, Mr. Kirby was president and chief executive officer of
National Oats, Inc. From 1989 until November 1992, Mr. Kirby was president and
chief operating officer of Willow Foods. From 1984 until 1989, Mr. Kirby was
president and chief executive officer of Royal American Foods, Inc. until its
sale to Pepperidge Farm, Inc. during Mr. Kirby's tenure. Mr. Kirby has also held
senior marketing positions at the Kellogg Company, Win Schuler Foods, Inc. and
H.P. Hood. Mr. Kirby holds a B.S. in Business from The State University of New
York-Albany (formerly Regent's College of New York-Albany).
Jeffry W. Weiner has been the Company's Vice President and Chief Financial
Officer since March 1996 and its Secretary since October 1997. Mr. Weiner was a
consultant in the consumer electronics industry from 1994 until March 1996. From
1977 to 1994, Mr. Weiner was employed in several positions, most recently as
senior vice president of finance and administration, by Cobra Electronics
Corporation, a publicly-held marketer of radar detectors, cordless telephones
and answering machines to retail stores. Mr. Weiner holds a B.S. in Accounting
from the University of Illinois, and is a Certified Public Accountant.
Jay G. Shoemaker has been a director of the Company since December 1997.
Mr. Shoemaker has been the chief operating officer of Niebaum Coppola Winery and
American Zoetrope Studios since 1996. Mr. Shoemaker was the president, chief
executive officer, chief operating officer and acting chairman of the board of
Earth's Best, Inc., an organic baby food company, from 1991 until its sale to
the Heinz Co. in 1996. From 1990 until 1991, Mr. Shoemaker was president of
Whitman's Chocolates. Mr. Shoemaker holds a B.A. in Experimental Social
Psychology from Williams College and a M.B.A. from Harvard University.
Edward R. Sousa has been a director of the Company since February 1998. Mr.
Sousa has been a practicing attorney in New York for more than five years. Mr.
Sousa holds a B.A. from Brandeis University and a J.D. from the University of
Pennsylvania.
John H. Wyant has been a director of the Company since December 1997. Mr.
Wyant was a co-founder and has been the managing partner of Blue Chip Venture
Company, a venture capital firm with approximately $180 million under management
that concentrates on financing companies primarily based in the mid-western
United States, since its inception in 1990. Mr. Wyant serves as a director of
various private companies and two publicly-traded companies, Zaring National
Corporation and Ciao Cucina Corporation. Mr. Wyant was a
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<PAGE> 35
director of the Company from 1990 to 1996. Mr. Wyant holds a B.A. in Political
Science from Denison University and a J.D. from Salmon P. Chase College of Law.
BOARD COMMITTEES
The Board of Directors has created an Audit Committee, a Compensation
Committee and a Stock Option Committee. The function of the Audit Committee is
to recommend annually to the Board of Directors the appointment of the
independent accountants of the Company; review with the independent accountants
the scope of the annual audit and review their final report relating thereto;
review with the independent accountants the accounting practices and policies of
the Company; review with the internal and independent accountants the overall
accounting and financial controls of the Company; be available to independent
accountants during the year for consultation; and review related party
transactions by the Company on an ongoing basis and review potential conflicts
of interest situations where appropriate. The Compensation Committee recommends
to the Board of Directors compensation for the Company's key employees. The
Stock Option Committee administers the Company's stock option plans. The members
of the Audit Committee are Messrs. Schmitt, Shoemaker and Wyant. The members of
the Compensation Committee are Messrs. Schmitt, Shoemaker and Wyant. The members
of the Stock Option Committee are Messrs. Shoemaker and Wyant.
DIRECTORS' COMPENSATION
Each non-employee director receives an annual grant of options to purchase
1,500 shares of Common Stock pursuant to the Formula Plan at an exercise price
equal to fair market value on the date of grant and $1,500 per Board meeting
attended. See "Stock Option Plans." All directors will be reimbursed for their
reasonable out-of-pocket expenses incurred in connection with their duties to
the Company.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
for the year ended December 31, 1997 of the Company's Chief Executive Officer
and each other most highly compensated executive officers of the Company whose
aggregate cash compensation exceeded $100,000 during the year ended December 31,
1997 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- ---------------------------
AWARDS PAYOUTS
---------- --------------
SECURITIES LONG-TERM
OTHER ANNUAL UNDERLYING INCENTIVE PLAN ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) PAYOUTS($) COMPENSATION($)
- --------------------------- --------- -------- --------------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Kirby........... 48,750(1) -- (1) 90,000 -- 8,000(2)
Chief Executive Officer
Jeffry W. Weiner........... 113,750 30,000 -- -- -- 7,500(3)
Chief Financial Officer
Richard S. Worth(4)........ 114,125 -- -- -- -- 7,050(5)
Former Chairman of the
Board and Chief Executive
Officer
</TABLE>
- ---------------
(1) Mr. Kirby began employment with the Company in August 1997 at a base salary
of $130,000 per annum. Mr. Kirby's base salary increased to $200,000 per
annum on April 3, 1998. Additionally, Mr. Kirby receives an auto allowance
of $600 per month.
(2) Consists of a relocation allowance of $5,000 and automobile expenses of
$3,000.
(3) Consists of a payout of accrued vacation time.
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<PAGE> 36
(4) Mr. Worth resigned as Chairman of the Board and Chief Executive Officer of
the Company effective August 13, 1997.
(5) Consists of automobile and insurance expenses.
OPTION GRANTS TABLE
The following table sets forth certain information regarding stock option
grants made to each of the Named Executive Officers during the year ended
December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS RATES OF ANNUAL
------------------------------------------------------------------ STOCK PRICE
PERCENT OF TOTAL APPRECIATION FOR
NUMBER OF SECURITIES OPTIONS GRANTED EXERCISE OR OPTION TERM(1)
UNDERLYING OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#) FISCAL YEAR(%) ($/SH) DATE 5%($) 10%($)
---- -------------------- ---------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Kirby.......... 90,000 74 6.00- 3/11/08 -- 290,000
24.00(2)
Jeffry W. Weiner.......... -- -- -- -- -- --
Richard S. Worth.......... -- -- -- -- -- --
</TABLE>
- ---------------
(1) The potential realizable portion of the foregoing table illustrates value
that might be realized upon exercise of options immediately prior to the
expiration of their term, assuming (for illustrative purposes only) the
specified compounded rates of appreciation on the Company's Common Stock
over the term of the option. These numbers do not take into account
provisions providing for termination of the option following termination of
employment, nontransferability or difference in vesting periods.
(2) Mr. Kirby was granted options to purchase (i) 25,000 shares of Common Stock
at an exercise price of $6.00 per share, (ii) 50,000 shares of Common Stock
at an exercise price of $12.00 per share and (iii) 15,000 shares of Common
Stock at an exercise price of $24.00 per share.
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES TABLE
No stock options were exercised by the Named Executive Officers during the
year ended December 31, 1997. The following table sets forth certain information
regarding unexercised options held by each of the Named Executive Officers at
December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS HELD AT AT DECEMBER 31,
DECEMBER 31, 1997(#) 1997($)(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael J. Kirby........................... 25,000 65,000 125,000 --
Jeffry W. Weiner........................... 75,000 -- 375,000 --
Richard S. Worth........................... 257,750 -- 1,939,350 --
</TABLE>
- ---------------
(1) Represents the total gain that would be realized if all in-the-money options
held at December 31, 1997 were exercised, determined by multiplying the
number of shares underlying the options by the difference between the per
share option exercise price and the assumed initial public offering price of
$11.00 per share. An option is in-the-money if the fair market value of the
underlying shares exceeds the exercise price of the option.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement, as amended, with
Michael J. Kirby pursuant to which Mr. Kirby has agreed to serve as Chief
Executive Officer and President of the Company, commencing as
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<PAGE> 37
of August 11, 1997 and expiring on December 31, 2001. The agreement provides for
annual base compensation of $200,000. Mr. Kirby has been granted options to
purchase an aggregate of 90,000 shares of Common Stock. In addition, Mr. Kirby
may be paid a cash bonus the first year of his employment based on the extent to
which the Company's performance exceeds Mr. Kirby's budget as approved by the
Board. After the first year, the Board and Mr. Kirby will mutually agree upon a
reasonable performance bonus for Mr. Kirby, provided that if Mr. Kirby has met
or exceeded his budget in the first year, then the maximum bonus to be earned
during the second year of his employment shall be greater than $30,000. Mr.
Kirby shall receive a car allowance of $600 per month. Through the term of Mr.
Kirby's employment, the Company will also pay the premiums for a term life
insurance policy, for up to a $1,000,000 death benefit, the beneficiary of which
will be Mr. Kirby's estate or the beneficiary chosen by Mr. Kirby. The
employment agreement provides that Mr. Kirby will not compete or engage in a
business competitive with the current or anticipated business of the Company
during the term of the employment agreement and for a period of one year
thereafter. The agreement also provides that if Mr. Kirby is terminated without
cause (including as a result of liquidation, dissolution or a change of
control), Mr. Kirby will be entitled to receive severance equal to Mr. Kirby's
then-effective base salary for twelve months, and, in the event of a
liquidation, dissolution or a change of control, his stock options will
immediately vest.
The Company entered into an amended and restated employment agreement with
Jeffry W. Weiner on December 15, 1997 pursuant to which Mr. Weiner agreed to
continue to serve as Vice President and Chief Financial Officer of the Company
until December 31, 1999. The agreement may be terminated for any reason with or
without cause. The agreement provides for an annual base salary of $135,000,
which may be increased by the Board after the end of each fiscal year. Mr.
Weiner is eligible for an annual incentive cash bonus in an amount to be
determined by the Board of Directors. Mr. Weiner was granted options to purchase
75,000 shares of Common Stock at an exercise price of $6.00 per share, all of
which vested upon consummation of the First Closing of the October Private
Placement. The Company's agreement with Mr. Weiner provides that if Mr. Weiner
is terminated other than for cause or change of control of the Company, Mr.
Weiner will be entitled to receive severance equal to 12 months' base salary
(which cannot exceed $135,000). If Mr. Weiner is terminated upon a merger,
consolidation or reorganization by way of a cash buyout of at least 80% of the
Company's stockholders where the Company is not the surviving corporation or
upon the sale of all of the Company's assets, Mr. Weiner will be entitled to
receive a one-time severance payment of $130,000.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation limits the personal liability of a director to the
Company for monetary damages for breach of fiduciary duty of care as a director.
Liability is not eliminated for (i) any breach of the director's duty of loyalty
to the Company or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
unlawful payment of dividends or stock purchases or redemptions pursuant to
Section 174 of the Delaware General Corporation Law or (iv) any transaction from
which the director derived an improper personal benefit.
The Company has obtained directors and officers liability insurance. The
Company has also entered into indemnification agreements with its directors and
executive officers. The indemnification agreements provide that the directors
and executive officers will be indemnified to the full extent permitted by
applicable law against all expenses (including attorneys' fees), judgments,
fines and amounts reasonably paid or incurred by them for settlement in any
threatened, pending or completed action, suit or proceeding, including any
derivative action, on account of their services as a director or officer of the
Company or of any subsidiary of the Company or of any other company or
enterprise in which they are serving at the request of the Company. No
indemnification will be provided under the indemnification agreements, however,
to any director or executive officer in certain limited circumstances, including
on account of knowingly fraudulent, deliberately dishonest or willful
misconduct. To the extent the provisions of the indemnification agreements
exceed the indemnification permitted by applicable law, such provisions may be
unenforceable or may be limited to the extent they are found by a court of
competent jurisdiction to be contrary to public policy.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been
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<PAGE> 38
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
STOCK OPTION PLANS
1989 and 1995 Stock Option Plans. In 1989, the Company adopted a stock
option plan (the "1989 Plan") and in 1995 the Company adopted a second stock
option plan (the "1995 Plan," and, together with the 1989 Plan, the "Option
Plans") pursuant to which 625,000 shares of Common Stock and 500,000 shares of
Common Stock, respectively, have been reserved for issuance upon the exercise of
options designated as either (i) options intended to constitute incentive stock
options ("ISOs") under the Code, or (ii) nonqualified stock options ("NQSOs").
ISOs and NQSOs may be granted under the Option Plans to employees of the
Company. NQSOs may be granted to consultants, directors (whether or not they are
employees) and any other non-employee.
The purpose of each of the Option Plans is to encourage stock ownership by
directors, officers and employees of the Company and other persons instrumental
to the success of the Company. The Option Plans are intended to qualify under
Rule 16b-3 under the Exchange Act and will be administered by the Stock Option
Committee of the Board of Directors, which consists of Messrs. Wyant and
Shoemaker. The Committee, within the limitations of the Option Plans, determines
the persons to whom options will be granted, the number of shares to be covered
by each option, the option purchase price per share and the manner of exercise,
and the time, manner and form of payment upon exercise of an option.
ISOs granted under the Option Plans may not be granted at a price less than
the fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company and any related
corporation) may not exceed $100,000. NQSOs granted under the 1989 Plan may not
be granted at a price less than the lesser of (i) the book value of the shares
issuable upon exercise of the end of the fiscal year of the Company immediately
preceding the date of the grant or (ii) 50% of the fair market value of the
Common Stock on the date of such grant. NQSOs granted under the 1995 Plan may
not be granted at a price less than the par value of the Common Stock. The term
of options granted under the Option Plans may not exceed 10 years (five years in
the case of ISOs granted to persons holding 10% or more of the voting stock of
the Company). All options granted under the Option Plans are not transferable
during an optionee's lifetime but are transferable at death by will or by the
laws of descent and distribution. In general, upon termination of employment of
an optionee, all options granted to such persons which are not exercisable on
the date of such termination immediately terminate, and any options that are
exercisable terminate 90 days following termination of employment.
1994 Formula Stock Option Plan. Effective January 1994, the Company's
Board of Directors and stockholders adopted the 1994 Formula Stock Option Plan
(the "Formula Plan") to provide an incentive for non-employee directors.
Non-employee directors who hold more than 5% of the outstanding shares of stock
of the Company or who are in control of such a holder are ineligible to receive
stock option grants under the Formula Plan. Non-employee directors may also
irrevocably elect to be ineligible to receive stock option grants under the
Formula Plan. Options to purchase up to 75,000 shares of Common Stock may be
granted under the Formula Plan.
Under the Formula Plan, options are granted pursuant to a formula that
determines the timing, pricing and amount of the option awards using only
objective criteria, without discretion on the part of the administration of the
Formula Plan. The Formula Plan provides that its provisions may not be amended
more than once every six months, other than to comply with changes in the Code,
ERISA, or the rules thereunder. Also, any provision for forfeiture or
termination of an option award will be specific and objective, rather than
general, subjective or discretionary.
Beginning on January 1, 1994, and annually thereafter on each January 1,
options are granted under the Formula Plan, without approval or discretion on
the part of the Board, to non-employee directors as follows: Each non-employee
director, on the date such non-employee director is elected will receive options
to
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<PAGE> 39
purchase 1,500 shares of Common Stock, which vest and become exercisable in
three equal installments, one-third on the date of grant and one-third on each
of the first and second anniversaries of such grant. Each non-employee director
who has been a director of the Company for at least one year and has met certain
other requirements will receive on each January 1 options to purchase an
additional 1,500 shares of Common Stock, which will vest and become exercisable
in two equal installments, one-half on the date of grant and one-half on the
first anniversary of such grant.
The exercise price of such options will be the fair market value of the
shares of Common Stock on the grant date, and such options will be exercisable
subject to the directors' continued service as a director of the Company on such
date.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution, and during the lifetime of an optionee, the
option will be exercisable only by him or her. In the event that the optionee
ceases to be a director for any reason other than death, the option will be
exercisable only to the extent of the options, if any, that have vested as of
the date of such cessation; provided, that upon any such cessation of service,
the remaining options shall in any event terminate upon the expiration of the
original term of the option. Upon termination of service as a director by reason
of death, such director's options remain exercisable until the expiration of the
original term of the options. However, any such exercise is limited to the
options that have vested as of the date when such director ceased to be a
director whether by death or otherwise.
Options under the Formula Plan must be granted within ten years from the
effective date of the Formula Plan. The options granted under the Formula Plan
cannot be exercised more than ten years from the date of grant.
As of the date of this Prospectus, options to purchase 157,285, 282,500 and
49,000 shares of Common Stock are outstanding under the 1989 Plan, the 1995 Plan
and the Formula Plan, respectively. There are also options outstanding to
purchase 443,750 shares that were not issued pursuant to the Option Plans or the
Formula Plan. The Company has agreed not to issue any additional options under
the 1989 Plan and to issue options to purchase no more than up to an additional
200,000 shares of Common Stock under the 1995 Plan. The Company has agreed that
the exercise price of any options issued within three years under the 1995 Plan
after the date of this Prospectus will not be less than the greater of (i) the
initial public offering price set forth on the cover page of this Prospectus or
(ii) the market price per share of Common Stock on the date of grant. The
Company is seeking stockholder approval to amend the 1989 Plan to reduce the
number of shares covered by the 1989 Plan to the number of shares underlying
currently outstanding options under such plan (157,285 shares) and to prohibit
the granting of options at an exercise price below the market price per share of
Common Stock on the date of grant. The Company is also seeking stockholder
approval to amend the 1995 Plan to reduce the number of shares covered by the
1995 Plan to 482,500 shares and to prohibit the granting of options at an
exercise price below the market price per share of Common Stock on the date of
grant.
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<PAGE> 40
CERTAIN TRANSACTIONS
On August 13, 1997, the Company entered into separate consulting agreements
with each of Richard and Randye Worth, pursuant to which the Worths were
obligated to provide consulting services to the Company for one year (the
"Consulting Period") and will receive compensation from the Company for five
years. Each agreement provides that the Company may require the Worths' services
for up to 10 hours per week during the Consulting Period. The Company will pay
Mr. Worth and Ms. Worth $111,345 and $106,261 per year, respectively, for five
years, with $11,345 and $6,261, respectively, credited each year toward
repayment of monies owed to the Company of $56,725 and $31,305, respectively.
Each agreement also provides for insurance coverage commensurate with coverage
received by the Company's executive officers, an automobile allowance, and
reimbursement of all business expenses incurred while providing services to the
Company. Mr. Worth will also receive a non-accountable office expense allowance
of $70,000 for the three years, and Ms. Worth received a non-accountable
telephone allowance of $5,000 for one year. Each agreement also contains
confidentiality and non-competition provisions and early termination provisions.
Simultaneously with the First Closing of the October Private Placement, the
Company exchanged with Richard Worth the Freezer Pop Lines for the cancellation
of options to purchase 250,000 shares of Common Stock held by Richard Worth.
The Company's products are distributed by Shur-Good on an exclusive basis
in parts of Ohio, Kentucky and Indiana. Donald C. Schmitt, Chairman of the Board
of Directors of the Company, is the president and principal stockholder of
Shur-Good. During the year ended December 31, 1997, the Company sold
approximately $2.7 million of products to Shur-Good.
During the year ended December 31, 1997, the Company sold approximately
$272,000 of products to an affiliate of Consolidated Biscuit Co.
("Consolidated"). The Company also made purchases totaling approximately $78,000
from Consolidated. James Appold, a director of the Company until December 1997,
is the president and sole stockholder of Consolidated. The Company is obligated
to Consolidated in the amount of approximately $1,400,000 for discontinued
packaging materials. Of such amount, $350,000 will be paid out of a portion of
the net proceeds of this offering. The remaining balance will be paid in various
monthly increments through March 2000. Total payments to be made during 1998,
1999 and 2000 will be $620,000, $580,000 and $200,000, respectively. The
agreement stipulates that if the Company defaults on any payment and does not
cure the default within 90 days, an additional $200,000 will be added to the
unpaid balance and simple interest at an annual rate of 10% will begin to
accrue.
Edward R. Sousa, a director of the Company, as the Voting Trustee of the
Voting Trust containing all of the shares of Common Stock owned by Richard and
Randye Worth, former principal stockholders and officers of the Company,
currently controls an aggregate of 1,011,000 Trust Shares, or 30.8% of the
outstanding Common Stock (21.1% upon consummation of this offering). Pursuant to
the Voting Agreement with the Company, the Voting Trustee has agreed, at any
meeting of the stockholders of the Company, however called, or in any written
consent of the stockholders of the Company, to vote the Trust Shares, and any
other shares of Common Stock that may be deposited in such trust, in accordance
with (i) the specific direction of the Board of Directors of the Company or (ii)
the recommendation of the Board of Directors to the stockholders of the Company
generally; provided, however, that the Voting Trustee shall be entitled to vote
for the removal of a director of the Company for Cause (as defined in the Voting
Agreement) as permitted by the Delaware General Corporation Law despite a
contrary direction or recommendation of the Board of Directors.
As of August 1, 1998, Donald C. Schmitt and, collectively, his mother and
adult children exchanged $130,000 and $196,000, respectively, principal amount
of the 9% Notes for 16,250 and 24,500 shares, respectively, of Series A
Preferred Stock.
The Company believes all of the arrangements described above are on terms
at least as favorable as could be obtained from unaffiliated parties. The
Company's bylaws provide that all future transactions between the Company and
its officers, directors, principal stockholders or affiliates will be approved
in advance by a majority of the Board of Directors, including all of the
independent and disinterested directors, or, if required by law, a majority of
disinterested stockholders, and must be on terms no less favorable to the
Company than could be obtained in arm's length transactions from unaffiliated
third parties.
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<PAGE> 41
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock of the Company as of the date of this
Prospectus for (i) each person known by the Company to own beneficially more
than 5% of the outstanding Common Stock, (ii) each of the Named Executive
Officers of the Company, (iii) each of the Company's directors and (iv) all
directors and officers as a group.
<TABLE>
<CAPTION>
PERCENT OF CLASS(2)
SHARES ---------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) BEFORE OFFERING AFTER OFFERING
- --------------------------------------- --------------------- --------------- --------------
<S> <C> <C> <C>
Michael J. Kirby(3)........................... 45,000 * *
Jeffry W. Weiner(4)........................... 75,000 2.2 1.5
Donald C. Schmitt(5).......................... 103,750 3.1 2.1
Jay G. Shoemaker(6)........................... 500 * *
John H. Wyant(7).............................. 25,500 * *
Edward Sousa(8)............................... 1,011,000 30.8 21.1
Richard S. Worth(8)(9)(10).................... 768,250 21.7 15.2
1497 Rail Head Blvd., Unit 2
Naples, Florida 74110-8444
Randye Worth(8)(9)(11)........................ 561,750 16.8 11.6
3757 Ascot Bend Court
Bonita Springs, Florida 34134
Robert L. Moody, Jr.(12)...................... 203,419 6.2 4.3
2302 Post office, Suite 601
Galveston, Texas 77550
Swiss Bank Corp............................... 210,000 6.4 0(13)
Paradeplatz 6
CH-8010 Zurich, Switzerland
All directors and officers as a group (6
persons)(3)(4)(5)(6)(7)(8).................. 1,255,750 35.9 25.1
</TABLE>
- ---------------
* Less than one percent (1%) of outstanding Common Stock.
(1) Except as otherwise indicated, the address for each of the named
individuals is c/o The Delicious Frookie Company, Inc., 2070 Maple Street,
Des Plaines, Illinois 60018.
(2) Except as otherwise indicated, the stockholders listed in the table have
sole voting and investment power with respect to all shares of Common Stock
beneficially owned by them. Pursuant to the rules and regulations of the
Commission, shares of Common Stock that an individual or group has a right
to acquire within 60 days pursuant to the exercise of warrants or options
are deemed to be outstanding for the purposes of computing the percentage
ownership of such individual or group, but are not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person
shown in the table.
(3) Consists of (i) 25,000 shares of Common Stock issuable upon exercise of
options exercisable through August 11, 2008, at a price of $6.00 per share
and (ii) 20,000 shares of Common Stock issuable upon exercise of options
exercisable through August 11, 2008, at a price of $12.00 per share.
Excludes 45,000 shares of Common Stock issuable upon exercise of options
not exercisable currently or within 60 days of the date of this Prospectus,
at exercise prices ranging from $12.00 to $24.00 per share.
(4) Consists of (i) 50,000 shares of Common Stock issuable upon exercise of
options exercisable through March 18, 2001, at a price of $6.00 per share
and (ii) 25,000 shares of Common Stock issuable upon exercise of options
exercisable through March 14, 2003, at a price of $6.00 per share.
(5) Includes (i) 250 shares of Common Stock issuable upon exercise of options
exercisable through February 21, 1999, at a price of $1.60 per share; (ii)
25,000 shares of Common Stock issuable upon exercise of options exercisable
through November 8, 2004, at a price of $6.00 per share; (iii) 36,750
shares of Common Stock issuable upon exercise of options exercisable
through August 4, 2004 with respect to 6,500 shares, through December 31,
2004 with respect to 1,500 shares, through
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<PAGE> 42
December 31, 2005 with respect to 1,500 shares, through December 31, 2006
with respect to 1,500 shares, through December 17, 2007 with respect to
25,000 shares and through December 31, 2007 with respect to 750 shares, all
at a price of $6.00 per share; (iv) 13,000 shares of Common Stock issuable
upon exercise of warrants exercisable through April 27, 2001, at a price of
$4.00 per share, of which warrants to purchase 4,000 shares of Common Stock
are held by an individual retirement account ("IRA") for the benefit of Mr.
Schmitt, warrants to purchase 5,000 shares of Common Stock are held by Mr.
Schmitt together with his wife and 4,000 shares are held by an IRA for the
benefit of Mr. Schmitt's wife, of which shares Mr. Schmitt disclaims
beneficial ownership; and (v) 16,250 shares of Common Stock issuable upon
conversion of 16,250 shares of Series A Preferred Stock, which
automatically convert on August 1, 2001 if not earlier converted, of which
5,000 shares of Series A Preferred Stock are held by an IRA for the benefit
of Mr. Schmitt, 6,250 shares of Series A Preferred Stock are held by Mr.
Schmitt together with his wife and 5,000 shares of Series A Preferred Stock
are held by an IRA for the benefit of Mr. Schmitt's wife, of which shares
Mr. Schmitt disclaims beneficial ownership. Excludes (i) 750 shares of
Common Stock exercisable upon exercise of options not exercisable currently
or within 60 days of the date of this Prospectus; (ii) 40,750 shares of
Common Stock held by Donald Schmitt's adult children, of which shares Mr.
Schmitt disclaims beneficial ownership; (iii) 19,600 shares of Common Stock
issuable upon exercise of warrants exercisable through April 27, 2001, at a
price of $4.00 per share, held by Mr. Schmitt's adult children and his
mother, of which shares Mr. Schmitt disclaims beneficial ownership; and
(iv) 24,500 shares of Common Stock issuable upon conversion of 24,500
shares of Series A Preferred Stock, which automatically convert on August
1, 2001 if not earlier converted, held by Mr. Schmitt's adult children and
his mother, of which shares Mr. Schmitt disclaims beneficial ownership.
(6) Consists of 500 shares of Common Stock issuable upon exercise of options
exercisable through December 21, 2007, at a price of $6.00 per share.
Excludes 1,000 shares of Common Stock exercisable upon exercise of options
not exercisable currently or within 60 days of the date of this Prospectus
at a price of $6.00 per share.
(7) Consists of (i) 6,250 shares of Common Stock issuable upon exercise of
options exercisable through December 9, 2000, at a price of $2.80 per
share; (ii) 10,000 shares of Common Stock issuable upon exercise of options
exercisable through December 21, 1999, at a price of $.40 per share; and
(iii) 9,250 shares of Common Stock issuable upon exercise of options
exercisable through August 14, 2004 with respect to 6,500 shares, through
December 31, 2004 with respect to 1,500 shares, through December 31, 2005
with respect to 750 shares and through December 21, 2007 with respect to
500 shares, all at a price of $6.00 per share. Excludes 1,000 shares of
Common Stock issuable upon exercise of options not exercisable currently or
within 60 days of the date of this Prospectus at a price of $6.00 per
share.
(8) Simultaneously with the consummation of the First Closing of the October
Private Placement on December 22, 1997, (i) Richard and Randye Worth sold
an aggregate of 157,500 shares of Common Stock to private investors
(together with an aggregate of 34,500 shares of Common Stock sold by the
Worths on March 31, 1998 to private investors, the "Worth Shares") and
options to purchase an additional 500,000 shares of Common Stock owned by
them at a purchase price of $6.00 per share (the "Worth Options") at a
price of $6.00 per Worth Share and $.0002 per Worth Option, respectively,
and (ii) all of the remaining shares of Common Stock held by Richard and
Randye Worth, including the shares underlying the Worth Options (the "Trust
Shares") were deposited into the Voting Trust, and will be held in the
Voting Trust for a period of two years (but the terms of the Voting Trust
shall be extended to four years when the Worths have received at least
$4,000,000 of gross proceeds from the sale of their shares of Common Stock
(including the sale of the Worth Shares and Worth Options)). Pursuant to
the Voting Agreement with the Company, the Voting Trustee has agreed, at
any meeting of the stockholders of the Company, however called, or in any
written consent of the stockholders of the Company, to vote the Trust
Shares, and any other shares of Common Stock that may be deposited in such
trust, in accordance with the specific direction of the Board of Directors
of the Company or the recommendation of the Board of Directors to the
stockholders of the Company generally; provided, however, that the Voting
Trustee shall be entitled to vote for the removal of a director of the
Company
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<PAGE> 43
for Cause (as defined in the Voting Agreement) as permitted by the Delaware
General Corporation Law despite a contrary direction or recommendation of
the Board of Directors.
(9) Richard S. Worth and Randye Worth are former husband and wife. Each of them
disclaims any beneficial ownership of the other's Common Stock.
(10) Includes (i) 5,000 shares of Common Stock issuable upon exercise of
warrants exercisable through April 27, 1999, at a price of $4.00 per share;
(ii) 25,250 shares of Common Stock issuable upon exercise of options
exercisable through February 21, 1999 with respect to 250 shares and
through September 25, 1999 with respect to 25,000 shares, all at a price of
$1.60 per share; (iii) 55,000 shares of Common Stock issuable upon exercise
of options exercisable through October 31, 2000 with respect to 50,000
shares, and December 29, 2002 with respect to 5,000 shares, all at a price
of $2.80 per share; (iv) 10,000 shares of Common Stock issuable upon
exercise of options exercisable through December 2, 2002, at a price of
$2.50 per share; (v) 117,500 shares of Common Stock issuable upon exercise
of options exercisable through January 2, 2004, at a price of $3.20 per
share; and (vi) 50,000 shares of Common Stock issuable upon the exercise of
options exercisable through July 5, 2005, at a price of $6.00 per share.
(11) Includes (i) 18,750 shares of Common Stock issuable upon exercise of
options exercisable through October 31, 2000, at a price of $2.80 per
share; (ii) 2,500 shares of Common Stock issuable upon exercise of options
exercisable through December 29, 2002, at a price of $2.80 per share; (iii)
30,000 shares of Common Stock issuable upon exercise of options exercisable
through January 2, 2004, at a price of $3.20 per share; and (iv) 5,000
shares of Common Stock issuable upon exercise of warrants exercisable
through April 27, 1999, at a price of $4.00 per share.
(12) Includes 101,704 shares of Common Stock held by Moody Insurance Group,
Inc., a corporation controlled by Robert L. Moody, Jr.
(13) Assumes the sale by Swiss Bank Corp. of 210,000 shares of Common Stock in
the Concurrent Offering. See "Concurrent Offering."
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<PAGE> 44
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue up to 25,000,000 shares of Common Stock,
$.01 par value per share. There are currently outstanding 3,282,842 shares of
Common Stock and options, warrants and convertible securities outstanding to
purchase an additional 1,318,557 shares of Common Stock.
The holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of Preferred Stock which may from time to time be outstanding, holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor, and, upon the
liquidation, dissolution or winding up of the Company, are entitled to share
ratably in all assets remaining after payment of liabilities and payment of
accrued dividends and liquidation preference on the Preferred Stock, if any.
Holders of Common Stock have no preemptive rights and have no rights to convert
their Common Stock into any other securities.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of Preferred Stock from
time to time in one or more series. As of the date of this Prospectus, the
Company had 195,834 shares of Series A Preferred Stock issued and outstanding.
The Board of Directors is authorized to provide for the issuance of
Preferred Stock in one or more series, to establish from time to time the number
of shares to be included in each such series, to fix the rights, preferences and
privileges of the shares of each wholly unissued series and any qualifications,
limitations or restrictions thereon, and to increase or decrease the number of
shares of any such series (but not below the number of shares of such series
then outstanding), without any further vote or action by stockholders. The Board
of Directors may authorize and issue Preferred Stock with voting or conversion
rights that could adversely affect the voting power or other rights of the
holders of Common Stock, because the terms of the Preferred Stock that might be
issued could conceivably prohibit the Company's consummation of any merger,
reorganization, sale of substantially all its assets, liquidation or other
extraordinary corporate transaction absent approval of the outstanding shares of
Preferred Stock. Thus, the issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no current plan to issue any additional shares of Preferred Stock.
On February 11, 1998, the Board of Directors of the Company authorized the
issuance of up to 245,000 shares of Preferred Stock, $.01 par value per share,
designated the Series A Convertible Preferred Stock ("Series A Preferred
Stock"). Each share of Series A Preferred Stock will, (i) at the option of the
holder or (ii) automatically on the third anniversary of the date of issuance,
be converted into one share of Common Stock. Holders of shares of Series A
Preferred Stock are entitled to cumulative dividends of 10% per annum, payable
on January 31 and July 31 of each year. The Series A Preferred Stock is subject
to certain anti-dilution protections and has liquidation preference over the
Common Stock in the event of any liquidation or sale of the Company. Except as
otherwise provided by law, the holders of Series A Preferred Stock are not
entitled to vote.
CHANGE OF CONTROL PROVISIONS
Certain provisions of the Company's Certificate of Incorporation may have
the effect of preventing, discouraging or delaying a change in control of the
Company and may maintain the incumbency of the Board of Directors and
management. The authorization of undesignated Preferred Stock makes it possible
for the Board of Directors to issue Preferred Stock with voting or other rights
or preferences that could impede the success of any attempt to change control of
the Company.
Upon consummation of this offering, the Company will be subject to the
provisions of Section 203 regulating corporate takeovers. Section 203 prevents
an "interested stockholder" (defined in Section 203,
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<PAGE> 45
generally, as a person owning 15% or more of a corporation's outstanding voting
stock) from engaging in a "business combination" with a publicly-held Delaware
corporation for three years following the date such person became an interested
stockholder, unless: (i) before such person became an interested stockholder,
the board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (subject to certain exceptions); or (iii)
following the transaction in which such person became an interested stockholder,
the business combination is approved by the board of directors of the
corporation and authorized at a meeting of stockholders by the affirmative vote
of the holders of 66% of the outstanding voting stock of the corporation not
owned by the interested stockholder. A "business combination" includes mergers,
stock or asset sales and other transactions resulting in a financial benefit to
the interested stockholder. A Delaware corporation may "opt out" of Section 203
with an express provision in its original certificate of incorporation or an
express provision in its certificate of incorporation or bylaws resulting from a
stockholders' amendment approved by at least a majority of the outstanding
voting shares. The Company has not "opted out" of the provisions of Section 203.
The provisions of Section 203 could have the effect of delaying, deferring
or preventing a change in control of the Company.
TRANSFER AND WARRANT AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.
QUOTATION ON NASDAQ SMALLCAP MARKET
The Company has applied for, and it is anticipated that upon effectiveness
of the offering, the shares of Common Stock will be approved for, quotation on
the Nasdaq SmallCap Market under the symbol "DBSI."
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<PAGE> 46
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have outstanding
4,782,842 shares of Common Stock (4,992,842 if the Underwriters' over-allotment
is exercised in full), not including shares of Common Stock issuable upon
exercise of outstanding options and warrants and conversion of outstanding
convertible securities. Of those shares, the 1,500,000 shares of Common Stock
sold to the public in this offering (1,725,000 if the Underwriters'
over-allotment is exercised in full) may be freely traded without restriction or
further registration under the Securities Act, except for any shares that may be
held by an "affiliate" of the Company (as that term is defined in the rules and
regulations under the Securities Act) which may be sold only pursuant to a
registration under the Securities Act or pursuant to an exemption from
registration under the Securities Act, including the exemption provided by Rule
144 adopted under the Securities Act.
All of the 3,282,842 shares of Common Stock outstanding prior to this
offering are restricted securities as that term is defined in Rule 144
("Restricted Shares") and may not be sold unless such sale is registered under
the Securities Act or is made pursuant to an exemption from registration under
the Securities Act, including the exemption provided by Rule 144. In general,
under Rule 144, a stockholder (or stockholders whose shares are aggregated) who
has beneficially owned any restricted securities for at least one year
(including a stockholder who may be deemed to be an affiliate of the Company),
will be entitled to sell, within any three-month period, that number of shares
that does not exceed the greater of (i) 1% of the then-outstanding shares of
Common Stock or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the date on which notice of such sale
is given to the Commission, provided certain public information, manner of sale
and notice requirements are satisfied. A stockholder who is deemed to be an
affiliate of the Company, including members of the Board of Directors and
executive officers of the Company, will still need to comply with the
restrictions and requirements of Rule 144, other than the one-year holding
period requirement, in order to sell shares of Common Stock that are not
restricted securities, unless such sale is registered under the Securities Act
or another exemption from registration applies. A stockholder (or stockholders
whose shares are aggregated) who is deemed not to have been an affiliate of the
Company at any time during the 90 days preceding a sale by such stockholder, and
who has beneficially owned restricted securities for at least two years, will be
entitled to sell such restricted securities under Rule 144 without regard to the
volume limitations described above.
Of the Restricted Shares, 2,035,842 shares are currently eligible for sale
under Rule 144, subject however, to any applicable requirements of Rule 144.
1,042,000 of the Restricted Shares not currently available for resale under Rule
144 have been registered for resale in the Concurrent Offering under the
registration statement of which this Prospectus is a part. Each of the directors
and officers of the Company and beneficial owners of more than 2,500 shares of
Common Stock, other than Richard and Randye Worth, who hold in the aggregate
shares of Common Stock, has agreed not to offer, sell or otherwise
dispose of any shares of Common Stock without the prior consent of the
Representative until 12 months after the date of this Prospectus. Richard and
Randye Worth have agreed not to offer, sell or otherwise dispose of any shares
of Common Stock without the prior consent of the Representative for a period of
36 months after the date of this Prospectus, however, Richard and Randye Worth
will be able to sell up to 10% of their aggregate holdings between the first and
second anniversaries of the date of this Prospectus and up to an additional 20%
of their aggregate holding between the second and third anniversaries of the
date of this Prospectus without the prior written consent of the Representative.
Prior to this offering, there has been no public trading market for the
Common Stock, and no predictions can be made as to the effect, if any, that
future sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of the Common Stock in the public market could adversely affect the
then-prevailing market price.
44
<PAGE> 47
CONCURRENT OFFERING
The registration statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering of 1,042,000 shares of Common
Stock (the "Concurrent Offering"), including 500,000 shares of Common Stock
underlying the Worth Options, owned by certain selling securityholders (the
"Holders"). Such shares of Common Stock may be sold in the open market, in
privately negotiated transactions or otherwise, directly by the Holders. The
Company will not receive any proceeds from the sale of such shares. Expenses of
the Concurrent Offering, other than fees and expenses of counsel to the Holders
and selling commissions, will be paid by the Company. Sales of such shares of
Common Stock by the Holders or the potential of such sales may have an adverse
effect on the market price of the securities offered hereby. See "Risk
Factors -- Shares Eligible for Future Sale."
All of the Holders have agreed not to sell or dispose of any securities
issued by the Company, including Common Stock or securities convertible into or
exchangeable for or evidencing any right to purchase or subscribe for any shares
of Common Stock for a period of 12 months from the effective date of the
registration statement of which this Prospectus forms a part, without the prior
written consent of the Representative.
45
<PAGE> 48
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Gaines, Berland
Inc. is acting as the Representative, have severally agreed to purchase from the
Company the respective number of shares of Common Stock set forth opposite their
names:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Gaines, Berland Inc.........................................
---------
Total............................................. 1,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other considerations. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of Common Stock if any are purchased.
The Underwriters, through the Representative, have advised the Company that
they propose to offer the Common Stock initially at the public offering price
set forth on the cover page of this Prospectus; that the Underwriters may allow
to selected dealers a concession of $ per share; and that such dealers
may reallow a concession of $ per share to other dealers. After the
initial public offering of the Common Stock, the offering price and other
selling terms may be changed by the Underwriters.
The Company has granted to the Underwriters a 30-day over-allotment option
to purchase up to 225,000 additional shares of Common Stock from the Company,
exercisable at the public offering price less the underwriting discount. If the
Underwriters exercise such over-allotment option, then each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares of Common
Stock to be purchased by it as shown in the table above bears to the 1,500,000
shares of Common Stock offered by the Company hereby. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
Each of the directors and officers of the Company and beneficial owners of
more than 2,500 shares of Common Stock, other than Richard and Randye Worth, who
hold in the aggregate shares of Common Stock, has agreed not to offer,
sell or otherwise dispose of any shares of Common Stock without the prior
consent of the Representative until 12 months after the date of this Prospectus.
Richard and Randye Worth have agreed not to offer, sell or otherwise dispose of
any shares of Common Stock without the prior consent of the Representative for a
period of 36 months after the date of this Prospectus, however, Richard and
Randye Worth will be able to sell up to 10% of their aggregate holdings between
the first and second anniversaries of the date of this Prospectus and up to an
additional 20% of their aggregate holding between the second and third
anniversaries of the date of this Prospectus without the prior written consent
of the Representative.
In connection with the offering made hereby, the Company has agreed to sell
to the Representative, for nominal consideration, the Representative's Warrant
to purchase from the Company up to 150,000 shares of Common Stock. The
Representative's Warrants is exercisable, in whole or in part, at an exercise
price equal to 150% of the price to public at any time during the four-year
period commencing one year after the effective date of the registration
statement, of which this Prospectus is a part. The Representative's Warrant
contains provisions providing for the adjustment of the exercise price and the
type and number of securities issuable upon exercise of the Representative's
Warrant should one or more of specified events occur. The Representative's
Warrant grants to the holders thereof demand and piggyback registration rights
for the securities issuable upon the exercise of the Representative's Warrant.
The Representative's Warrant may not be sold, transferred, assigned, pledged or
hypothecated until one year after the effective date of the offering, except to
officers or partners of the Representative and other members of the underwriting
or selling group and officers
46
<PAGE> 49
or partners thereof in compliance with the applicable provisions of the
Corporate Financing Rule of the NASD.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities Act
or to contribute to payments that the Underwriters may be required to make in
respect thereof. The Company has agreed to pay the Representative a
non-accountable expense allowance equal to $495,000 (at an assumed initial
public offering price of $11.00 per share) ($569,250 if the Underwriters'
over-allotment option is exercised in full).
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price will be determined through negotiations
between the Company and the Representative. Among the factors to be considered
in determining the initial public offering price, in addition to prevailing
market conditions, will be certain financial information of the Company, the
history of, and the prospects for, the Company and the industry in which it
competes, an assessment of the Company's management, its past and present
operations, the prospects for, and timing of, future net sales of the Company,
the present state of the Company's development, and the above factors in
relation to market values and various valuation measures of other companies
engaged in activities similar to, the Company. The range of the initial public
offering price set forth on the cover page of this Prospectus is subject to
change as a result of market conditions and other factors. There can be no
assurance that an active trading market will develop for the Common Stock or
that the Common Stock will trade in the public market subsequent to the offering
at or above the initial public offering price.
In connection with the offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters may also create a short position for the account of the
Underwriters by selling more Common Stock in connection with the offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 225,000 shares of Common Stock, by
exercising the Underwriters' over-allotment option referred to above. In
addition, the Representative, on behalf of the Underwriters, may impose "penalty
bids" whereby it may reclaim from an Underwriter (or dealer participating in the
offering) for the account of the other Underwriters, the selling concession with
respect to the Common Stock that is distributed in the offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which may otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if any are undertaken, they may be discontinued at any time.
The Underwriters have advised the Company that they do not intend to sell
any of the Company's securities to any account over which any of the
Underwriters exercises discretionary authority.
LEGAL MATTERS
The legality of the securities offered hereby and certain other legal
matters will be passed upon for the Company by Olshan Grundman Frome &
Rosenzweig LLP, New York, New York. Graubard Mollen & Miller, New York, New
York, has served as counsel to the Underwriters in connection with this
offering.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997
and for each of the two years in the period ended December 31, 1997 and the
financial statements of Salerno as of December 31, 1997 and for the year then
ended included in this Prospectus have been so included in reliance on the
report of Altschuler, Melvoin & Glasser LLP, independent certified public
accountants, given on the authority of said firm as experts in auditing and
accounting.
47
<PAGE> 50
The financial statements of the Company for the year ended December 31,
1995 included in this Prospectus have been so included in reliance on the report
of Cooper, Selvin & Strassberg, LLP, independent certified public accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of Salerno as of December 31, 1996 and for the
period January 23, 1996 (Date of Inception) through December 31, 1996 included
in this Prospectus have been so included in reliance on the report of Friedman
Eisenstein Raemer and Schwartz, LLP ("FERS"), independent certified public
accountants, given on the authority of said firm as experts in auditing and
accounting. The Company has agreed to indemnify and hold FERS and each partner,
employee, agent and controlling person of FERS harmless against and from any and
all losses, claims, damages or liabilities to which FERS may become subject in
connection with its issuance of the consent letter relating to Salerno's 1996
financial statements under any of the federal securities laws; provided,
however, that the foregoing indemnity does not apply in the case of negligence,
dishonesty or fraudulent acts of FERS or the failure of FERS to follow generally
acceptable professional or regulatory standards.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus, which constitutes part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information, reference is made to the
Registration Statement and the exhibits and schedules filed as a part thereof,
copies of which may be obtained from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of the fees prescribed by the Commission as well as at
the following regional offices: Northeast Regional Office, 7 World Trade Center,
New York, New York 10048, and Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission also
maintains a home page on the World Wide Web that contains reports, proxy and
information statements and other information. The address of such site is
http://www.sec.gov. Copies of such Registration Statement may also be requested
from the Company, attention Mr. Jeffry W. Weiner, Chief Financial Officer, 2070
Maple Street, Des Plaines, Illinois 60018.
The Company intends to furnish its stockholders with annual reports
containing financial statements which will be audited by its independent public
accounting firm, and such other periodic reports as the Company may determine to
be appropriate or as may be required by law.
48
<PAGE> 51
DELICIOUS BRANDS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA STATEMENTS OF OPERATIONS
Introduction to Pro Forma Statements of Operations.......... F-2
Pro Forma Statement of Operations, Six Months Ended June 30,
1998...................................................... F-3
Pro Forma Statement of Operations, Year Ended December 31,
1997...................................................... F-4
Notes to the Pro Forma Statements of Operations............. F-5
DELICIOUS BRANDS, INC.
Report of Altschuler, Melvoin and Glasser LLP............... F-6
Report of Cooper, Selvin & Strassberg, LLP.................. F-7
Balance Sheets, December 31, 1996 and 1997 and June 30,
1998...................................................... F-8
Statement of Operations, Years Ended December 31, 1995, 1996
and 1997 and the Six Months Ended June 30, 1997 and
1998...................................................... F-9
Statement of Stockholders' Equity (Deficit), Years Ended
December 31, 1995, 1996 and 1997 and the Six Months Ended
June 30, 1998............................................. F-10
Statement of Cash Flows, Years Ended December 31, 1995, 1996
and 1997 and the Six Months Ended June 30, 1997 and
1998...................................................... F-11
Notes to the Financial Statements........................... F-13
SALERNO FOODS, L.L.C.
Report of Altschuler, Melvoin and Glasser LLP............... F-26
Balance Sheets, December 31, 1997 and March 31, 1998........ F-27
Statement of Operations, Year Ended December 31, 1997 and
the Three Months Ended March 31, 1997 and 1998............ F-28
Statement of Changes in Members' Equity (Deficit), Year
Ended December 31, 1997 and the Three Months Ended March
31, 1998.................................................. F-29
Statement of Cash Flows, Year Ended December 31, 1997 and
the Three Months Ended March 31, 1997 and 1998............ F-30
Notes to the Financial Statements........................... F-31
Report of Friedman Eisenstein Raemer and Schwartz, LLP...... F-37
Balance Sheet, December 31, 1996............................ F-38
Statement of Operations and Members' Equity, January 23,
1996 (Date of Inception) through December 31, 1996........ F-39
Statement of Cash Flows, January 23, 1996 (Date of
Inception) through December 31, 1996...................... F-40
Notes to Financial Statements............................... F-41
</TABLE>
F-1
<PAGE> 52
DELICIOUS BRANDS, INC.
INTRODUCTION TO PRO FORMA STATEMENTS OF OPERATIONS
(UNAUDITED)
The unaudited pro forma statements of operations of Delicious Brands, Inc.
(formerly The Delicious Frookie Company, Inc.) (the "Company") give effect to
the acquisition of Salerno Foods, L.L.C. ("Salerno") and the closing of a
$500,000 loan, bearing interest at a rate of 12% per annum, incurred in
connection with the above-mentioned acquisition as if the transactions had
occurred on January 1, 1997.
The historical results of operations presented for Salerno for 1998 is for
the period January 1, 1998 through April 2, 1998. On April 3, 1998 Salerno was
acquired by the Company and the historical results of operations for Salerno
subsequent to April 2, 1998 have been included in the historical results of
operations of the Company.
The unaudited pro forma financial data presented herein does not purport to
represent what the Company's results of operations would have been had the
transactions which are the subject of pro forma adjustments occurred on January
1, 1997, as assumed, and are not necessarily representative of the Company's
results of operations in any future period. The pro forma statements of
operations should be read in conjunction with the other financial statements and
notes thereto included elsewhere in this Prospectus.
F-2
<PAGE> 53
DELICIOUS BRANDS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
DELICIOUS SALERNO PRO FORMA
BRANDS, INC. FOODS, L.L.C. ADJUSTMENTS PRO FORMA
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Net Sales............................. $ 22,331,015 $9,105,348 $ 31,436,363
Cost of Sales......................... 17,446,954 6,289,135 23,736,089
------------ ---------- ------------
Gross Profit.......................... 4,884,061 2,816,213 7,700,274
------------ ---------- ------------
Operating Expenses:
Promotion and selling............... 3,322,686 2,526,315 5,849,001
General and administrative.......... 2,506,268 484,257 78,900(a) 3,069,425
------------ ---------- ---------- ------------
5,828,954 3,010,572 78,900 8,918,426
------------ ---------- ---------- ------------
Loss from Operations.................. (944,893) (194,359) (78,900) (1,218,152)
Other Income (Expense):
Interest expense.................... (514,514) (79,055) (119,500)(b) (713,069)
Other, net.......................... 37,805 (3,229) 34,576
------------ ---------- ---------- ------------
(476,709) (82,284) (119,500) (678,493)
------------ ---------- ---------- ------------
Net Loss.............................. $ (1,421,602) $ (276,643) $ (198,400) $ (1,896,645)
============ ========== ========== ============
Weighted Average Shares Outstanding... (d) 3,254,983
============
Net Loss per Share (Basic and
Diluted)............................ $ (0.58)
============
</TABLE>
See accompanying notes to pro forma statement of operations.
F-3
<PAGE> 54
DELICIOUS BRANDS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
DELICIOUS SALERNO PRO FORMA
BRANDS, INC. FOODS, L.L.C. ADJUSTMENTS PRO FORMA
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Net Sales.......................... $30,664,723 $39,147,701 $69,812,424
Cost Of Sales...................... 25,193,264 28,412,752 53,606,016
----------- ----------- -----------
Gross Profit....................... 5,471,459 10,734,949 16,206,408
----------- ----------- -----------
Operating Expenses:
Promotion and selling............ 3,932,089 9,221,584 $ (321,800)(c) 12,831,873
General and administrative....... 2,938,325 2,060,753 $ 315,700(a) 5,314,778
Restructuring charge............. 1,548,035 1,548,035
----------- ----------- ----------- -----------
8,418,449 11,282,337 (6,100) 19,694,686
----------- ----------- ----------- -----------
Loss from Operations............... (2,946,990) (547,388) 6,100 (3,488,278)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest expense................. (416,913) (321,035) (735,600)(b) (1,473,548)
Other, net....................... (34,223) 29,798 (4,425)
----------- ----------- ----------- -----------
(451,136) (291,237) (735,600) (1,477,973)
----------- ----------- ----------- -----------
Net Loss........................... $(3,398,126) $ (838,625) $ (729,500) $(4,966,251)
=========== =========== =========== ===========
Weighted Average Shares
Outstanding...................... (d) 2,933,623
Net Loss Per Share (Basic and
Diluted)......................... $ (1.69)
===========
</TABLE>
See accompanying notes to pro forma statement of operations.
F-4
<PAGE> 55
DELICIOUS BRANDS, INC.
NOTES TO THE PRO FORMA STATEMENTS OF OPERATIONS
(UNAUDITED)
(a) Adjustment to reflect the increase in amortization expense relating to
goodwill, recorded in purchase accounting related to the acquisition of Salerno,
as if the acquisition had occurred on January 1, 1997.
(b) Adjustment to reflect (i) the increase in interest expense related to a
$4,600,000 12% promissory note and a $100,000 12% promissory note issued in
connection with the acquisition of Salerno and the $500,000 12% promissory note
issued in connection with the loan incurred in connection with the acquisition
of Salerno and (ii) the amortization of $200,000 of related financing costs
(approximately $9,300 per month for 21.5 months). Such increase was computed as
if these promissory notes were outstanding from January 1, 1997.
(c) Adjustment to conform Salerno's accounting policy concerning slotting
fees to the Company's policy as if the acquisition had occurred on January 1,
1997.
(d) The weighted average shares outstanding used to calculate pro forma net
loss per share is based on the weighted average number of shares of common stock
outstanding for each of the periods presented plus the shares of common stock
issued in connection with the second closing of a private placement. Diluted
earnings per share and basic earnings per share are identical because of the
losses incurred during the periods presented. All options and warrants were
omitted from the computation of diluted earnings (loss) per share because the
options and warrants are antidilutive when net losses are reported.
F-5
<PAGE> 56
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Delicious Brands, Inc.
We have audited the accompanying balance sheets of DELICIOUS BRANDS, INC.
(FORMERLY THE DELICIOUS FROOKIE COMPANY, INC.) as of December 31, 1996 and 1997,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 aforementioned financial statements present fairly, in
all material respects, the financial position of Delicious Brands, Inc. as of
December 31, 1996 and 1997 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ ALTSCHULER, MELVOIN AND GLASSER
LLP
---------------------------------------
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
January 22, 1998, except for Notes 1, 4, 5, 12 and 13
as to which the date is August 1, 1998
F-6
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Delicious Brands, Inc.
We have audited the accompanying statements of operations, stockholders'
equity (deficit) and cash flows of DELICIOUS BRANDS, INC. (FORMERLY THE
DELICIOUS FROOKIE COMPANY, INC.) (the "Company") for the year ended December 31,
1995. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in
all material respects, the results of operations and cash flows of Delicious
Brands, Inc. for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
/s/ COOPER SELVIN & STRASSBERG, LLP
--------------------------------------
Cooper Selvin & Strassberg, LLP
Great Neck, New York
July 18, 1996
F-7
<PAGE> 58
DELICIOUS BRANDS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1996 1997 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash..................................................... $ 661,706 $ 808,349 $ 0
Accounts receivable including $191,234, $276,294 and
$505,297, respectively, due from related parties, net
of allowances of $572,872, $575,000 and $1,085,358,
respectively.......................................... 1,943,134 1,924,390 5,540,993
Inventory (Note 2)....................................... 768,647 152,399 2,447,617
Due from distributors (Note 2)........................... 187,829 172,176 59,798
Prepaid expenses and other current assets................ 382,577 141,925 577,432
----------- ------------ ------------
3,943,893 3,199,239 8,625,840
----------- ------------ ------------
Property and Equipment, Net of Accumulated Depreciation
(Notes 2 and 3).......................................... 339,600 177,852 1,018,689
----------- ------------ ------------
Other Assets:
Goodwill (Note 2)........................................ 2,860,878 2,698,174 8,852,124
Other.................................................... 447,883 411,340 931,223
----------- ------------ ------------
3,308,761 3,109,514 9,783,347
----------- ------------ ------------
$ 7,592,254 $ 6,486,605 $ 19,427,876
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Bank loan payable (Note 4)............................... $ 1,929,086 $ 1,498,382 $ 3,638,823
Notes payable (Note 13).................................. 0 0 5,200,000
Current portion of subordinated debt (Note 5)............ 0 0 393,332
Accounts payable and accrued expenses, including $36,018,
$62,530 and $1,718,149, respectively, due to related
parties............................................... 4,179,753 4,617,552 11,208,987
Due to distributors (Note 2)............................. 167,552 326,012 350,696
Current portion of long-term liabilities................. 118,533 1,120,544 932,343
----------- ------------ ------------
6,394,924 7,562,490 21,724,181
----------- ------------ ------------
Long-term Liabilities:
Subordinated debt (Note 5)............................... 2,110,000 1,960,000 1,566,668
Restructuring liability (Note 11)........................ 0 880,573 785,912
Packaging loss liability (Note 6)........................ 1,413,111 870,075 865,559
Other.................................................... 23,016 1,919 0
----------- ------------ ------------
3,546,127 3,712,567 3,218,139
----------- ------------ ------------
Commitments and Contingencies (Note 10)
Stockholders' Deficit (Notes 8 and 12):
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding.......... 0 0 0
Class A common stock, voting, $.01 par value, 25,000,000
shares authorized, 2,945,618, 3,191,767 and 3,331,767
shares issued in 1996, 1997 and 1998, respectively.... 29,456 31,918 33,318
Class B common stock, non-voting, 31,149 shares issued at
December 31, 1996 no shares authorized at December 31,
1997 and June 30, 1998................................ 312 0 0
Additional paid-in capital............................... 6,013,494 6,969,815 7,664,025
Accumulated deficit...................................... (8,231,010) (11,629,136) (13,050,738)
----------- ------------ ------------
(2,187,748) (4,627,403) (5,353,395)
Less, common stock in treasury at cost................... (161,049) (161,049) (161,049)
----------- ------------ ------------
Total stockholders' deficit...................... (2,348,797) (4,788,452) (5,514,444)
----------- ------------ ------------
$ 7,592,254 $ 6,486,605 $ 19,427,876
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-8
<PAGE> 59
DELICIOUS BRANDS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales (including
approximately $7,310,000,
$5,656,000, $5,325,000,
$2,666,000 and $3,045,000,
respectively, to related
parties)....................... $52,721,868 $36,847,650 $30,664,723 $15,322,392 $22,331,015
Cost of Sales (including
approximately $3,393,000,
$744,000, $395,000, $189,000
and $1,913,000, respectively,
from related parties).......... 42,252,593 29,837,075 25,193,264 12,108,605 17,446,954
----------- ----------- ----------- ----------- -----------
Gross Profit..................... 10,469,275 7,010,575 5,471,459 3,213,787 4,884,061
----------- ----------- ----------- ----------- -----------
Operating Expenses:
Promotion and selling.......... 12,380,999 3,171,857 3,932,089 1,578,419 3,322,686
General and administrative..... 3,944,852 4,331,375 2,938,325 1,475,028 2,506,268
Restructuring charge (Note
11)......................... 0 0 1,548,035 0 0
----------- ----------- ----------- ----------- -----------
16,325,851 7,503,232 8,418,449 3,053,447 5,828,954
----------- ----------- ----------- ----------- -----------
Income (Loss) from Operations.... (5,856,576) (492,657) (2,946,990) 160,340 (944,893)
----------- ----------- ----------- ----------- -----------
Other Income (Expense):
Interest expense............... (597,480) (408,873) (416,913) (186,594) (514,514)
Other, net..................... 161,598 3,396 (34,223) 0 37,805
----------- ----------- ----------- ----------- -----------
(435,882) (405,477) (451,136) (186,594) (476,709)
----------- ----------- ----------- ----------- -----------
Loss before Provision for Income
Taxes.......................... (6,292,458) (898,134) (3,398,126) (26,254) (1,421,602)
Provision for Income Taxes (Note
7)............................. 662,180 0 0 0 0
----------- ----------- ----------- ----------- -----------
Net Loss......................... $(6,954,638) $ (898,134) $(3,398,126) $ (26,254) $(1,421,602)
=========== =========== =========== =========== ===========
Earnings per Share (Note 2):
Basic:
Net loss per common share... $ (2.57) $ (.32) $ (1.16) $ (0.01) $ (.44)
=========== =========== =========== =========== ===========
Weighted average number of
common shares
outstanding............... 2,704,178 2,814,079 2,933,623 2,927,842 3,254,983
Diluted:
Net loss per common share... $ (2.57) $ (.32) $ (1.16) $ (0.01) $ (.44)
=========== =========== =========== =========== ===========
Weighted average number of
common shares
outstanding............... 2,704,178 2,814,079 2,933,623 2,927,842 3,254,983
</TABLE>
The accompanying notes are an integral part of this statement.
F-9
<PAGE> 60
DELICIOUS BRANDS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------
CLASS A CLASS B ADDITIONAL TREASURY STOCK
------------------- ---------------- PAID-IN ACCUMULATED ----------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT
--------- ------- ------- ------ ---------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995....... 2,721,091 $27,211 31,149 $ 312 $4,668,574 $ (378,238) (17,425) $ (60,250)
Purchase of Treasury Stock..... (31,500) (100,799)
Net Loss....................... (6,954,638)
--------- ------- ------- ----- ---------- ------------ -------- -----------
Balance, December 31, 1995..... 2,721,091 27,211 31,149 312 4,668,574 (7,332,876) (48,925) (161,049)
Conversion of 8% Subordinated
Debentures to Class A Common
Stock........................ 224,527 2,245 1,344,920
Net Loss....................... (898,134)
--------- ------- ------- ----- ---------- ------------ -------- -----------
Balance, December 31, 1996..... 2,945,618 29,456 31,149 312 6,013,494 (8,231,010) (48,925) (161,049)
Change in Authorized Capital
Structure.................... 31,149 312 (31,149) (312)
Proceeds from Issuance of
Common Stock, Net of $303,829
in Expenses.................. 210,000 2,100 954,071
Issuance of Stock for
Services..................... 5,000 50 2,250
Net Loss....................... (3,398,126)
--------- ------- ------- ----- ---------- ------------ -------- -----------
Balance, December 31, 1997..... 3,191,767 31,918 0 0 6,969,815 (11,629,136) (48,925) (161,049)
Proceeds from Issuance of
Common Stock, Net of $144,390
in Expenses (unaudited)...... 140,000 1,400 694,210
Net Loss (unaudited)........... (1,421,602)
--------- ------- ------- ----- ---------- ------------ -------- -----------
Balance, June 30, 1998
(unaudited).................. 3,331,767 $33,318 0 $ 0 $7,664,025 $(13,050,738) (48,925) $ (161,049)
========= ======= ======= ===== ========== ============ ======== ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balance, January 1, 1995....... $ 4,257,609
Purchase of Treasury Stock..... (100,799)
Net Loss....................... (6,954,638)
-----------
Balance, December 31, 1995..... (2,797,828)
Conversion of 8% Subordinated
Debentures to Class A Common
Stock........................ 1,347,165
Net Loss....................... (898,134)
-----------
Balance, December 31, 1996..... (2,348,797)
Change in Authorized Capital
Structure....................
Proceeds from Issuance of
Common Stock, Net of $303,829
in Expenses.................. 956,171
Issuance of Stock for
Services..................... 2,300
Net Loss....................... (3,398,126)
-----------
Balance, December 31, 1997..... (4,788,452)
Proceeds from Issuance of
Common Stock, Net of $144,390
in Expenses (unaudited)...... 695,610
Net Loss (unaudited)........... (1,421,602)
-----------
Balance, June 30, 1998
(unaudited).................. $(5,514,444)
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-10
<PAGE> 61
DELICIOUS BRANDS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss.................................... $(6,954,638) $ (898,134) $(3,398,126) $ (26,254) $(1,421,602)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 412,434 560,106 352,320 176,831 421,431
Provision for bad debts.................. 100,001 583,337 40,487 10,487 232,144
Loss on disposal of property and
equipment.............................. 0 0 50,899 0 0
Restructuring charge..................... 0 0 1,548,035 0 0
Issuance of common stock for services.... 0 0 2,300 0 0
Deferred income taxes.................... 678,800 0 0 0 0
Increase (Decrease) in cash (exclusive of
Salerno acquisition) from changes in:
Accounts receivable.................... 1,334,473 537,559 (76,217) (767,506) (131,271)
Inventory.............................. (1,094,349) 798,807 616,248 17,453 (745,498)
Due from distributors.................. 17,341 (42,654) 15,653 0 112,378
Prepaid expenses and other current
assets.............................. (315,769) 307,834 240,652 (63,453) (70,098)
Refundable income taxes................ 542,922 71,678 0 0 0
Other assets........................... 51,058 11,420 (90,020) (3,424) 59,190
Accounts payable and accrued
expenses............................ 2,485,484 (1,197,562) 437,799 255,262 1,929,772
Due to distributors.................... 166,802 (408,750) 158,460 175,349 24,684
Accrued restructuring liabilities...... 0 0 (399,128) 0 (114,661)
Other liabilities...................... 1,337,000 (222,778) 186,964 (8,703) (164,519)
----------- ----------- ----------- --------- -----------
Net cash provided by (used in) operating
activities............................... (1,238,441) 100,863 (313,674) (233,958) 131,950
----------- ----------- ----------- --------- -----------
Cash Flows from Investing Activities:
Payment for purchase of assets of Salerno
Foods, L.L.C. (net of cash acquired of
$12,564)................................. 0 0 0 0 (3,709,599)
Purchase of property and equipment.......... (247,192) (88,131) (47,730) (35,041) (63,826)
Purchase of product line.................... (255,678) 0 0 0 0
----------- ----------- ----------- --------- -----------
Net cash used in investing activities....... (502,870) (88,131) (47,730) (35,041) (3,773,425)
----------- ----------- ----------- --------- -----------
Cash Flows from Financing Activities:
Payments of long-term debt.................. (15,879) (16,953) (17,420) (8,594) (10,120)
Proceeds (Payments) of bank loan payable,
net...................................... 1,099,409 617,801 (430,704) (10,836) (1,162,470)
Checks issued in excess of funds on
deposit.................................. 0 0 0 0 195,121
Proceeds from issuance of notes payable..... 0 0 0 0 3,500,000
Proceeds from issuance of common stock...... 0 0 1,260,000 0 840,000
Purchase of treasury stock.................. (100,799) 0 0 0 0
Initial public offering costs............... 0 0 0 0 (385,015)
Payment of stock issuance costs............. 0 0 (303,829) 0 (144,390)
----------- ----------- ----------- --------- -----------
Net cash provided by (used in) financing
activities............................... 982,731 600,848 508,047 (19,430) 2,833,126
----------- ----------- ----------- --------- -----------
Increase (Decrease) in Cash................... (758,580) 613,580 146,643 (288,429) (808,349)
Cash, Beginning of Period..................... 806,706 48,126 661,706 661,706 808,349
----------- ----------- ----------- --------- -----------
Cash, End of Period........................... $ 48,126 $ 661,706 $ 808,349 $ 373,277 $ 0
=========== =========== =========== ========= ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Income taxes............................. $ 86,862 $ 0 $ 0 $ 0 $ 0
=========== =========== =========== ========= ===========
Interest................................. $ 464,738 $ 338,197 $ 420,296 $ 191,358 $ 285,986
=========== =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-11
<PAGE> 62
DELICIOUS BRANDS, INC.
STATEMENT OF CASH FLOWS -- (CONTINUED)
Supplemental Disclosure of Noncash Investing and Financing Activities:
On April 3, 1998, the Company acquired substantially all of the assets
and assumed certain liabilities of Salerno Foods, L.L.C. (Note 13).
In conjunction with the acquisition, liabilities were assumed as
follows:
<TABLE>
<S> <C>
Fair value of assets acquired, including goodwill and
transaction costs...................................... $12,771,886
Less: Seller notes........................................ (1,500,000)
Cash paid (net of $220,000 purchase price adjustment)..... (3,280,000)
Transaction costs......................................... (497,433)
-----------
Liabilities assumed....................................... $ 7,494,453
===========
</TABLE>
During 1998, the Company incurred $200,000 in financing fees which were
included in notes payable at June 30, 1998 (Note 13).
As of June 30, 1998, unpaid transaction costs of approximately $275,270
were included in accounts payable and accrued expenses.
During March and October of 1997, in satisfaction for payments of trade
accounts receivable, an aggregate $150,000 of subordinated debt was
redeemed and cancelled.
During 1996, in exchange for 8% Subordinated Promissory Notes of
$1,260,000 and related accrued interest of $87,165, the Company
issued 224,527 shares of Class A common stock.
The accompanying notes are an integral part of this statement.
F-12
<PAGE> 63
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Information as of June 30, 1998 and for the Six Months
Ended June 30, 1997 and 1998 is Unaudited)
NOTE 1 -- NATURE OF ACTIVITIES
Delicious Brands, Inc. (formerly The Delicious Frookie Company, Inc.) (the
"Company"), a Delaware corporation, was incorporated in 1989. In March 1994, the
Company acquired all of the stock of The Delicious Cookie Company, Inc.
("Delicious"), an Illinois corporation. Effective December 29, 1995, Delicious
was merged with and into the Company with the Company remaining as the surviving
entity.
The Company is a marketer of pre-packaged cookies, crackers and snacks
which are sold throughout the United States under the Company's own "Delicious"
and "Frookie" labels. The products are sold through a combination of independent
direct store delivery distributors, natural food distributors, brokers and
direct to retail.
The Company grants credit to its customers in the normal course of
business. Sales to one customer approximated 17%, 20% and 21% of total Company
sales for the years ended December 31, 1995, 1996, and 1997, respectively. No
other customer accounted for more than 10% of the Company's sales. Amounts due
from such customer represented approximately 18% and 20% of the Company's net
trade accounts receivable at December 31, 1996, and 1997, respectively.
Approximately 40%, 49% and 52% of the Company's inventory purchases for the
years ended December 31, 1995, 1996, and 1997, respectively, were from two major
vendors.
The Company has several customers and vendors who are also holders of the
Company's common stock or subordinated convertible notes. During the years ended
December 31, 1995, 1996 and 1997 and six months ended June 30, 1998,
respectively, net sales to these customers were approximately $7,310,000,
$5,656,000, $5,325,000 and $3,045,000 while purchases from such vendors were
approximately $3,393,000, $744,000, $395,000 and $1,913,000. Management believes
all of these transactions were on terms at least as favorable as could be
obtained from unaffiliated parties.
The Company has suffered recurring losses since 1994, and at December 31,
1997 has negative working capital and a stockholders' deficit. In addition, on
April 3, 1998 the Company incurred $4,700,000 of debt in connection with the
acquisition of substantially all of the assets of Salerno Foods, L.L.C. (Note
13) for which such debt is to mature on October 16, 1998. During 1997, the
Company initiated several actions to improve its financial condition and
operating performance including the restructuring of management (Note 11), a
private placement of the Company's common stock (Note 12) which provided working
capital and extended credit terms with its major vendors. In 1998, the Company
raised an additional $695,610 in a private placement of common stock, borrowed
$500,000 by issuing a short term 12% note and amended its revolving bank line of
credit agreement (See Notes 4 and 13). Additionally, the Company plans to (a)
complete an initial public offering of the Company's common stock, (b) exchange
the 9% Convertible Subordinated Notes (Note 5) for convertible preferred stock,
(c) increase sales prices and (d) implement cost reductions already negotiated
with the Company's vendors. Management believes that the condition of its trade
accounts receivable is satisfactory and that the Company either is current with
its obligations to vendors or has verbally obtained extended terms from vendors
where necessary.
There can be no assurance that the Company will be able to successfully
implement its plans for growth or, if such plans are implemented, that the
Company will achieve its goals. The Company's financial statements have been
presented on the basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result in the event
the Company's plans are not successful.
F-13
<PAGE> 64
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of June 30, 1998 and for the Six Months
Ended June 30, 1997 and 1998 is Unaudited)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited balance sheet as of June 30, 1998, and the unaudited
statements of operations and cash flows for the six months ended June 30, 1997
and 1998, and the unaudited statement of stockholders' equity (deficit) for the
six months ended June 30, 1998 include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the Company's financial position, results of operations and cash flows.
Operating results for the six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. The footnotes related to such periods are also unaudited.
REVENUE RECOGNITION -- The Company recognizes revenue from product sales
upon shipment to its customers. All discounts and allowances provided to
customers are recorded as allowances in determining net sales.
INVENTORY -- Inventory is stated at the lower of cost or market with cost
determined by the first-in, first-out (FIFO) method.
ADVERTISING AND PROMOTION -- All costs associated with advertising,
promotion, marketing and slotting are charged to operations as incurred. Such
expenses are included in promotion and selling in the statement of operations
and amounted to $8,348,409, $2,184,433 and $2,227,242 for the years ended
December 31, 1995, 1996 and 1997, respectively and $1,127,306 and $1,403,641 for
the six months ended June 30, 1997 and 1998.
AMOUNTS DUE TO/FROM DISTRIBUTORS -- The Company offers its distributors
promotional allowances which can be earned based on percentages of their
purchases from the Company. Amounts due from distributors represent overspent
allowances. These will either be earned by the distributors in the future or
paid to the Company. Amounts due to distributors represent promotional
allowances earned but unspent by the distributors.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost. For
financial reporting purposes, depreciation is provided using the straight-line
method over the estimated useful lives of the assets. For income tax reporting
purposes, depreciation is computed under accelerated methods, as permitted under
the Internal Revenue Code. When capital assets are sold, retired or otherwise
disposed of, the cost of the assets and the related accumulated depreciation are
removed from the respective accounts and any gains or losses are included in
operations. Major improvements are capitalized and repairs and maintenance are
charged to operations as incurred.
GOODWILL -- Goodwill represents the excess of cost over the fair value of
net assets of acquired businesses, and is being amortized on a straight-line
basis over a period of twenty years. Accumulated amortization amounted to
$650,270, $555,905 and $716,178 at December 31, 1996 and 1997 and June 30, 1998,
respectively.
DEFERRED FINANCING COSTS -- Costs incurred in connection with obtaining
financing are amortized over the life of the related debt.
IMPAIRMENT OF LONG-LIVED ASSETS -- In the event that facts and
circumstances indicate that the cost of any long-lived assets may be impaired,
an evaluation of recoverability would be performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with the asset
would be compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow value is required.
F-14
<PAGE> 65
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of June 30, 1998 and for the Six Months
Ended June 30, 1997 and 1998 is Unaudited)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INCOME TAXES -- Deferred income taxes are provided for temporary
differences between financial and income tax reporting.
STOCK OPTION PLANS -- The Company has adopted only the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and
continues to account for stock options in accordance with APB Opinion 25.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS -- Certain amounts reported in the 1995 and 1996
financial statements have been reclassified to conform with the 1997
presentation without affecting previously reported net losses.
PER SHARE INFORMATION -- On July 14, 1998, the Company effected a 1-for-2
reverse stock split and, accordingly, all share and per share amounts have been
retroactively restated.
EARNINGS PER SHARE -- The Company adopted Financial Standards Board No.
128, "Earnings per Share" (FAS 128), which requires retroactive application to
all periods presented. Under FAS 128, "Basic Earnings per Share" is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of shares of common stock outstanding during the period. "Diluted
Earnings per Share" reflects the potential dilution that could occur if warrants
and options or other contracts to issue common stock were exercised and resulted
in the issuance of additional common shares. For the years ended December 31,
1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998, diluted
earnings per share and basic earnings per share are identical because of the
losses incurred during those years. All options and warrants discussed in Notes
5 and 8 were omitted from the computation of diluted earnings (loss) per share
because the options and warrants are antidilutive when net losses are reported.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- Because the interest rate of the
revolving loan with U.S. Bancorp Republic Commercial Finance, Inc. (formerly
known as Republic Acceptance Corporation) ("U.S. Bancorp") adjusts with changes
in the market rate of interest, management believes the fair value is equivalent
to the carrying value. Management believes that the fair value of the 9%
subordinated debt (Note 5) is approximately $1,895,000, which is $65,000 less
than its carrying value. Management has estimated the fair value by discounting
expected cash flows using an interest rate (12%) that management believes is
approximately equal to the interest rate available for similar debt.
RECENT ACCOUNTING PRONOUNCEMENTS -- In June 1997, the Financial Accounting
Standards Board (FASB) issued Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (FAS 130). FAS 130 establishes standards for reporting and
display of comprehensive income and its components in the financial statements.
FAS 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The adoption of this standard is expected to
have no impact on the Company's results of operations, financial position or
cash flows.
In June 1997, the FASB issued Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (FAS 131).
FAS 131 establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued
F-15
<PAGE> 66
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of June 30, 1998 and for the Six Months
Ended June 30, 1997 and 1998 is Unaudited)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
to shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. FAS 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. Financial statement disclosure for prior periods are required to be
restated. The Company has not determined what effect, if any, the adoption of
FAS 131 will have on financial statement disclosures.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- ESTIMATED
1996 1997 JUNE 30, 1998 LIFE
-------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Office and warehouse equipment.... $361,537 $275,666 $1,165,483 3 to 10 years
Molds and dies.................... 230,666 232,074 232,074 3 years
Promotion and display equipment... 84,153 44,444 44,444 5 years
Vehicles.......................... -- -- 78,096 5 years
-------- -------- ----------
676,356 552,184 1,520,097
Less accumulated depreciation..... 336,756 374,332 501,408
-------- -------- ----------
$339,600 $177,852 $1,018,689
======== ======== ==========
</TABLE>
Depreciation expense amounted to $142,425, $152,378 and $158,578 for the
years ended December 31, 1995, 1996 and 1997, respectively, and $79,961 and
$127,076 for the six months ended June 30, 1997 and 1998, respectively.
NOTE 4 -- BANK LOAN PAYABLE
The Company is obligated to U.S. Bancorp under a Financing Agreement (the
"Agreement"), dated November 27, 1996 as last amended April 3, 1998, for a
revolving line of credit limited to the lesser of $7,000,000 or the sum of
eligible accounts receivable and eligible inventories as defined. Borrowings
under the Agreement are due upon demand and bear interest at 1.50% per annum
(prior to the last amendment, 3.25%) above the reference rate of interest
publicly announced by U.S. Bank National Association (8.25% at December 31,
1997). Borrowings under the Agreement, which expires on November 30, 1999, are
collateralized by substantially all of the assets of the Company. Availability
under the Agreement as of December 31, 1997 approximated $418,000. The Agreement
requires a minimum interest charge of $12,500 per month and the payment of a
prepayment penalty ranging from 2 to 3% of the loan facility in the event the
Agreement is terminated prior to its expiration.
The weighted average interest rates on the aforementioned borrowings were
10.3%, 10.5% and 11.7% for the years ended December 31, 1995, 1996, and, 1997
respectively.
NOTE 5 -- SUBORDINATED DEBT
The Company was obligated to noteholders of the Company's 9% Subordinated
Convertible Notes aggregating $2,110,000 at December 31, 1996 and $1,960,000 at
December 31, 1997 and June 30, 1998. The notes are due April 27, 1999 with
interest payable semiannually in January and July at 9% per annum. The notes are
convertible into the Company's common stock at the rate of $8 per share in the
event of a default by the Company. When the notes were originally issued on
April 28, 1994, a total of 145,188 common stock
F-16
<PAGE> 67
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of June 30, 1998 and for the Six Months
Ended June 30, 1997 and 1998 is Unaudited)
NOTE 5 -- SUBORDINATED DEBT -- (CONTINUED)
purchase warrants were issued. The warrants are exercisable for five years and
each warrant gives the holder the right to purchase one share of common stock at
an exercise price of $8 per share. At December 31, 1997 and June 30, 1998,
140,188 of these warrants were available to be exercised through April 27, 1999.
Effective August 1, 1998, $1,566,668 of the Company's 9% Subordinated
Convertible Notes was exchanged for 195,834 shares of Series A Preferred Stock
pursuant to an offer to exchange made by the Company. Upon liquidation,
dissolution or winding up, the holders of Series A Preferred Stock are entitled
to receive liquidation value and any declared but unpaid dividends prior and in
preference to any distribution to the holders of common stock, any other class
of Preferred Stock or any other class of the Company's capital stock, whether
now existing or hereafter created. Upon the exchange, the expiration date of
warrants to purchase 107,730 shares of common stock was extended to April 27,
2001 from April 27, 1999.
The holders of shares of Series A Preferred Stock are entitled to receive,
when and as declared by the Board of Directors out of the assets of the Company
legally available for payment, dividends at the rate per share of ten percent
(10%) per annum on the aggregated stated value ($8.00 per share) of the Series A
Preferred Stock.
Each holder of Series A Preferred Stock has the right to convert each of
such holder's shares of Series A Preferred Stock into one share of Common Stock
until July 31, 2001. However, on August 1, 2001, each share of Series A
Preferred Stock will automatically convert into one share of common stock.
On April 30, 1996, the Company defaulted on the repayment of 8%
Subordinated Promissory notes (the "Notes") aggregating $1,260,000. As a result
of such default, effective May 1, 1996, the interest rate on the Notes increased
to 16%. In July and August 1996, the holders of the Notes converted such Notes
plus accrued interest of $87,165 into a total of 224,527 shares of common stock.
NOTE 6 -- PACKAGING LOSS LIABILITY
Packaging for the Company's products is generally purchased directly by the
Company's suppliers based upon the Company's projected sales of a product. Upon
discontinuance of a product or in instances where sales do not meet
expectations, the Company may incur a liability to its suppliers for unused
packaging. At December 31, 1996 and 1997 and June 30, 1998, the Company has
accrued $1,514,222, $1,701,186 and $1,536,670, respectively, to provide for
future potential liability including certain amounts already agreed to with
certain suppliers (see below). Of this amount, management estimates that
$831,111 will be paid during 1998.
During 1997, the Company entered into an agreement to settle various
disputes with one of its suppliers, whose sole shareholder is a shareholder of
the Company and was a director of the Company until December 1997, that requires
the Company to pay the supplier $1,400,000 (included in the above mentioned
accrual), of which $300,000 was provided in 1997 and charged to cost of sales.
The agreement stipulates that if the Company defaults on any payment and does
not cure the default within 90 days, an additional $200,000 will be
F-17
<PAGE> 68
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of June 30, 1998 and for the Six Months
Ended June 30, 1997 and 1998 is Unaudited)
NOTE 6 -- PACKAGING LOSS LIABILITY -- (CONTINUED)
added to the unpaid balance and simple interest at an annual rate of 10% will
begin to accrue. Principal payments are scheduled as follows:
<TABLE>
<S> <C>
1998............................................. $ 620,000
1999............................................. 580,000
2000............................................. 200,000
----------
$1,400,000
==========
</TABLE>
NOTE 7 -- INCOME TAXES
The Company uses the asset and liability method for determining deferred
income taxes. The provision (benefit) for income taxes consists of the
following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- --------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current
Federal................ $ (14,130) $ 0 $ 0 $ 0 $ 0
State.................. (2,490) 0 0 0 0
----------- --------- ----------- ----------- -----------
(16,620) 0 0 0 0
----------- --------- ----------- ----------- -----------
Deferred (net)
Federal................ (1,963,600) (525,600) (1,223,800) 31,600 (408,000)
State.................. (346,500) (92,700) (216,000) 5,600 (72,000)
----------- --------- ----------- ----------- -----------
(2,310,100) (618,300) (1,439,800) 37,200 (480,000)
----------- --------- ----------- ----------- -----------
Increase (Decrease) in
valuation allowance.... 2,988,900 618,300 1,439,800 (37,200) 480,000
----------- --------- ----------- ----------- -----------
$ 662,180 $ 0 $ 0 $ 0 $ 0
=========== ========= =========== =========== ===========
</TABLE>
F-18
<PAGE> 69
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of June 30, 1998 and for the Six Months
Ended June 30, 1997 and 1998 is Unaudited)
NOTE 7 -- INCOME TAXES -- (CONTINUED)
A reconciliation of the provision for income taxes on income and the amount
computed by applying the federal income tax rate to net loss before income tax
expense is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- --------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed income tax
expense (benefit) at
federal statutory
rate................... $(2,139,000) $(305,000) $(1,155,000) $ (9,000) $ (483,000)
State income taxes....... (295,000) (35,000) (156,000) (1,000) (65,000)
Non-deductible
amortization of
intangible assets...... 55,000 55,000 55,000 28,000 28,000
Adjustment to net
operating loss
carryforward........... 52,280 (333,300) (183,800) 19,200 40,000
Increase (Decrease) in
valuation allowance.... 2,988,900 618,300 1,439,800 (37,200) 480,000
----------- --------- ----------- ----------- -----------
$ 662,180 $ 0 $ 0 $ 0 $ 0
=========== ========= =========== =========== ===========
</TABLE>
The Company's net deferred income tax asset consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- -----------
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Gross deferred tax assets:
Net operating loss carryforwards.................. $ 3,276,900 $ 4,155,000 $ 4,683,000
Allowance for doubtful accounts................... 217,700 342,000 282,000
Amortization of goodwill.......................... 85,300 79,000 66,000
Restructuring liability........................... 0 366,000 393,000
Other............................................. 52,400 136,000 138,000
----------- ----------- -----------
Total gross deferred tax assets................... 3,632,300 5,078,000 5,562,000
Less valuation allowance.......................... (3,607,200) (5,047,000) (5,527,000)
----------- ----------- -----------
Net deferred tax assets........................... 25,100 31,000 35,000
----------- ----------- -----------
Gross deferred tax liabilities:
Depreciation and amortization expense............. 25,100 31,000 35,000
----------- ----------- -----------
Net deferred taxes................................ $ 0 $ 0 $ 0
=========== =========== ===========
</TABLE>
Deferred income tax assets and liabilities result from the recognition of
temporary differences. Temporary differences are differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements that will result in differences between income for tax purposes and
income for financial statement purposes in future years.
At December 31, 1997, the Company has available for tax reporting purposes
approximately $10,394,000 of net operating loss carryforwards expiring in
varying amounts through 2012.
F-19
<PAGE> 70
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of June 30, 1998 and for the Six Months
Ended June 30, 1997 and 1998 is Unaudited)
NOTE 8 -- STOCK OPTIONS
Pursuant to the 1989 Stock Option Plan (the "1989 Plan") and the 1995 Stock
Option Plan (the "1995 Plan"), the Company is authorized to grant stock options
for a maximum of 1,125,000 shares, collectively, of the Company's common stock.
Incentive stock options and nonqualified stock options may be granted to
employees and employee directors and nonqualified stock options may be granted
to consultants, nonemployee directors and other nonemployees.
The exercise price of incentive stock options shall not be less than 100%
of the fair market value of the shares at the time of grant (110% in the cases
of persons owning 10% or more of the Company's voting stock) and the term of
incentive stock options shall not exceed ten years from the date of the grant.
Incentive stock options may be granted to an employee owning more than ten
percent of the combined voting powers of all classes of stock only if such
options are exercisable within five years from the date of grant. The exercise
price of nonqualified options under the 1989 Plan shall not be less than the
lesser of either the book value of the shares covered by the options or 50% of
the fair market value of those shares. The exercise price of nonqualified
options under the 1995 Plan shall not be less than par value.
Pursuant to the 1994 Formula Stock Option Plan (the "1994 Plan") the
Company is authorized to grant, to nonemployee directors who are not holders of
more than 5% of the outstanding shares of stock of the Company, nonqualified
stock options to purchase up to 75,000 shares of the Company's common stock.
Options granted pursuant to the plan shall be at the fair market value of the
stock and all options shall be for a term of ten years.
Pursuant to the 1994 Plan, each eligible director who becomes a director
will receive on the date of the eligible director's election options to purchase
a total of 1,500 shares that vest and become exercisable in three equal
installments, one-third on the date of grant and one-third on each of the first
and second anniversaries of such grant. Each eligible director on January 1 of
each year who has served as director for at least one full year and has met
other specified requirements will receive options to purchase a total of 1,500
shares that vest and become exercisable in two equal installments, one-half on
the date of grant and one-half on the first anniversary of such grant. The
exercise price of these options shall be the fair market value of the shares of
Common Stock on the date of grant. In addition, on August 15, 1994, eligible
directors were granted options for a total of 27,500 shares of common stock
representing options for 1994 as well as for past service. Options granted to
individuals who were directors on August 15, 1994 vested and became exercisable
in two equal installments on the date of grant and on the first anniversary of
the grant.
F-20
<PAGE> 71
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of June 30, 1998 and for the Six Months
Ended June 30, 1997 and 1998 is Unaudited)
NOTE 8 -- STOCK OPTIONS -- (CONTINUED)
Following is a table indicating the activity during the years 1995, 1996,
and 1997, and the six months ended June 30, 1998, for such plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding at January 1, 1995................. 188,885 $ 3.40
======
Granted during year.................................. 398,500 6.00
Exercised during year................................ 0
Forfeited............................................ (52,850) (5.84)
---------
Options outstanding at December 31, 1995............... 534,535 $ 5.10
======
Granted during year.................................. 85,500 6.00
Exercised during year................................ 0
Forfeited............................................ (5,250) (5.24)
---------
Options outstanding at December 31, 1996............... 614,785 $ 5.22
======
Granted during year.................................. 150,000 9.80
Exercised during year................................ 0
Forfeited............................................ (278,166) (6.00)
---------
Options outstanding at December 31, 1997............... 486,619 $ 6.18
======
Granted during six months............................ 4,500 6.00
Exercised during six months.......................... 0
Forfeited............................................ (2,334) (6.00)
=========
Options outstanding at June 30, 1998 (unaudited)....... 488,785 $ 6.20
========= ======
</TABLE>
The following table summarizes information about outstanding and
exercisable stock options as of:
DECEMBER 31, 1997
- --------------------
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (MONTHS) PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.40 to $1.60 57,105 19 $ 1.38 57,105 $1.38
$2.80 to $3.20 82,450 36 $ 2.80 82,450 $2.80
$6.00 264,334 95 $ 6.00 256,833 $6.00
$8.96 17,730 22 $ 8.96 17,730 $8.96
$12.00 50,000 127 $12.00 -- $ --
$24.00 15,000 127 $24.00 -- $ --
</TABLE>
F-21
<PAGE> 72
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of June 30, 1998 and for the Six Months
Ended June 30, 1997 and 1998 is Unaudited)
NOTE 8 -- STOCK OPTIONS -- (CONTINUED)
JUNE 30, 1998 (UNAUDITED)
- --------------
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (MONTHS) PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.40 to $1.60 57,105 13 $ 1.38 57,105 $1.38
$2.80 to $3.20 82,450 30 $ 2.80 82,450 $2.80
$6.00 266,500 90 $ 6.00 257,499 $6.00
$8.96 17,730 16 $ 8.96 17,730 $8.96
$12.00 50,000 124 $12.00 -- --
$24.00 15,000 124 $24.00 -- --
</TABLE>
In addition to the stock options issued pursuant to the above plans, the
Company has granted options which are not covered by a formal plan for the
purchase of shares of its common stock. At December 31, 1997 and June 30, 1998
there were 443,750 of these options outstanding, all of which are exercisable,
with a weighted average contractual life of 48 and 42 months, respectively, and
a weighted average exercise price of $3.18.
As permitted under generally accepted accounting principles, grants under
the plans are accounted for following provisions of APB Opinion 25 and its
related interpretations. Accordingly, no compensation cost has been recognized
for grants made to date. Had compensation been determined based on the fair
value method prescribed in SFAS No. 123, the reported net loss for 1996 and 1997
would have been approximately $182,000 ($.06 per share) and $133,000 ($.04 per
share), respectively, greater than that which is presented in the statement of
operations. In determining the compensation based on the fair value method
prescribed by SFAS No. 123, the following assumptions were used:
<TABLE>
<S> <C>
Risk-free interest rate...................... 5.71%
Expected option life......................... 84 months
Expected volatility.......................... Not Applicable
Expected dividends........................... None
</TABLE>
Additionally, during 1998 the Company issued warrants to purchase 50,000
shares of the Company's common stock, at $11.00 per share. Such warrants, which
expire in April 2008, were issued in conjunction with the execution of a
manufacturing agreement with one of the Company's suppliers. The supplier's
principal stockholder is also a principal stockholder of American Pacific
Financial Corporation, and a principal member of Salerno Foods, L.L.C. -- See
Note 13. Management believes that the warrants had little to no value at the
date of issuance.
NOTE 9 -- EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) savings plan for the benefit of all eligible
employees, as defined. Participants may elect to contribute a percentage of
their salary to the plan. The Company may make matching and discretionary
contributions at its discretion, subject to limitations imposed by the plan. No
Company contributions were made in 1995, 1996 or 1997.
F-22
<PAGE> 73
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of June 30, 1998 and for the Six Months
Ended June 30, 1997 and 1998 is Unaudited)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company leases office and warehouse space under an operating lease
expiring in 2003. Minimum future rental payments under noncancellable operating
leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998......................................... $ 280,023
1999......................................... 453,276
2000......................................... 464,300
2001......................................... 473,680
2002......................................... 486,716
Thereafter................................... 205,290
----------
$2,363,284
==========
</TABLE>
Total rent expense for the years ended December 31, 1995, 1996, and 1997 was
$96,954, $93,307 and $91,656 and $60,962 and $226,359 for the six months ended
June 30, 1997 and 1998, respectively.
The Company is obligated under the terms of a consulting agreement which
expires August 31, 1999 to pay the consultant an annual fee of $72,000 in
monthly installments of $6,000. The payments are charged to expense each month
when paid.
An action was commenced against the Company and an unaffiliated third party
by a former distributor of the Company's products alleging a breach of contract.
The plaintiff seeks damages in the amount of approximately $2,500,000 and
punitive damages in the amount of $1,000,000. In 1998, this action was settled
for $65,000 in full satisfaction of the claim. Additionally, the Company is a
party to various other claims, legal actions and complaints arising in the
ordinary course of business. In the opinion of management, all such matters are
adequately covered by insurance, or, if not so covered, are without merit or are
of such kind, or involve such amounts, that unfavorable disposition would not
have a material effect on the Company's financial position, results of
operations or liquidity.
NOTE 11 -- RESTRUCTURING
Effective August 13, 1997, two Company executives/stockholders resigned and
entered into agreements to provide consulting services to the Company. The
agreements require the former executives to be available to provide consulting
services to the Company through August 1998 and include a clause restricting the
former executives from competing with the Company. The agreements cumulatively
provide for (a) consulting fees aggregating $200,000 per year for five years,
(b) automobile and office allowances aggregating $83,600 per year for three
years, (c) life and health insurance coverage for five years and (d) forgiveness
of debts aggregating $88,030. In addition, the Company exchanged its Cool Fruits
Fruit Juice Freezers product line and assigned the Company's license agreement
for Chiquita Tropical Freezers product line to one of the individuals for the
cancellation of options to purchase 250,000 shares of the Company's common
stock.
It is management's opinion that the Company will not utilize the services
of the former executives during the one-year consulting period and there is no
value to the non-compete clause. The cost of the benefits being paid to the
former executives was charged to expense in 1997 and accrued using a present
value method over the expected term of the agreements. For the year ended
December 31, 1997, the Company recognized $1,548,035 as a restructuring charge
and recognized $44,908 and $20,599 as related interest expense for the year
ended December 31, 1997 and the six months ended June 30, 1998, respectively. At
December 31, 1997,
F-23
<PAGE> 74
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of June 30, 1998 and for the Six Months
Ended June 30, 1997 and 1998 is Unaudited)
NOTE 11 -- RESTRUCTURING -- (CONTINUED)
and June 30, 1998, the balance sheet reflected a liability of $1,148,907 and
$1,034,246, respectively, of which $268,334 and $248,334, respectively, was
included in the current portion of long-term liabilities.
NOTE 12 -- COMMON STOCK
During 1997, and in anticipation of the proposed initial public offering,
the Company amended its articles of incorporation to (a) combine the two classes
of common stock into one class, (b) increase the number of authorized shares of
$.01 par value common stock to 25,000,000 shares, (c) authorize 1,000,000 shares
of $.01 par value preferred stock and (d) initiated a private placement to sell
a minimum 87,500 shares of common stock and a maximum 350,000 shares of common
stock at a price of $6 per share. On December 22, 1997, an initial closing of
this private placement took place whereby the Company sold 210,000 shares of
common stock and received proceeds of approximately $956,000 net of expenses of
approximately $304,000. On February 6, 1998, a second closing of this private
placement took place whereby the Company sold 140,000 shares of common stock and
received proceeds of approximately $696,000 net of expenses of approximately
$144,000.
Simultaneously with the initial closing of the private placement, the
former executives (Note 11) agreed to sell an aggregate of 192,000 shares of
common stock and options to purchase 500,000 shares of common stock owned by
them to a group of outside investors and deposit into a voting trust controlled
by a director of the Company all remaining shares of common stock owned by them
for a period of two years.
NOTE 13 -- ACQUISITION OF ASSETS OF SALERNO FOODS, L.L.C.
On April 3, 1998, the Company acquired substantially all of the assets of
Salerno Foods, L.L.C. ("Salerno") The purchase price consisted of (a) $3,500,000
in cash, (b) a $1,500,000 promissory note bearing interest at 12% per annum
("Salerno Promissory Note") secured by a second lien on substantially all of the
Company's assets and (c) the assumption of substantially all of the liabilities
of Salerno. Subsequent to closing, the purchase price was reduced by $220,000
for working capital adjustments. The Company assigned its obligations under the
Salerno Promissory Note to American Pacific Financial Corporation ("APFC") and
its principal stockholder, who is also a principal member of Salerno. In
connection therewith, the Company entered into a loan agreement with APFC
pursuant to which the Company borrowed $4,600,000 from APFC (the "APFC Loan")
consisting of $3,000,000 in cash used by the Company to fund a portion of the
cash purchase price for Salerno, $1,500,000 in the form of APFC assuming primary
liability under the Salerno Promissory Note and $100,000 as a fee for the APFC
Loan. The APFC Loan bears interest at 12% per annum through August 3, 1998 and
15% per annum thereafter. In addition, the Company issued APFC a 12% promissory
note in the amount of $100,000 as a fee for assuming the Salerno Promissory Note
and agreed to pay an additional $150,000 fee for extending the maturity date of
the loan. The Salerno Promissory Note and the APFC Loan each mature on the
earlier of (a) October 16, 1998 (as amended) or (b) consummation of an initial
public offering of common stock or other recapitalization from which the Company
receives gross proceeds of at least $7,000,000 or (c) a sale or other transfer
of all or substantially all of the Company's assets or equity interests. The
APFC Loan is secured by a third lien on substantially all of the Company's
assets. The Company expects to repay the APFC Loan with a portion of the net
proceeds of the proposed initial public offering.
In anticipation of the above-mentioned acquisition, the Company consummated
a loan whereby the Company borrowed $500,000 . Such indebtedness bears interest
at the rate of 12% per annum and matures on the earlier of (a) October 31, 1998
(as amended) or (b) consummation of an initial public offering of the Company's
common stock pursuant to which the Company receives gross proceeds of at least
$7 million. The loan is convertible into the Company's common stock at a rate of
$6 per share in the event of a default by the Company.
F-24
<PAGE> 75
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of June 30, 1998 and for the Six Months
Ended June 30, 1997 and 1998 is Unaudited)
NOTE 13 -- ACQUISITION OF ASSETS OF SALERNO FOODS, L.L.C. -- (CONTINUED)
The Salerno acquisition has been accounted for as a purchase. The total
purchase price and the fair value of liabilities assumed have been allocated to
the tangible and intangible assets of the Company based on their respective fair
values.
The following provides an allocation of the purchase price:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Purchase price, net of a purchase price adjustment of
$220,000.................................................. $ 4,780,000
Transaction costs........................................... 497,433
Liabilities assumed......................................... 7,494,453
-----------
Total consideration......................................... 12,771,886
Less fair value of assets acquired (including $12,564 of
cash)..................................................... 6,457,386
-----------
Goodwill.................................................... $ 6,314,500
===========
</TABLE>
Results of operations for Salerno from April 3, 1998 to June 30, 1998 have
been included in the accompanying statement of operations for the six months
ended June 30, 1998. The following unaudited pro forma information has been
prepared assuming the acquisition had taken place at January 1, 1997. The
unaudited pro forma information includes adjustments for interest expense that
would have been incurred to finance the purchase, additional depreciation of the
property and equipment acquired, amortization of the goodwill arising from the
acquisition and the result of conforming Salerno's accounting policy for
slotting fees to the Company's policy. The unaudited pro forma results of
operations are not necessarily indicative of the results that would have been
had the Salerno acquisition been effected on the assumed date.
<TABLE>
<CAPTION>
UNAUDITED FOR THE
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1997 1998
----------- -----------
<S> <C> <C>
Net sales................................................. $34,413,364 $31,436,363
Loss before income taxes.................................. $ (802,123) $(1,896,645)
Net loss.................................................. $ (802,123) $(1,896,645)
Net loss per share:
Basic................................................... $ (0.27) $ (0.58)
Diluted................................................. $ (0.27) $ (0.58)
</TABLE>
F-25
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
To the Members of
Salerno Foods, L.L.C.
We have audited the accompanying balance sheet of SALERNO FOODS, L.L.C. as
of December 31, 1997, and the related statements of operations, changes in
members' equity (deficit) and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides 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 Salerno Foods, L.L.C. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
As described in Note 1 to the financial statements, on April 3, 1998,
substantially all of the Company's assets were sold.
/s/ ALTSCHULER, MELVOIN AND GLASSER
LLP
----------------------------------------
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
March 24, 1998, except for the
third paragraph of Note 1,
as to which the date is April 3, 1998
F-26
<PAGE> 77
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 5,239 $ 12,543
Accounts receivable, net of allowances of $330,424 and
$611,356, respectively................................. 2,847,757 3,198,536
Inventory (Note 2)........................................ 2,167,950 1,685,237
Prepaid expenses and other current assets................. 84,565 337,484
---------- ----------
5,105,511 5,233,800
---------- ----------
Property and Equipment, Net of Accumulated Depreciation and
Amortization (Notes 2 and 3).............................. 967,840 904,086
---------- ----------
Other Assets:
Intangible assets, net of accumulated amortization (Notes
2 and 4)............................................... 233,212 308,499
Other..................................................... 118,265 123,265
---------- ----------
351,477 431,764
---------- ----------
$6,424,828 $6,569,650
========== ==========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current Liabilities:
Borrowings under revolving bank line of credit (Note 5)... $2,537,269 $3,302,911
Accounts payable.......................................... 3,225,304 2,921,878
Accrued expenses.......................................... 582,212 493,775
Accrued royalties (Note 4)................................ 160,331 203,115
---------- ----------
6,505,116 6,921,679
---------- ----------
Commitments and Contingencies (Note 8)
Members' Equity (Deficit) (Note 9).......................... (80,288) (352,029)
---------- ----------
$6,424,828 $6,569,650
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-27
<PAGE> 78
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------------
1997 1997 1998
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Net Sales............................................. $39,147,701 $9,539,602 $8,908,462
Cost of Sales......................................... 28,412,752 6,684,707 6,153,872
----------- ---------- ----------
Gross Profit.......................................... 10,734,949 2,854,895 2,754,611
----------- ---------- ----------
Operating Expenses:
Selling............................................. 9,221,584 2,522,223 2,462,268
General and administrative.......................... 2,060,753 487,050 469,880
----------- ---------- ----------
11,282,337 3,009,273 2,932,148
----------- ---------- ----------
(Loss) from Operations................................ (547,388) (154,378) (177,537)
----------- ---------- ----------
Other Income (Expense):
Interest expense.................................... (321,035) (71,688) (79,055)
Other............................................... 29,798 12,763 (15,149)
----------- ---------- ----------
(291,237) (58,925) (94,685)
----------- ---------- ----------
Net (Loss)............................................ $ (838,625) $ (213,303) $ (271,741)
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-28
<PAGE> 79
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENT OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED A PREFERRED B COMMON
------------------- ------------------- -------------------
UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT TOTAL
------- --------- ------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997........... 401,477 $ 394,194 371,023 $ 364,143 332,000 $ 0 $ 758,337
Issuance of Units in Satisfaction
of the Preferred Priority
Return........................... 29,703 27,483
Net Loss........................... (423,994) (391,685) (22,946) (838,625)
------- --------- ------- --------- ------- --------- ---------
Balance, December 31, 1997......... 431,180 (29,800) 398,506 (27,542) 332,000 (22,946) (80,288)
Issuance of Units in Satisfaction
of the Preferred Priority
Return........................... 7,535 6,771
Net Loss (unaudited)............... (101,332) (93,669) (76,740) (271,741)
------- --------- ------- --------- ------- --------- ---------
Balance, March 31, 1998
(unaudited)...................... 438,715 $(131,132) 405,277 $(121,211) 332,000 $ (99,886) $(352,029)
======= ========= ======= ========= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-29
<PAGE> 80
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net (Loss)............................................ $(838,625) $(213,303) $(271,741)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization...................... 280,966 52,740 83,117
Increase (decrease) in cash from changes in:
Accounts receivable.............................. 322,289 (888,351) (350,779)
Inventory........................................ 381,116 590,849 482,713
Prepaid expenses and other current assets........ 282,962 (75,780) (252,919)
Other assets..................................... (28,273) (34,331) (5,000)
Accounts payable................................. (118,013) 303,791 (303,426)
Accrued expenses................................. (160,446) (130,357) (88,437)
--------- --------- ---------
Net cash provided by (used in) operating activities... 121,976 (394,742) (706,472)
--------- --------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment................... (198,960) (68,623) (4,986)
Payment of additional purchase price (Note 4)......... (165,981) (39,745) (46,880)
--------- --------- ---------
Net cash used in investing activities................. (364,941) (108,368) (51,866)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from revolving bank line of credit, net...... 70,077 413,953 765,642
Redemption of membership units........................ (5,002) (5,002) 0
--------- --------- ---------
Net cash provided by financing activities............. 70,077 408,951 765,642
--------- --------- ---------
Net Increase (Decrease) in Cash......................... (177,890) (94,159) 7,304
Cash, Beginning of Period............................... 183,129 183,129 5,239
--------- --------- ---------
Cash, End of Period..................................... $ 5,239 $ 88,970 $ 12,543
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest................ $ 324,370 $ 71,688 $ 79,055
========= ========= =========
Supplemental Schedule of Noncash Investing and Financing
Activities:
Increase in additional purchase price (see Note 4) for
accrued and unpaid royalties at December 31, 1997
of $143,400 and customer chargebacks of $125,575,
which reduced such payments
</TABLE>
The accompanying notes are an integral part of this statement.
F-30
<PAGE> 81
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(Information as of March 31, 1998 and for the Three Months
ended March 31, 1997 and 1998 is Unaudited)
NOTE 1 -- NATURE OF ACTIVITIES
Salerno Foods, L.L.C. (the "Company") markets and distributes cookies and
related products, primarily using the Salerno and Mama's brand names, to
distributors and retailers located throughout the United States.
The Company began operations on January 23, 1996 by acquiring certain
regional brands (see Note 4), leasing a facility, establishing relationships
with co-packers to manufacturer products and recruiting staff for sales,
marketing, finance and distribution. The Company is a limited liability company
(L.L.C.) under the Delaware Limited Liability Company Act. The term of the
Company shall continue with perpetuity, unless the Company is earlier dissolved.
On April 3, 1998, substantially all of the assets of the Company were sold
to The Delicious Frookie Company, Inc. in exchange for $3,500,000 in cash, a
$1,500,000 promissory note and the assumption of substantially all of the
Company's liabilities. The Delicious Frookie Company, Inc. assigned its primary
obligations under the promissory note to American Pacific Financial Corporation.
A stockholder of American Pacific Financial Corporation is also a member of the
Company. The purchase price is subject to adjustments as outlined in the
purchase agreement. Simultaneous with the sale, The Delicious Frookie Company,
Inc. paid in full the Company's borrowings under the revolving line of credit
(see Note 5). The Company is in the process of winding down its affairs and has
distributed its available cash to its members. A final distribution will be made
at such time as the managing members determine that all affairs of the Company
have been completed.
The Company grants credit to its customers in the ordinary course of
business. Sales to one customer approximated 12% of total Company sales for the
year ended December 31, 1997. No other customer accounted for more than 10% of
the Company's sales. Amounts due from such customer represented approximately
14% of the Company's net trade accounts receivable at December 31, 1997.
Approximately 74% of the Company's inventory purchases for the year ended
December 31, 1997 were from two major vendors, one of which is related to the
Company (see Note 7).
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
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.
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited balance sheet as of March 31, 1998, and the unaudited
statements of operations and cash flows for the three months ended March 31,
1997 and 1998, and the unaudited statement of members' equity deficit for the
three months ended March 31, 1998 include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the Company's financial position, results of operations and cash flows.
The footnotes related to such periods are also unaudited.
A summary of significant accounting policies followed by the Company is as
follows:
REVENUE RECOGNITION -- The Company recognizes revenue from product
sales upon shipment to its customers. All discounts and allowances provided
to customers are recorded as allowances in determining net sales.
F-31
<PAGE> 82
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of March 31, 1998 and for the Three Months
ended March 31, 1997 and 1998 is Unaudited)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INVENTORY -- Inventory is valued at the lower of cost, determined on
the first-in, first-out (FIFO) method, or market.
ADVERTISING COSTS -- The Company expenses advertising costs as
incurred or when the related campaign commences. Slotting fees paid or
credited to grocery store chains for shelf space allocations are amortized
over the shorter of expected utility or one year. At December 31, 1997 all
slotting fees were fully amortized. Such expenses are included in selling
in the statement of operations and amounted to $2,317,160 for the year
ended December 31, 1997 and $703,452 for the three months ended March 31,
1998.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost
less accumulated depreciation and amortization. Depreciation is provided on
the straight-line method over estimated useful lives ranging from three to
ten years. Leasehold improvements are amortized over the lesser of the
useful life of the asset or the term of the lease.
When capital assets are sold, retired or otherwise disposed of, the
cost of the assets and the related accumulated depreciation are removed
from the respective accounts and gains or losses are included in
operations. Major improvements are capitalized and repairs and maintenance
are charged to operations as incurred.
INTANGIBLE ASSETS -- Intangible assets resulting from the business
acquisition are amortized using the straight-line method over various lives
as described in Note 4.
IMPAIRMENT OF LONG-LIVED ASSETS -- In the event that facts and
circumstances indicate that the cost of any long-lived assets may be
impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value
is required.
INCOME TAXES -- As a limited liability company the Company is not
subject to federal income taxes, and its income or loss is allocated to and
reported in the tax returns of its members. Accordingly, no liability or
provision for federal income taxes and deferred income taxes attributable
to the Company's operations are included in the accompanying financial
statements; however, the Company's taxable income is subject to Illinois
replacement tax.
F-32
<PAGE> 83
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of March 31, 1998 and for the Three Months
ended March 31, 1997 and 1998 is Unaudited)
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998 LIFE
------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Office equipment...................... $ 541,020 $ 541,512 3 to 5 years
Warehouse equipment................... 695,587 700,082 10 years
Leasehold improvements................ 35,213 35,213 3 1/2 years
---------- ----------
1,271,820 1,276,807
Less accumulated depreciation and
amortization........................ (303,980) (372,721)
---------- ----------
$ 967,840 $ 904,086
========== ==========
</TABLE>
Depreciation and amortization expense related to these assets amounted to
$224,881 for the year ended December 31, 1997 and $40,864 and $68,741 for the
three months ended March 31, 1997 and 1998, respectively.
NOTE 4 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1998 AMORTIZATION
1997 (UNAUDITED) PERIOD
------------ ----------- ------------
<S> <C> <C> <C>
Acquisition costs...................... $111,009 $ 111,009 5 years
Organization costs..................... 50,361 50,361 5 years
Financing costs........................ 62,815 62,815 3 years
Goodwill............................... 113,941 203,605 15 years
-------- ---------
338,126 427,790
Less accumulated amortization.......... (104,914) (119,291)
-------- ---------
$233,212 $ 308,499
======== =========
</TABLE>
Amortization expense was $56,243 for the year ended December 31, 1997 and
$13,301 and $14,377 for the three months ended March 31, 1997 and 1998,
respectively.
On January 23, 1996, the Company purchased certain assets (principally,
Salerno and Mama's brand products and related formulations) and assumed certain
liabilities of the Salerno Biscuit Division of Sunshine Biscuits, Inc., a
manufacturer and distributor of nationally advertised brand cookies and related
products. The fair value of the net assets acquired exceeded the purchase price
of $4,430,390 by $785,456, which reduced the noncurrent assets acquired. The
purchase price is increased annually based on 1.5% of "Net Product Revenues"
through January 22, 1999, as defined in the purchase agreement. The present
value of these payments, as of the acquisition date, is reflected as additional
purchase price and the difference is recorded as interest expense. The
additional purchase price reflected through December 31, 1997 is $899,213,
including additional amounts recorded during 1997 of $434,956. Company
management estimates that the maximum additional purchase price for the period
January 1, 1998 through January 22, 1999 to be $550,000.
F-33
<PAGE> 84
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of March 31, 1998 and for the Three Months
ended March 31, 1997 and 1998 is Unaudited)
NOTE 5 -- BORROWINGS UNDER REVOLVING BANK LINE OF CREDIT
The Company is obligated to Bank One, Wisconsin under a Forbearance
Agreement and First Amendment to Loan and Security Agreement (the "Agreement"),
dated December 12, 1997, for a revolving line of credit limited to the lesser of
$4,500,000 or the sum of 85% of eligible accounts receivable, as defined, and
60% of eligible inventory, as defined or $2,250,000. Borrowings bear interest at
.75% above the bank's reference rate (9% at December 31, 1997). Borrowings under
the Agreement are collateralized by substantially all of the Company's assets.
The Agreement contains covenants which requires the achievement of specified net
income and limits capital expenditures and distributions to members.
During 1997, the Company was in violation of certain financial covenants.
The Agreement provided, among other things, for the lender to temporarily
forbear exercising their right to accelerate repayment of the loan until May 15,
1998, conditional upon the Company's compliance with the terms and conditions of
the Agreement and no additional events of default occurring. The Bank will
consider continuation of the financing beyond May 15, 1998 based on their
evaluation of financial information and projections to be submitted by the
Company's management.
The Company receives cash from its customers and issues checks to pay its
obligations in the ordinary course of business. Such receipts and disbursements
are cleared by Bank One, Wisconsin and charged against the revolving line of
credit. The Company has included in borrowings under revolving bank line of
credit at December 31, 1997 $127,917 of checks issued which have not cleared
Bank One, Wisconsin as of such date.
NOTE 6 -- EMPLOYEE BENEFIT PLANS
INCENTIVE SAVINGS PLAN -- The Company maintains a qualified 401(k) savings
plan for the benefit of all eligible employees, as defined. Participants may
elect to contribute a percentage of their salary to the plan. The Company may
make contributions at its discretion, subject to limitations imposed by the
plan. Company contributions were $22,962 for the year ended December 31, 1997.
PENSION AND WELFARE PLANS -- The Company's two collective bargaining
agreements require the Company to participate in two multi-employer,
union-administered, defined contribution health and welfare and pension plans
covering all union employees. Contributions to these plans by the Company were
approximately $189,000 for the year ended December 31, 1997.
NOTE 7 -- RELATED PARTY TRANSACTIONS
The Company is party to a Manufacturing Agreement with Pate's Bakery LLC
("Pate's"), a company that is related by common ownership. The Manufacturing
Agreement provides for Pate's right of first refusal to manufacture certain
products for the Company at prices which are established in the Manufacturing
Agreement. The Company purchased approximately $7,228,000 of inventory in 1997
from Pate's. Accounts payable to Pate's approximated $596,000 at December 31,
1997.
The Company also paid $75,090 in consulting fees to a company some of whose
owners are also members of the Company.
F-34
<PAGE> 85
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of March 31, 1998 and for the Three Months
ended March 31, 1997 and 1998 is Unaudited)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
The Company leases various warehouse and office facilities and vehicles
under agreements expiring in various periods through 2001. Under the terms of
some of the facility leases, the Company must provide for insurance,
maintenance, utilities and property taxes.
Future minimum rental commitments under these operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
<S> <C>
1998.............................................. $433,081
1999.............................................. 264,143
2000.............................................. 71,190
2001.............................................. 42,025
--------
$810,439
========
</TABLE>
Total rent expense charged to operations for 1997 amounted to $964,362.
As of December 31, 1997, the Company had 107 full-time employees, 26 of
which are represented by Teamster Local 734. The Company's collective bargaining
agreements with Teamster Local 734 expire on May 12, 2001. Management believes
relations with the Company's employees is good.
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. In the opinion of management, all
such matters are adequately covered by insurance, or, if not so covered, are
without merit or are of such kind, or involve such amounts, that unfavorable
disposition would not have a material effect on the financial position of the
Company.
NOTE 9 -- MEMBERS' EQUITY (DEFICIT)
A "Member" is any person, as defined, that holds an interest in the Company
represented by units and is admitted pursuant to the provisions of the Salerno
Foods, L.L.C. Operating Agreement (the "Operating Agreement"). The following is
a summary of the significant provisions of the Operating Agreement:
PREFERRED PRIORITY RETURN -- All Preferred Units rank senior to the Common
Units in that they are vested with the right to receive a Preferred Priority
Return ("Return"). This Return for any period, is an amount equal to 8% of the
average daily balance of the Preferred Member's Unrecovered Preferred Capital,
as defined in the Operating Agreement. The Return is in the form of a
distribution of additional Preferred Units, within 75 days after the last day of
each fiscal quarter, based on the Original Preferred Price per Unit. Preferred
Units have been issued in satisfaction of the Preferred Priority Return through
December 31, 1997.
PREFERRED UNIT REDEMPTION RIGHTS -- After the Earliest Preferred Redemption
Date, January 23, 2001, at the request of a Preferred Member, the Company shall
redeem not less than all the Member's Preferred Units at a price equal to the
Preferred Redemption Price, plus the Preferred Priority Return accrued and
unpaid thereon to the redemption date plus Common Units equal to the number of
Preferred Units being redeemed. On the Mandatory Preferred Redemption Date,
January 23, 2003, all Preferred Units then outstanding shall be automatically
redeemed at the price described above.
The Preferred Redemption Price plus the Preferred Priority Return accrued
and unpaid (the redemption amount), in the sole discretion of the Managing
Members, shall be paid in cash on the Preferred Redemption
F-35
<PAGE> 86
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(Information as of March 31, 1998 and for the Three Months
ended March 31, 1997 and 1998 is Unaudited)
NOTE 9 -- MEMBERS' EQUITY (DEFICIT) -- (CONTINUED)
date or on a payment schedule with at least one-third in cash, and the remainder
payable through a promissory note, bearing annual interest at 14%, over two
years.
Any Preferred Member may at any time prior to redemption convert all or any
number of the Preferred Units held into a number of Common Units computed by
multiplying the number of such Preferred Units to be converted by 1.892061 and
dividing the result by the Preferred Conversion Price then in effect.
After a conversion has been effected, the Company will deliver to the
converting Member payment equal to all accrued but unpaid Preferred Priority
Return for each Preferred Unit converted, unless the Company has previously
issued an optional Preferred Unit payment. No Preferred Units were converted
during the year ended December 31, 1997.
ANTI-DILUTION PROVISIONS -- In order to prevent dilution of the Preferred
Conversion Rights, the Preferred Conversion Price is subject to adjustment from
time to time. Certain events which may cause an adjustment includes the issuance
or sale of Common Units; the granting of rights or options to purchase Common
Units or securities that are convertible into Common Units; the subsequent
expiration of such rights and options; and subdivision of the outstanding Common
Units into a greater number of Units.
OTHER RIGHTS AND OBLIGATIONS OF MEMBERS -- No Preferred Member has priority
over any other Preferred Member and no Common Member has priority over any
Common Member. Any payment of a Preferred Priority Return and any return of
capital to the Preferred Member shall be solely from Company assets and the
Common Members shall not be personally liable for any such return except as
otherwise provided by law.
With certain exceptions, no Member shall have any obligation to restore any
portion of any capital account deficit or to contribute to the capital of the
Company; nor shall any Member have any personal liability for debts or other
obligations of the Company, including without limitation obligations for Federal
and State income taxes and any State replacement taxes.
Generally, no Member may sell or otherwise dispose of that Member's
interest in the Company, in whole or in part, to any person other than the
Company. In the event of death (or cessation of existence) of the Member, the
Company shall have the option and the right (but not any obligation) to
purchase, at any time within six months after the Company is notified, the
entire interest held by the Member at his or her death. The purchase price shall
be equal to the balance in the Member's capital account on the date of death,
adjusted to reflect the fair market value of the Company's assets on such date.
F-36
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
MEMBERS
SALERNO FOODS, L.L.C.
DES PLAINES, ILLINOIS
We have audited the accompanying balance sheet of SALERNO FOODS, L.L.C. as
of December 31, 1996, and the related statements of operations and members'
equity and cash flows for January 23, 1996 through December 31, 1996. 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 audit.
We conducted our audit 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 audit provides 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 Salerno Foods, L.L.C., as of
December 31, 1996, and the results of its operations and its cash flows for
January 23, 1996 through December 31, 1996 in conformity with generally accepted
accounting principles.
As more fully described in Note 10, subsequent to the issuance of the 1996
financial statements and our report thereon dated March 5, 1997, the Company's
assets were acquired by The Delicious Frookie Company, Inc. The financial
statements have been revised to correct an overstatement of inventory and gross
profit, subsequently discovered by management, to reflect changes in common and
preferred units deemed to have been issued and to reclassify certain balance
sheet amounts, costs and expenses. Our opinion, as expressed in the third
paragraph above, remains unchanged.
/s/ FRIEDMAN EISENSTEIN RAEMER AND SCHWARTZ, LLP
FRIEDMAN EISENSTEIN RAEMER AND SCHWARTZ, LLP
Chicago, Illinois
March 5, 1997, except for Notes 9 and 10, as to which
the date is April 3, 1998
F-37
<PAGE> 88
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash...................................................... $ 183,129
Receivables, net of allowance for uncollectible accounts
of $202,000............................................ 3,295,622
Inventory................................................. 2,549,066
Prepaid expenses.......................................... 367,526
----------
Total Current Assets................................... 6,395,343
----------
Property and Equipment:
Leasehold improvements.................................... 35,213
Office and data processing equipment and software......... 280,356
Warehouse equipment....................................... 459,326
----------
774,895
Less: Accumulated depreciation and amortization........... 79,617
----------
Net Property and Equipment............................. 695,278
----------
Other Assets:
Intangible assets, net of amortization.................... 152,824
Deposits.................................................. 89,992
----------
Total Other Assets..................................... 242,816
----------
$7,333,437
==========
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities
Accounts payable.......................................... $3,348,319
Accrued expenses.......................................... 742,658
Accrued royalties......................................... 16,931
----------
Total Current Liabilities.............................. 4,107,908
Noncurrent Liabilities
Notes payable............................................. 2,467,192
----------
Total Liabilities...................................... 6,575,100
Members' Equity............................................. 758,337
----------
$7,333,437
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-38
<PAGE> 89
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENT OF OPERATIONS AND MEMBERS' EQUITY
JANUARY 23, 1996 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
Net Sales................................................... $36,925,865
Cost of Sales............................................... 26,149,842
-----------
Gross Profit................................................ 10,776,023
-----------
Operating Expenses
Selling................................................... 9,254,691
Administrative and general................................ 1,999,971
-----------
Total Operating Expenses.......................... 11,254,662
-----------
Operating Loss.............................................. (478,639)
-----------
Other Income (Expense)
Interest expense.......................................... (113,043)
Gain on sale of property and equipment.................... 66,943
Other..................................................... (70,706)
-----------
Total Other Income (Expense)...................... (116,806)
-----------
Net Loss.................................................... (595,445)
Members' Equity
Beginning of period.......................................
Members' contributions.................................... 1,358,782
Purchase of members' units................................ (5,000)
-----------
End of period............................................. $ 758,337
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-39
<PAGE> 90
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENT OF CASH FLOWS
JANUARY 23, 1996 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss.................................................. $ (595,445)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization.......................... 128,288
Gain on sale of property and equipment................. (66,943)
Net (increase) decrease in assets
Receivables.......................................... (861,580)
Inventory............................................ (821,032)
Prepaid expenses..................................... (349,575)
Net increase (decrease) in liabilities
Accounts payable..................................... 3,343,319
Accrued expenses..................................... 562,199
-----------
Net cash provided by operating activities......... 1,339,231
-----------
Cash Flows from Investing Activities:
Acquisition of assets (Note 2)............................ (4,233,000)
Purchases of property and equipment....................... (631,770)
Proceeds from sale of property and equipment.............. 93,600
Increase in intangible assets............................. (188,592)
Deposits.................................................. (22,314)
-----------
Net cash used by investing activities............. (4,982,076)
-----------
Cash Flows from Financing Activities:
Net borrowings under bank line of credit agreement........ 2,467,192
Principal payments on notes payable....................... (1,000,000)
Proceeds from issuance of debt............................ 1,000,000
Members' equity contributions............................. 1,358,782
-----------
Net cash provided by financing activities......... 3,825,974
-----------
Net Increase in Cash........................................ 183,129
Cash
Beginning of period....................................... 0
-----------
End of period............................................. $ 183,129
===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest.................... $ 99,607
===========
Supplemental Schedule of Noncash Investing and Financing
Activities
The Company acquired various assets on January 23, 1996
(Note 2). In conjunction with the acquisition,
liabilities were assumed as follows:
Purchase price of assets............................... $ 4,430,390
Cash paid.............................................. 4,233,000
-----------
Liabilities assumed.................................... $ 197,390
===========
The Company also incurred a $5,000 liability upon the
purchase of units from two members.
</TABLE>
The accompanying notes are an integral part of this statement.
F-40
<PAGE> 91
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS AND FORMATION -- The Company markets and distributes cookies and
related products, primarily using the Salerno and Mama's brand names, to
distributors and retailers located throughout the United States. All sales are
made on credit.
The Company began operations on January 23, 1996 by acquiring certain
regional brands (see Note 2) leasing a facility, establishing relationships with
co-packers to manufacture products and recruiting staff for sales, marketing,
finance and distribution. The Company is a limited liability company under the
Delaware Limited Liability Company Act. The term of the Company shall continue
with perpetuity, unless the Company is earlier dissolved.
The Company places its cash accounts with two financial institutions which
are Federally insured up to prescribed limits. However, the amount of cash at
any one institution may from time to time exceed these Federally insured
prescribed limits.
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.
ADVERTISING COSTS -- The Company expenses advertising costs as incurred or
when the related campaign commences. Slotting fees paid or credited to grocery
store chains for shelf space allocations are amortized over the shorter of
expected utility or one year. Such expenses are included in selling expenses in
the statement of operations and members' equity and amounted to $2,541,122 in
1996. At December 31, 1996, $321,900 of slotting fees, net of accumulated
amortization of $25,000, are included in prepaid expenses.
REVENUE RECOGNITION -- The Company recognizes revenue from product sales
upon shipment to its customers. All discounts and allowances provided to
customers are recorded as allowances in determining net sales.
INVENTORY -- The Company values its inventory at the lower of cost, on the
first-in, first-out method, or market.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost less
accumulated depreciation and amortization. Depreciation is provided on the
straight-line method over estimated useful lives ranging from three to ten
years.
Leasehold improvements are amortized over the lesser of the useful life of
the asset or the term of the lease.
Maintenance and repairs, which neither materially add to the value of the
property nor appreciably prolong its life, are charged to expense as incurred.
Gain or loss on dispositions of property and equipment are included in income.
INTANGIBLE ASSETS -- Intangible assets are amortized using the
straight-line method over various lives as described in Note 3.
IMPAIRMENT OF LONG-LIVED ASSETS -- In the event that facts and
circumstances indicate that the cost of any long-lived assets may be impaired,
an evaluation of recoverability would be performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with the asset
would be compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow value is required.
INCOME TAXES -- The Company is a limited liability company and is,
therefore, taxed under the partnership provisions of the Internal Revenue Code.
As a result, Federal income taxes on the net earnings of
F-41
<PAGE> 92
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the Company are payable by the members and no provision is made for Federal
income taxes in the accompanying financial statements.
NOTE 2 -- ACQUISITION
On January 23, 1996, the Company purchased certain assets (principally, the
Salerno and Mama's brands products and related formulations, trade accounts
receivable and inventories) and assumed certain liabilities of Sunshine
Biscuits, Inc., a manufacturer and distributor of nationally advertised brand
cookies and related products. The fair value of the net assets acquired exceeded
the purchase price of $4,430,390 by $785,456, which reduced the noncurrent
assets acquired. The purchase price is increased annually based on "Net Product
Revenues," as defined in the purchase agreement. Through January 22, 1999, 1.5%
of these revenues are paid to the selling company on a monthly basis. The
present value of these payments is reflected as additional purchase price and is
allocated to the noncurrent assets. The difference is recorded as interest
expense. The additional purchase price through December 31, 1996 is $464,257.
The maximum total additional purchase price through January 22, 1999, including
the amount through December 31, 1996, is estimated to be $1,446,000.
NOTE 3 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
AMORTIZATION
ORIGINAL COST PERIOD
------------- ------------
<S> <C> <C>
Acquisition costs................................ $ 88,319 5 Years
Organization costs............................... 50,361 5 Years
Financing costs.................................. 62,815 3 Years
--------
201,495
Less: Accumulated amortization................... 48,671
--------
Total.................................. $152,824
========
</TABLE>
NOTE 4 -- NOTES PAYABLE
The Company has a $6,000,000 bank line of credit, expiring December 31,
1998, with interest at .5% over the bank's reference rate (8.25% at December 31,
1996). Substantially all assets of the Company are pledged as collateral for the
note. Borrowings are limited to 85% of eligible (as defined) accounts receivable
and 60% of eligible inventory, which is limited to $3,000,000. The financing
agreement is subject to covenants, including specific annual net income and
capital expenditure amounts and limitations on distributions to members.
NOTE 5 -- LEASES
The Company leases various plant and office facilities and vehicles under
agreements expiring through various dates in 1999. Under the terms of some of
the facility leases, the Company must provide for insurance, maintenance,
utilities and property taxes.
Future minimum rental commitments under these operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ --------
<S> <C>
1997........................................................ $275,700
1998........................................................ 277,100
1999........................................................ 215,600
--------
Total....................................................... $768,400
========
</TABLE>
F-42
<PAGE> 93
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense was approximately $291,000.
NOTE 6 -- EMPLOYEE BENEFIT PLANS
INCENTIVE SAVINGS PLAN -- The Company has a qualified 401(k) savings plan
covering full-time employees, as defined, with a specified period of service.
Company contributions are discretionary and were $20,622.
PENSION AND WELFARE PLANS -- The Company participates in two multiemployer
union-administered health and welfare and pension plans covering all union
employees. Contributions to these plans by the Company were approximately
$138,900.
NOTE 7 -- RELATED PARTY TRANSACTIONS
The Company purchased approximately $2,500,000 of inventory in 1996 from a
company related to the Company through common ownership. Accounts payable to
this company was approximately $512,000 at December 31, 1996.
The Company also paid approximately $193,700 of consulting and organization
fees to a company, six stockholders of which are members of the Company. The
Company is obligated to make monthly payments of $10,000 to this company under
an informal, month-to-month agreement.
NOTE 8 -- MAJOR SUPPLIERS AND CUSTOMERS
Purchases from two suppliers aggregated approximately $17,039,000.
Approximately $1,901,000 was due to those suppliers at December 31, 1996.
Sales to one customer aggregated approximately $5,207,000. Approximately
$265,000 was due from this customer at December 31, 1996.
NOTE 9 -- MEMBERS' EQUITY AND RIGHTS
A "Member" is any person, as defined, that holds an interest in the Company
represented by units and is admitted pursuant to the provisions of the Salerno
Foods, L.L.C. Operating Agreement (the Agreement). At December 31, 1996, Common
A, Preferred A and Preferred B Units and amounts were as follows:
<TABLE>
<CAPTION>
NUMBER OF
UNITS AMOUNT
--------------- --------
<S> <C> <C>
Common A.......................................... 332,000 $ 0
Preferred A....................................... 401,477 394,194
Preferred B....................................... 371,023 364,143
--------
Total Members' Equity................... $758,337
========
</TABLE>
PREFERRED PRIORITY RETURN -- All Preferred Units rank senior to the Common
Units in that they are vested with the right to receive a Preferred Priority
Return ("Return"). This Return for any period, is an amount equal to 8% of the
average daily balance of the Preferred Member's Unrecovered Preferred Capital,
as defined in the Agreement. The Return is in the form of a distribution of
additional Preferred Units, within 75 days after the last day of each fiscal
quarter, based on the Original Preferred Price per Unit.
PREFERRED UNIT REDEMPTION RIGHTS -- After the Earliest Preferred Redemption
Date, January 23, 2001, at the request of a Preferred Member, the Company shall
redeem not less than all the Member's Preferred Units at a price equal to the
Preferred Redemption Price, plus the Preferred Priority Return accrued and
unpaid thereon to the redemption date plus Common Units equal to the number of
Preferred Units being redeemed. On the Mandatory Preferred Redemption Date,
January 23, 2003, all Preferred Units then outstanding shall be automatically
redeemed at the price described above.
F-43
<PAGE> 94
SALERNO FOODS, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Preferred Redemption Price plus the Preferred Priority Return accrued
and unpaid (the redemption amount), in the sole discretion of the Managing
Members, shall be paid in cash on the Preferred Redemption Date or on a payment
schedule with at least one-third in cash, and the remainder payable through a
promissory note, bearing annual interest at 14%, over two years.
Any Preferred Member may at any time prior to redemption convert all or any
number of the Preferred Units held into a number of Common Units computed by
multiplying the number of such Preferred Units to be converted by $1.892061 and
dividing the result by the Preferred Conversion Price then in effect.
After a conversion has been effected, the Company will deliver to the
converting Member payment equal to all accrued but unpaid Preferred Priority
Return for each Preferred Unit converted, unless the Company has previously
issued an optional Preferred Unit payment.
ANTI-DILUTION PROVISIONS -- In order to prevent dilution of the Preferred
Conversion Rights, the Preferred Conversion Price is subject to adjustment from
time to time. Certain events which may cause an adjustment include the issuance
or sale of Common Units; the granting of rights or options to purchase Common
Units or securities that are convertible into Common Units; the subsequent
expiration of such rights and options; and subdivision of the outstanding Common
Units into a greater number of Units.
OTHER RIGHTS AND OBLIGATIONS OF MEMBERS -- No Preferred Member has priority
over any other Preferred Member and no Common Member has priority over any
Common Member. Any payment of a Preferred Priority Return and any return of
capital to the Preferred Members shall be solely from Company assets and the
Common Members shall not be personally liable for any such return except as
otherwise provided by law.
With certain exceptions, no Member shall have any obligation to restore any
portion of any capital account deficit or to contribute to the capital of the
Company; nor shall any Member have any personal liability for debts or other
obligations of the Company, including without limitation obligations for Federal
and State income taxes and any State replacement taxes.
Generally, no Member may sell or otherwise dispose of that Member's
interest in the Company, in whole or in part, to any person other than the
Company. In the event of the death (or cessation of existence) of the Member,
the Company shall have the option and the right (but not any obligation) to
purchase, at any time within six months after the Company is notified, the
entire interest held by the Member at his or her death. The purchase price shall
be equal to the balance in the Member's capital account on the date of death,
adjusted to reflect the fair market value of the Company's assets on such date.
NOTE 10 -- SUBSEQUENT EVENTS
On April 3, 1998, the Company's assets were acquired by The Delicious
Frookie Company, Inc. These financial statements have been revised to reflect
certain balance sheet reclassifications and recategorization of selected costs
and expenses.
Also, subsequent to the issuance of the Company's financial statements,
management became aware of an accounting error that caused inventory and gross
profit to be overstated by $155,994 as of December 31, 1996. The removal of
these items from the financial statements increases the net loss and decreases
inventory and members' equity by $155,994 in the revised financial statements.
Information reflected in Note 9 regarding preferred and common units issued
has also been revised to reflect subsequent changes made as of December 31,
1996.
F-44
<PAGE> 95
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Cautionary Statement Regarding
Forward-Looking Statements.......... 6
Risk Factors.......................... 6
Use of Proceeds....................... 13
Dividend Policy....................... 14
Dilution.............................. 15
Capitalization........................ 16
Selected Historical Financial Data.... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 25
Management............................ 32
Certain Transactions.................. 38
Principal Stockholders................ 39
Description of Capital Stock.......... 42
Shares Eligible For Future Sale....... 44
Concurrent Offering................... 45
Underwriting.......................... 46
Legal Matters......................... 47
Experts............................... 47
Available Information................. 48
Index to Financial Statements......... F-1
</TABLE>
UNTIL ________, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,500,000 SHARES
[DELICIOUS BRANDS LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
GAINES, BERLAND INC.
__________, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 96
1,042,000 SHARES OF COMMON STOCK
DELICIOUS BRANDS, INC.
This Prospectus relates to 1,042,000 shares (the "Shares") of common stock,
$.01 par value (the "Common Stock"), of Delicious Brands, Inc., a Delaware
corporation (the "Company"), including 500,000 outstanding shares of Common
Stock to be sold to certain Holders upon exercise of options ("Options") to
purchase shares of Common Stock held by certain former principal stockholders of
the Company. The Shares may be offered by certain holders (the "Holders")
thereof. See "Selling Securityholders."
The Shares may be offered by the Holders from time to time in transactions
in the over-the-counter market, in negotiated transactions, or a combination of
such methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to prevailing market prices or
at negotiated prices. The Holders may effect such transactions by selling the
Shares to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Holders and/or the purchasers of the Shares for whom such broker-dealers may act
as agents or to whom they sell as principals, or both (which compensation as to
a particular broker-dealer might be in excess of the customary commissions). To
the extent required, the specific Shares to be sold, the names of the holders,
the public offering price, the names of such agent, dealer or underwriter, and
any applicable commission or discount with respect to a particular offer will be
set forth in an accompanying Prospectus Supplement.
None of the proceeds from the sale of the Shares by the Holders will be
received by the Company. The Company has agreed to bear certain expenses (other
than selling commissions and fees and expenses of counsel and other advisors to
the Holders) in connection with the registration and sale of the Shares being
offered by the Holders.
There is currently no public market for the Company's Common Stock.
Application has been made for approval for quotation on the Nasdaq SmallCap
Market of the Shares under the symbol "DBSI."
FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" COMMENCING
ON PAGE 6 HEREOF.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS PROCEEDS TO HOLDERS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................... $ $ $
- ------------------------------------------------------------------------------------------------------------
Total......................... $ $ $
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The Holders and any broker-dealers, agents or underwriters that participate
with the Holders in the distribution of the Shares may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act of
1933, as amended (the "Securities Act"), and any commissions received by them
and any profit on the resale of the Shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
A-1
<PAGE> 97
THE OFFERING
<TABLE>
<S> <C>
Common stock to be outstanding after the
offering:.................................. 4,782,842(1)(2)
Nasdaq SmallCap Market symbol:............... "DBSI"
Risk factors:................................ An investment in the Shares offered hereby
involves certain risks. Prospective investors
should carefully consider the risk factors
set forth below, as well as the other
information set forth in this Prospectus.
</TABLE>
- ---------------
(1) All references in this Prospectus to the number of shares of Common Stock
outstanding do not include (i) 500,000 shares of Common Stock reserved for
issuance upon exercise of options that may be granted under the Company's
1995 Stock Option Plan, pursuant to which options to purchase 282,500 shares
of Common Stock have been granted; (ii) 625,000 shares of Common Stock
reserved for issuance upon exercise of options that may be granted under the
Company's 1989 Stock Option Plan, pursuant to which options to purchase
157,285 shares of Common Stock have been granted; (iii) 75,000 shares of
Common Stock reserved for issuance upon exercise of options that may be
granted under the Company's 1994 Formula Stock Option Plan, pursuant to
which options to purchase 49,000 shares of Common Stock have been granted;
(iv) 443,750 shares of Common Stock reserved for issuance upon exercise of
other outstanding options; (v) 190,188 shares of Common Stock reserved for
issuance upon exercise of outstanding common stock purchase warrants to
purchase such shares of Common Stock; (vi) 195,834 shares of Common Stock
reserved for issuance upon conversion of the 195,834 Series A Convertible
Preferred Stock, $.01 par value per share ("Series A Preferred Stock"),
issued in exchange for approximately $1.57 million aggregate principal
amount of the Company's outstanding 9% Subordinated Convertible Notes (the
"9% Notes"); (vii) 225,000 shares of Common Stock to be sold by the Company
reserved for issuance upon exercise of the Underwriters' over-allotment
option; and (viii) 150,000 shares of Common Stock issuable upon exercise of
the Representative's Warrant.
(2) Includes 1,500,000 shares of Common Stock offered by the Company in the
Company's offering. See "The Company's Offering."
THE COMPANY'S OFFERING
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering by the Company of
1,500,000 shares of Common Stock and up to an additional 225,000 shares of
Common Stock to cover over-allotments, if any, was declared effective by the
Securities and Exchange Commission. Sales of Common Stock by the Company, or
even the potential of such sales, would likely have an adverse effect on the
market price of the Common Stock. See "Risk Factors -- Shares Eligible for
Future Sale."
A-2
<PAGE> 98
SELLING SECURITYHOLDERS
The following table sets forth certain information with respect to the
Holders of Shares. None of the Holders is currently an affiliate of the Company
and none of them has had a material relationship with the Company during the
past three years.
<TABLE>
<CAPTION>
AFTER THE OFFERING
-----------------------
NO. OF NO. OF NUMBER OF
NAME OF HOLDER SHARES OWNED SHARES OFFERED SHARES PERCENTAGE
-------------- ------------ -------------- --------- ----------
<S> <C> <C> <C> <C>
Swiss Bank Corp............................ 210,000 210,000 0 0
Paradeplatz 6
CH-8010 Zurich, Switzerland
H.T. Ardinger.............................. 136,715 35,000 101,715 2.1
c/o H.T. Ardinger & Sons
9040 Governors Row
Dallas, Texas 75247
Peter Clapp................................ 35,000 35,000 0 0
172 Thornhill Drive
Danville, Illinois 61832
John Crowl................................. 4,375 4,375 0 0
Peterkin Hill Road
South Woodstock, Vermont 05071
Sara D.K. Faulkner......................... 4,375 4,375 0 0
203 Poplar Heights
Oxford, Mississippi 38655
Eric Hassall............................... 4,375 4,375 0 0
4662 Bellevue Drive
Vancouver, British Columbia V6R1E7
Charles F. Kireker......................... 4,375 4,375 0 0
303 Cow Hill Road
Weybridge, Vermont 05753
Peter Strugatz............................. 17,500 17,500 0 0
83 Bishop's Lane
Southampton, New York 11968
Terra Trust Investments, A.G............... 140,000 140,000 0 0
c/o Martin Brenner
Bahnhofplatz 9
CH-8023 Zurich, Switzerland
Marc-Edouard Landolt....................... 52,500 52,500 0 0
Rue du Lion-d'Or 6
CH-1003 Lausanne, Switzerland
VTZ Versicherungs Treuhand Zurich A.G...... 50,000 50,000 0 0
c/o Martin Brenner
Bahnhofplatz 9
CH-8023 Zurich, Switzerland
Yapton Developments, Limited............... 100,000 100,000 0 0
c/o Raphael F. Pacheco
Celtic House
Douglas, Isle of Man IM125J
</TABLE>
A-3
<PAGE> 99
<TABLE>
<CAPTION>
AFTER THE OFFERING
-----------------------
NO. OF NO. OF NUMBER OF
NAME OF HOLDER SHARES OWNED SHARES OFFERED SHARES PERCENTAGE
-------------- ------------ -------------- --------- ----------
<S> <C> <C> <C> <C>
Steven Gillings............................ 150,000 150,000 0 0
95 Elmwood Avenue
Staten Island, New York 10312
Connie Bruccelari.......................... 100,000 100,000 0 0
101 Boardwalk
Staten Island, New York 10312
Tuttle Realty Ltd.......................... 100,000 100,000 0 0
c/o Nieves Soto
St. Andrews Court, Bahamas
P.O. Box N-4805
Terra Healthy Living....................... 81,000 16,500 64,500 1.3
c/o Martin Brenner
Bahnhofplatz 9
CH-8023 Zurich, Switzerland
Ken Stokes................................. 18,000 18,000 0 0
Fosseway South
Bath, England, U.K. BA34AN
</TABLE>
There is no assurance that the Holders will sell any or all of the Shares
offered hereby. To the extent required, the specific Shares to be sold, the
names of the Holder, other additional shares of Common Stock beneficially owned
by such Holder, the public offering price of the Shares to be sold, the names of
any agent, dealer or underwriter employed by such Holder in connection with such
sale, and any applicable commission or discount with respect to a particular
offer will be set forth in an accompanying Prospectus Supplement.
The Shares covered by this Prospectus may be sold from time to time so long
as this Prospectus remains in effect. The Holders expect to sell the Shares at
prices then attainable, less ordinary brokers, commissions and dealers'
discounts as applicable.
The Holders and any broker or dealer to or through whom any of the Shares
are sold may be deemed to be underwriters within the meaning of the Securities
Act with respect to the Common Stock offered hereby, and any profits realized by
the Holder or such brokers or dealers may be deemed to be underwriting
commissions. Brokers' commissions and dealers' discounts, taxes and other
selling expenses to be borne by the Holder are not expected to exceed normal
selling expenses for sales over-the-counter or otherwise, as the case may be.
The registration of the Shares under the Securities Act shall not be deemed an
admission by the Holders or the Company that the Holders are underwriters for
purposes of the Securities Act of any Shares offered under this Prospectus.
A-4
<PAGE> 100
PLAN OF DISTRIBUTION
This Prospectus covers 1,042,000 shares of the Company's Common Stock. All
of the Shares offered hereby are being sold by the Holders. The Company will
realize no proceeds from the sale of the Shares by the Holders.
The Holders may sell the Shares offered hereby from time to time in
transactions in the over-the-counter market, in negotiated transactions, or a
combination of such methods of sale, at fixed prices which may be changed, at
market prices prevailing at the time of sale, at prices relating to prevailing
market prices or at negotiated prices. The Holders may effect such transactions
by selling the Shares to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Holders and/or the purchasers of the Shares for whom such broker-dealers may
act as agents or to whom they sell as principals, or both (which compensation as
to a particular broker-dealer might be in excess of the customary commissions).
The Holders and any broker-dealers that participate with the Holders in the
distribution of the Shares may be deemed to be underwriters within the meaning
of Section 2(11) of the Securities Act and any commissions received by them and
any profit on the resale of the Shares commissioned by them may be deemed to be
underwriting commissions or discounts under the Securities Act. The Holders will
pay any transaction costs associated with effecting any sales that occur.
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with by the Company and the Holders.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Shares may not simultaneously engage in
market-making activities with respect to the Company's Common Stock for a period
of two business days prior to the commencement of such distribution. In addition
and without limiting the foregoing, each Holder will be subject to applicable
provisions of the Regulation M and the rules and regulations thereunder, which
provisions may limit the timing of the purchases and sales of shares of Common
Stock by the Holders.
The Holders are not restricted as to the price or prices at which they may
sell their Shares. Sales of such Shares may have an adverse effect on the market
price of the Common Stock. Moreover, the Holders are not restricted as to the
number of Shares that may be sold at any time subject, however, to certain
contractual lock-up agreements, and it is possible that a significant number of
Shares could be sold at the same time which may also have an adverse effect on
the market price of the Company's Common Stock. See "Shares Eligible For Future
Sale."
The Company has agreed to pay all fees and expenses incident to the
registration of the Shares, except selling commissions and fees and expenses of
counsel or any other professionals or other advisors, if any, to the Holders.
A-5
<PAGE> 101
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THIS OFFERING, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY UNDERWRITER OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER TO OR
SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CRATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Cautionary Statement Regarding
Forward-Looking Statements......... 6
Risk Factors......................... 6
Dividend Policy...................... 14
Dilution............................. 15
Capitalization....................... 16
Selected Historical Financial Data... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
Business............................. 25
Management........................... 32
Certain Transactions................. 38
Principal Stockholders............... 39
Description of Capital Stock......... 42
Shares Eligible For Future Sale...... 44
Legal Matters........................ 47
Experts.............................. 47
Available Information................ 48
Index to Financial Statements........ F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK WHETHER OR NOT PARTICIPATING IN THE
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,042,000 SHARES
[DELICIOUS BRANDS LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 102
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses (other than
underwriting discounts and commissions) which will be paid by the Registrant in
connection with the issuance and distribution of the securities being
registered. With the exception of the SEC registration fee and the NASD filing
fee, all amounts shown are estimates.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 14,029.02
NASD filing fee............................................. 5,255.62
Nasdaq SmallCap Market listing expenses..................... 25,000.00
Blue Sky fees and expenses (including legal and filing
fees)..................................................... 75,000.00
Printing expenses (including printing and engraving of stock
certificates)............................................. 150,000.00
Accounting fees and expenses................................ 90,000.00
Legal fees and expenses (other than Blue Sky)............... 285,000.00
Miscellaneous expenses...................................... 55,715.36
-----------
Total............................................. $700,000.00
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the Delaware General Corporation Law (the "Delaware Law"),
the Company's Certificate of Incorporation provides that no director of the
Company will be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except (i) for any
breach of the directors' duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or involving intentional misconduct
or a knowing violation of law, (iii) unlawful payments of dividends or unlawful
stock repurchases or redemptions, or (iv) for any transaction from which the
director derives any improper personal benefit. In addition, the Company's
Bylaws provide that any director or officer who was or is a party or is
threatened to be made a party to any action or proceeding by reason of his or
her services to the Company will be indemnified to the fullest extent permitted
by the Delaware Law.
The Company believes that the indemnification of its directors and officers
will facilitate the Company's ability to continue to attract and retain
qualified individuals to serve as directors and officers of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
The Company intends to enter into indemnification agreements with each of
its directors and executive officers pursuant to which the Company will agree to
indemnify each of them against expenses and losses incurred for claims brought
against them by reason of their being a director or executive director of the
Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the following securities were sold by the
Company without registration under the Securities Act of 1933, as amended (the
"Securities Act").
1. As of August 1, 1998, the Company issued an aggregate of 195,834 shares
of Series A Convertible Preferred Stock, $.01 par value per share ("Series A
Preferred Stock"), in consideration for the surrender of 9% Subordinated
Convertible Notes ("9% Notes"), aggregate principal amount $1,566,668, by the
holders thereof at a ratio of one share of Series A Preferred Stock for every $8
of principal amount of the 9% Notes. Such shares were issued pursuant to an
exemption from registration contained in Section 3(a)(9) of the Securities Act.
II-1
<PAGE> 103
2. On April 3, 1998, the Company issued a 12% promissory note, principal
amount $1,500,000, to Salerno Foods, L.L.C. ("Salerno"), which promissory note
consisted of a portion of the consideration given in respect of the acquisition
by the Company of substantially all of the assets of Salerno and the assumption
of substantially all of the liabilities of Salerno (the "Salerno Acquisition").
Such promissory note was issued pursuant to an exemption from registration
contained in Section 4(2) of the Securities Act as a transaction by an issuer
not involving any public offering.
3. On April 3, 1998, the Company issued (i) a 12% promissory note,
principal amount $4,600,000 to American Pacific Financial Corporation ("APFC")
and (ii) a 12% promissory note, principal amount $100,000, to APFC, which
promissory notes were issued (i) in consideration for a $4,600,000 loan from
APFC to the Company and (ii) for APFC's fee for such loan, respectively. Such
promissory notes were issued pursuant to an exemption from registration
contained in Section 4(2) of the Securities Act as a transaction by an issuer
not involving any public offering.
4. On March 30, 1998, the Company issued a 12% promissory note, principal
amount $500,000, for an offering price of $500,000 to an "accredited investor,"
as that term is defined Section 2(5) of the Securities Act and Rule 501
thereunder. Such promissory note was issued pursuant to an exemption from
registration contained in Section 4(2) of the Securities Act and Rule 506
thereunder as a transaction by an issuer not involving any public offering.
5. On February 6, 1998, the Company consummated a second closing (the
"Second Closing") of a minimum of five Units and a maximum of 20 Units, each
Unit consisting of 17,500 shares of common stock, $.01 par value per share (the
"Common Stock") (the "Private Placement"). At the Second Closing, the Company
issued an aggregate of eight Units at a price of $105,000 per Unit, for an
aggregate offering price of $840,000 (the "Aggregate Offering Price"). Network 1
Financial Securities, Inc. acted as the exclusive placement agent (the
"Placement Agent") and received a commission of $84,000 (10% of the Aggregate
Purchase Price) and was paid a non-accountable expense allowance of $25,200 (3%
of the Aggregate Purchase Price). The Units were offered and sold only to
accredited investors. Such shares were issued pursuant to an exemption from
registration contained in Section 4(2) of the Securities Act and Rule 506
thereunder as transactions by an issuer not involving any public offering.
6. On December 30, 1997, the Company issued 5,000 shares of Common Stock
to Eric Seidman, a former employee of the Company for services previously
rendered to the Company. Such shares were issued pursuant to an exemption from
registration contained in Section 4(2) of the Securities Act as a transaction by
an issuer not involving any public offering.
7. On December 22, 1997, the Company consummated the first closing of the
Private Placement (the "First Closing"). At the First Closing the Company issued
an aggregate of 12 Units at a price of $105,000 per Unit, for an aggregate
purchase price of $1,260,000 (the "First Closing Aggregate Purchase Price"). The
Placement Agent received a commission of $126,000 (10% of the First Closing
Aggregate Purchase Price) and was paid a non-accountable expense allowance of
$37,800 (3% of the First Closing Aggregate Purchase Price). The Units were
offered and sold only to accredited investors. Such shares were issued pursuant
to an exemption from registration contained in Section 4(2) of the Securities
Act and Rule 506 thereunder as transactions by an issuer not involving any
public offering.
8. On July 2, 1996, the Company issued an aggregate of 224,528 shares of
Common Stock in consideration of the conversion of 8% Subordinated Promissory
Notes, aggregate principal amount $1,260,000, plus $87,000 of interest accrued
thereon, by the holders thereof. Such shares were issued pursuant to an
exemption from registration contained in Section 3(a)(9) of the Securities Act.
All certificates representing the securities described herein and currently
outstanding have been properly legended.
II-2
<PAGE> 104
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement by and between the Company
and Gaines, Berland Inc.***
3.1 -- Certificate of Incorporation, as amended, of the Company.**
3.1.1 -- Amended and Restated Certificate of Incorporation of the
Company.**
3.1.2 -- Certificate of the Designations, Powers, Preferences and
Rights of the Series A Convertible Preferred Stock.***
3.2 -- By-laws, as amended, of the Company.**
4.1 -- Specimen Certificate of the Company's Common Stock.*
4.2 -- Form of Representative's Warrant.***
5.1 -- Opinion of Olshan Grundman Frome & Rosenzweig LLP.***
10.1 -- Employment Agreement dated as of August 11, 1997 by and
between the Company and Michael Kirby.**
10.2 -- Stock Option Agreement, dated as of August 11, 1997, by and
between the Company and Michael Kirby.**
10.3 -- Letter Agreement dated December 16, 1997 amending Michael
Kirby's Employment Agreement and Stock Option Agreement.**
10.4 -- Amended and Restated Employment Agreement dated as of
December 15, 1997 by and between the Company and Jeffry
Weiner.**
10.5 -- 1989 Stock Option Plan of the Company.**
10.6 -- 1995 Stock Option Plan of the Company.**
10.7 -- 1994 Formula Stock Option Plan of the Company.**
10.8 -- Trademark Sublicense Agreement dated December 16, 1993
between Nestle Food Company and the Company.**
10.9 -- Trademark License Agreement dated September 25, 1991 by and
between Land O' Lakes, Inc. and the Company.**
10.10 -- Trademark License Agreement dated May 3, 1996 by and between
Showbiz Pizzatime Inc., and the Company.**
10.11 -- Trademark License Agreement dated May 1, 1996 by and between
Ringling Brothers and Barnum & Bailey Combined Shows and the
Company.**
10.12 -- License Agreement dated November 26, 1996 between Chiquita
Brands, Inc. and the Company.**
10.13 -- License Agreement dated June 3, 1991 by and between CPC
International Inc., and the Company.**
10.14 -- License Agreement dated May 1, 1996 between Eskimo Pie Corp.
and the Company.**
10.15 -- Amendment to License Agreement dated May 1, 1997 between
Eskimo Pie Corp. and the Company.**
10.16 -- Consulting Agreement dated August 13, 1997 between the
Company and Richard Worth.**
10.17 -- Consulting Agreement dated August 13, 1997 between the
Company and Randye Worth.**
10.18 -- Asset Purchase Agreement dated December 22, 1997 between the
Company and Richard S. Worth.**
10.19 -- Financing Agreement dated November 27, 1996 between the
Company and Republic Acceptance Corporation.**
10.20 -- Security Agreement dated November 27, 1996 between the
Company and Republic Acceptance Corp.**
10.21 -- Distribution Agreement effective March 28, 1997 between the
Company and the Old Colony Baking Company, Inc.**
10.22 -- Asset Purchase Agreement dated as of April 3, 1998 by and
between the Company and Salerno Foods, L.L.C.**
10.23 -- Escrow Agreement dated as of April 3, 1998 by and among the
Company, Salerno Foods, L.L.C. and American National Bank
and Trust Company of Chicago.**
10.24 -- Assignment of Intellectual Property Rights dated April 3,
1998 by and between the Company and Salerno Foods, L.L.C.**
</TABLE>
II-3
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <C> <S>
10.25 -- Restrictive Covenant and Confidentiality Agreement dated
April 3, 1998 by and between the Company and Steve Coates.**
10.26 -- Restrictive Covenant and Confidentiality Agreement dated
April 3, 1998 by and between the Company and Peter Rogers.**
10.27 -- Restrictive Covenant and Confidentiality Agreement dated
April 3, 1998 by and between the Company and Ron Davies,
Jr.**
10.28 -- Manufacturing Agreement dated April 3, 1998 between the
Company and Pate's Bakery, L.L.C.**
10.29 -- Promissory Note of the Company dated April 3, 1998 in favor
of Salerno Foods, L.L.C.**
10.30 -- Security Agreement dated April 3, 1998 of the Company in
favor of Salerno Foods, L.L.C.**
10.31 -- Trademark Security Agreement dated April 3, 1998 of the
Company in favor of Salerno Foods, L.L.C.**
10.32 -- Assignment and Assumption Agreement dated April 3, 1998 by
and among the Company, Larry Polhill and American Pacific
Financial Corporation.**
10.33 -- Subordination Agreement dated as of April 3, 1998 by and
between U.S. Bancorp Republic Commercial Finance, Inc.,
American Pacific Financial Corporation, Lawrence R. Polhill,
Salerno Foods, L.L.C. and the Company.**
10.34 -- Loan Agreement dated as of April 3, 1998 between the Company
and American Pacific Financial Corporation.**
10.35 -- Security Agreement dated as of April 3, 1998 of the Company
in favor of American Pacific Financial Corporation.**
10.36 -- Promissory Note dated April 3, 1998 of the Company in favor
of American Pacific Financial Corporation in the aggregate
principal amount of $4.6 million.**
10.37 -- Promissory Note dated April 3, 1998 of the Company in favor
of American Pacific Financial Corporation in the aggregate
principal amount of $100,000.**
10.38 -- First Amendment dated as of April 3, 1998 to the Financing
Agreement by and between the Company and U.S. Bancorp
Republic Commercial Finance, Inc.**
10.39 -- Agreement between Salerno Foods, L.L.C. and Bakery, Cracker,
Pie Yeast Wagon Drivers Union, Local 734 International
Brotherhood of Teamsters of America (Cracker Drivers).**
10.40 -- Agreement between Salerno Foods, L.L.C. and Bakery, Cracker,
Pie Yeast Wagon Drivers Union, Local 734 International
Brotherhood of Teamsters of America (Insider Div.).**
10.41 -- Form of Indemnification Agreement between the Company and
its officers and directors.***
10.42 -- Voting Trust Agreement dated December 22, 1997 by and among
Richard S. Worth, Randye Worth, Graubard, Mollen & Miller,
the Company and Robert Rubin.**
10.43 -- Form of Voting Agreement by and between the Company and
Edward R. Sousa, as Voting Trustee.**
10.44 -- Registration Rights Letter Agreement from the Company dated
October 21, 1997.**
10.45 -- Sublease Amendment Agreement and Consent to Agreement dated
as of April 2, 1998 among Maple Properties Company, L.L.C.,
Salerno Foods, L.L.C. and the Company.**
10.46 -- Form of Trucklease and Service Agreement by and between
Ryder Transportation Services and the Company.**
10.47 -- Memorandum of Agreement by and between the Company and
Bakery, Cracker, Pie and Yeast Wagon Drivers, Local 734,
International Brotherhood of Teamsters of America dated May
13, 1998.**
10.48 -- Commercial Lease by and between Maple Properties Company and
the Company dated as of June 1, 1998.**
10.49 -- Promissory Note dated March 30, 1998 of the Company in favor
of Yapton Developments, Limited.**
10.50 -- Letter Agreement by and between the Company and Yapton
Developments, Limited dated July 6 , 1998 extending the
maturity of the promissory note to Yapton Developments,
Ltd.**
10.51 -- Letter Agreement by and between the Company and American
Pacific Financial Corporation dated July 13, 1998, extending
the maturity of the promissory note to American Pacific
Financial Corporation.**
23.1 -- Consent of Olshan Grundman Frome & Rosenzweig LLP (contained
in Exhibit 5.1).***
23.2 -- Consent of Altschuler, Melvoin & Glasser LLP.***
</TABLE>
II-4
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <C> <S>
23.3 -- Consent of Friedman Eisenstein Raemer and Schwartz, LLP.***
23.4 -- Consent of Cooper, Selvin & Strassberg, LLP.***
24.1 -- Powers of Attorney (included on the signature page to this
Registration Statement).**
27.1 -- Financial Data Schedule.***
</TABLE>
- ---------------
*To be filed by amendment.
**Previously filed.
***Filed herewith.
(b) Financial Statement Schedules
Independent Auditors' Reports
II -- Valuation and Qualifying Accounts.
All other schedules are omitted as not being required or the
information required therein is included in the financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low and high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(c) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities
II-5
<PAGE> 107
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) that, for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(5) that, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new Registration Statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing as specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-6
<PAGE> 108
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Des Plaines, State of Illinois, on the 18th of
September, 1998.
DELICIOUS BRANDS, INC.
By: *
------------------------------------
Michael J. Kirby
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board September 18, 1998
- --------------------------------------
Donald C. Schmitt
* President, Chief Executive Officer September 18, 1998
- -------------------------------------- and Director (principal
Michael J. Kirby executive officer)
/s/ JEFFRY W. WEINER Vice President, Chief Financial September 18, 1998
- -------------------------------------- Officer and Secretary (principal
Jeffry W. Weiner financial and accounting
officer)
* Director September 18, 1998
- --------------------------------------
Jay G. Shoemaker
* Director September 18, 1998
- --------------------------------------
John H. Wyant
* Director September 18, 1998
- --------------------------------------
Edward R. Sousa
*By: /s/ JEFFRY W. WEINER
- --------------------------------------
Jeffry W. Weiner
Attorney-in-fact
</TABLE>
II-7
<PAGE> 109
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Board of Directors of
Delicious Brands, Inc.
In connection with our audit of the financial statements of Delicious
Brands, Inc. referred to in our audit report dated January 22, 1998, which was
included in this Form S-1, we have also audited Schedule II as of and for the
years ended December 31, 1996 and 1997. In our opinion, this schedule presents
fairly, in all material respects, the information required to be set forth
therein.
/s/ ALTSCHULER, MELVOIN AND GLASSER
LLP
--------------------------------------
ALTSCHULER, MELVOIN AND GLASSER LLP
Chicago, Illinois
January 22, 1998
S-1
<PAGE> 110
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Board of Directors of
Delicious Brands, Inc.
In connection with our audit of the financial statements of Delicious
Brands, Inc. referred to in our audit report dated July 18, 1996, which was
included in this Form S-1, we have also audited Schedule II as of and for the
year ended December 31, 1995. In our opinion, this schedule presents fairly, in
all material respects, the information required to be set forth therein.
/s/ COOPER, SELVIN & STRASSBERG,
LLP
--------------------------------------
COOPER, SELVIN & STRASSBERG, LLP
Great Neck, New York
July 18, 1996
S-2
<PAGE> 111
SCHEDULE II
DELICIOUS BRANDS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN E
BALANCE AT CHARGED TO BALANCE
COLUMN A BEGINNING COSTS AND COLUMN D AT END OF
DESCRIPTION OF PERIOD EXPENSE WRITEOFFS PERIOD
- ----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
1997:
Allowance for doubtful accounts.......... $ 572,872 $ 40,487 $ 38,359 $ 575,000
========== ========== ======== ==========
Reserve for inventory obsolescence....... $ 56,521 $ 152,754 $ 0 $ 209,275
========== ========== ======== ==========
Valuation allowance for deferred tax
assets................................ $3,607,200 $1,439,800 $ 0 $5,047,000
========== ========== ======== ==========
1996:
Allowance for doubtful accounts.......... $ 100,000 $ 583,337 $110,465 $ 572,872
========== ========== ======== ==========
Reserve for inventory obsolescence....... $ 65,000 $ 0 $ 8,479 $ 56,521
========== ========== ======== ==========
Valuation allowance for deferred tax
assets................................ $2,988,900 $ 618,300 $ 0 $3,607,200
========== ========== ======== ==========
1995:
Allowance for doubtful accounts.......... $ 375,000 $ 100,001 $375,001 $ 100,000
========== ========== ======== ==========
Reserve for inventory obsolescence....... $ 176,000 $ 0 $111,000 $ 65,000
========== ========== ======== ==========
Valuation allowance for deferred tax
assets................................ $ 0 $2,988,900 $ 0 $2,988,900
========== ========== ======== ==========
</TABLE>
S-3
<PAGE> 112
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement by and between the Company
and Gaines, Berland Inc.***.................................
3.1 -- Certificate of Incorporation, as amended, of the
Company.**..................................................
3.1.1 -- Amended and Restated Certificate of Incorporation of the
Company.**..................................................
3.1.2 -- Certificate of the Designations, Powers, Preferences and
Rights of the Series A Convertible Preferred Stock.***......
3.2 -- By-laws, as amended, of the Company.**......................
4.1 -- Specimen Certificate of the Company's Common Stock.*........
4.2 -- Form of Representative's Warrant.***........................
5.1 -- Opinion of Olshan Grundman Frome & Rosenzweig LLP.***.......
10.1 -- Employment Agreement dated as of August 11, 1997 by and
between the Company and Michael Kirby.**....................
10.2 -- Stock Option Agreement, dated as of August 11, 1997, by and
between the Company and Michael Kirby.**....................
10.3 -- Letter Agreement dated December 16, 1997 amending Michael
Kirby's Employment Agreement and Stock Option
Agreement.**................................................
10.4 -- Amended and Restated Employment Agreement dated as of
December 15, 1997 by and between the Company and Jeffry
Weiner.**...................................................
10.5 -- 1989 Stock Option Plan of the Company.**....................
10.6 -- 1995 Stock Option Plan of the Company.**....................
10.7 -- 1994 Formula Stock Option Plan of the Company.**............
10.8 -- Trademark Sublicense Agreement dated December 16, 1993
between Nestle Food Company and the Company.**..............
10.9 -- Trademark License Agreement dated September 25, 1991 by and
between Land O' Lakes, Inc. and the Company.**..............
10.10 -- Trademark License Agreement dated May 3, 1996 by and between
Showbiz Pizzatime Inc., and the Company.**..................
10.11 -- Trademark License Agreement dated May 1, 1996 by and between
Ringling Brothers and Barnum & Bailey Combined Shows and the
Company.**..................................................
10.12 -- License Agreement dated November 26, 1996 between Chiquita
Brands, Inc. and the Company.**.............................
10.13 -- License Agreement dated June 3, 1991 by and between CPC
International Inc., and the Company.**......................
10.14 -- License Agreement dated May 1, 1996 between Eskimo Pie Corp.
and the Company.**..........................................
10.15 -- Amendment to License Agreement dated May 1, 1997 between
Eskimo Pie Corp. and the Company.**.........................
10.16 -- Consulting Agreement dated August 13, 1997 between the
Company and Richard Worth.**................................
10.17 -- Consulting Agreement dated August 13, 1997 between the
Company and Randye Worth.**.................................
10.18 -- Asset Purchase Agreement dated December 22, 1997 between the
Company and Richard S. Worth.**.............................
10.19 -- Financing Agreement dated November 27, 1996 between the
Company and Republic Acceptance Corporation.**..............
10.20 -- Security Agreement dated November 27, 1996 between the
Company and Republic Acceptance Corp.**.....................
10.21 -- Distribution Agreement effective March 28, 1997 between the
Company and the Old Colony Baking Company, Inc.**...........
</TABLE>
<PAGE> 113
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <C> <S> <C>
10.22 -- Asset Purchase Agreement dated as of April 3, 1998 by and
between the Company and Salerno Foods, L.L.C.**.............
10.23 -- Escrow Agreement dated as of April 3, 1998 by and among the
Company, Salerno Foods, L.L.C. and American National Bank
and Trust Company of Chicago.**.............................
10.24 -- Assignment of Intellectual Property Rights dated April 3,
1998 by and between the Company and Salerno Foods,
L.L.C.**....................................................
10.25 -- Restrictive Covenant and Confidentiality Agreement dated
April 3, 1998 by and between the Company and Steve
Coates.**...................................................
10.26 -- Restrictive Covenant and Confidentiality Agreement dated
April 3, 1998 by and between the Company and Peter
Rogers.**...................................................
10.27 -- Restrictive Covenant and Confidentiality Agreement dated
April 3, 1998 by and between the Company and Ron Davies,
Jr.**.......................................................
10.28 -- Manufacturing Agreement dated April 3, 1998 between the
Company and Pate's Bakery, L.L.C.**.........................
10.29 -- Promissory Note of the Company dated April 3, 1998 in favor
of Salerno Foods, L.L.C.**..................................
10.30 -- Security Agreement dated April 3, 1998 of the Company in
favor of Salerno Foods, L.L.C.**............................
10.31 -- Trademark Security Agreement dated April 3, 1998 of the
Company in favor of Salerno Foods, L.L.C.**.................
10.32 -- Assignment and Assumption Agreement dated April 3, 1998 by
and among the Company, Larry Polhill and American Pacific
Financial Corporation.**....................................
10.33 -- Subordination Agreement dated as of April 3, 1998 by and
between U.S. Bancorp Republic Commercial Finance, Inc.,
American Pacific Financial Corporation, Lawrence R. Polhill,
Salerno Foods, L.L.C. and the Company.**....................
10.34 -- Loan Agreement dated as of April 3, 1998 between the Company
and American Pacific Financial Corporation.**...............
10.35 -- Security Agreement dated as of April 3, 1998 of the Company
in favor of American Pacific Financial Corporation.**.......
10.36 -- Promissory Note dated April 3, 1998 of the Company in favor
of American Pacific Financial Corporation in the aggregate
principal amount of $4.6 million.**.........................
10.37 -- Promissory Note dated April 3, 1998 of the Company in favor
of American Pacific Financial Corporation in the aggregate
principal amount of $100,000.**.............................
10.38 -- First Amendment dated as of April 3, 1998 to the Financing
Agreement by and between the Company and U.S. Bancorp
Republic Commercial Finance, Inc.**.........................
10.39 -- Agreement between Salerno Foods, L.L.C. and Bakery, Cracker,
Pie Yeast Wagon Drivers Union, Local 734 International
Brotherhood of Teamsters of America (Cracker Drivers).**....
10.40 -- Agreement between Salerno Foods, L.L.C. and Bakery, Cracker,
Pie Yeast Wagon Drivers Union, Local 734 International
Brotherhood of Teamsters of America (Insider Div.).**.......
10.41 -- Form of Indemnification Agreement between the Company and
its officers and directors.***..............................
10.42 -- Voting Trust Agreement dated December 22, 1997 by and among
Richard S. Worth, Randye Worth, Graubard, Mollen & Miller,
the Company and Robert Rubin.**.............................
10.43 -- Form of Voting Agreement by and between the Company and
Edward R. Sousa, as Voting Trustee.**.......................
10.44 -- Registration Rights Letter Agreement from the Company dated
October 21, 1997.**.........................................
</TABLE>
<PAGE> 114
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <C> <S> <C>
10.45 -- Sublease Amendment Agreement and Consent to Agreement dated
as of April 2, 1998 among Maple Properties Company, L.L.C.,
Salerno Foods, L.L.C. and the Company.**....................
10.46 -- Form of Trucklease and Service Agreement by and between
Ryder Transportation Services and the Company.**............
10.47 -- Memorandum of Agreement by and between the Company and
Bakery, Cracker, Pie and Yeast Wagon Drivers, Local 734,
International Brotherhood of Teamsters of America dated May
13, 1998.**.................................................
10.48 -- Commercial Lease by and between Maple Properties Company and
the Company dated as of June 1, 1998.**.....................
10.49 -- Promissory Note dated March 30, 1998 of the Company in favor
of Yapton Developments, Limited.**..........................
10.50 -- Letter Agreement by and between the Company and Yapton
Developments, Limited dated July 6, 1998 extending the
maturity of the promissory note to Yapton Developments,
Ltd.**......................................................
10.51 -- Letter Agreement by and between the Company and American
Pacific Financial Corporation dated July 13, 1998, extending
the maturity of the promissory note to American Pacific
Financial Corporation.**....................................
23.1 -- Consent of Olshan Grundman Frome & Rosenzweig LLP (contained
in Exhibit 5.1).***.........................................
23.2 -- Consent of Altschuler, Melvoin & Glasser LLP.***............
23.3 -- Consent of Friedman Eisenstein Raemer and Schwartz,
LLP.***.....................................................
23.4 -- Consent of Cooper, Selvin & Strassberg, LLP.***.............
24.1 -- Powers of Attorney (included on the signature page to this
Registration Statement).**..................................
27.1 -- Financial Data Schedule.***.................................
</TABLE>
- ---------------
*To be filed by amendment.
**Previously filed.
***Filed herewith.
(b) Financial Statement Schedules
Independent Auditors' Reports
II -- Valuation and Qualifying Accounts.
All other schedules are omitted as not being required or the
information required therein is included in the financial statements or
notes thereto.
<PAGE> 1
EXHIBIT 1.1
UNDERWRITING AGREEMENT
between
DELICIOUS BRANDS, INC.
and
GAINES, BERLAND INC.
Dated: _______, 1998
<PAGE> 2
DELICIOUS BRANDS, INC.
(formerly The Delicious Frookie Company, Inc.)
1,500,000 Shares of Common Stock
UNDERWRITING AGREEMENT
New York, New York
___________, 1998
Gaines, Berland Inc.
1055 Stewart Avenue
Bethpage, New York 11714
Ladies and Gentlemen:
The undersigned, Delicious Brands, Inc., a Delaware
corporation (the "Company"), hereby confirms its agreement with Gaines, Berland
Inc. (being referred to herein variously as the "Representative" or "you") and
with the other underwriters named on Schedule 1 hereto (the Representative and
the other Underwriters being collectively called the "Underwriters" or,
individually, an "Underwriter"), as follows:
1. Purchase and Sale of Securities.
1.1 Firm Shares.
1.1.1 Purchase of Firm Shares. On the basis of the
representations and warranties herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue and sell, severally and
not jointly, to the several Underwriters, 1,500,000 shares (the "Firm Shares")
of the Company's common stock, par value $.01 per share ("Common Stock") at a
purchase price (net of commissions) of $____ per share. The Underwriters,
severally and not jointly, agree to purchase from the Company the number of Firm
Shares set forth opposite their respective names on Schedule I attached hereto
and made a part hereof at a purchase price of $_____ per share.
1.1.2 Payment and Delivery. Delivery and payment for the Firm
Shares shall be made at 10:00 A.M., New York time, on or before the third
business day following the date that the Firm Shares commence trading or at such
earlier time as the Representative shall determine, or at such other time as
shall be agreed upon by the Representative and the Company at the offices of the
Representative or at such other place as shall be agreed upon by the
Representative and the Company. The hour and date of delivery and payment for
the Firm Shares are called the "Closing Date." Payment for the Firm Shares shall
be made on the Closing Date at the Representative's election by wire transfer or
by certified or bank cashier's check(s) in New York Clearing House funds payable
to the order of the Company upon delivery to the Representative of certificates
(in form and substance satisfactory to the Representative) representing the Firm
Shares for the account of the respective accounts of the Underwriters. The Firm
Shares shall be registered in such name or names and in such authorized
denominations as the Representative may request in writing at least two full
business days prior to the Closing Date. The Company will permit the
Representative to examine and package the Firm Shares for
<PAGE> 3
delivery at least one full business day prior to the Closing Date. The Company
shall not be obligated to sell or deliver the Firm Shares except upon tender of
payment by the Underwriters for all the Firm Shares.
1.2 Over-Allotment Option.
1.2.1 Option Shares. For the purposes of covering any
over-allotments in connection with the distribution and sale of the Firm Shares,
the Underwriters are hereby granted an option ("Over-allotment Option") to
purchase up to an additional 225,000 Shares of Common Stock from the Company
(the "Option Shares"). The Firm Shares and the Option Shares are hereinafter
referred to collectively as the "Public Securities." The purchase price to be
paid for the Option Shares will be the same price per Option Share as the price
per Firm Share set forth in Section 1.1.1 hereof.
1.2.2 Exercise of Option. The Over-allotment Option granted
pursuant to Section 1.2.1 hereof may be exercised by the Representative on
behalf of the Underwriters as to all or any part of the Option Shares at any
time, from time to time, within thirty days after the effective date ("Effective
Date") of the Registration Statement (as hereinafter defined). The Underwriters
will not be under any obligation to purchase any Option Shares prior to the
exercise of the Over-allotment Option. The Over-allotment Option granted hereby
may be exercised by the giving of oral notice to the Company and the
Attorney-in-Fact (as hereinafter defined) from the Representative, which must be
confirmed by a letter or telecopy setting forth the number of Option Shares to
be purchased, the date and time for delivery of and payment for the Option
Shares and stating that the Option Shares referred to therein are to be used for
the purpose of covering over-allotments in connection with the distribution and
sale of the Firm Shares. If such notice is given at least two full business days
prior to the Closing Date, the date set forth therein for such delivery and
payment will be the Closing Date. If such notice is given thereafter, the date
set forth therein for such delivery and payment will not be earlier than five
full business days after the date of the notice. If such delivery and payment
for the Option Units does not occur on the Closing Date, the date and time of
the closing for such Option Units will be as set forth in the notice
(hereinafter "Option Closing Date"). Upon exercise of the Over-allotment Option,
the Company will become obligated to convey to the Underwriters, and, subject to
the terms and conditions set forth herein, the Underwriters will become
obligated to purchase, the number of Option Units specified in such notice.
1.2.3 Payment and Delivery. Payment for the Option Shares will
be at the Representative's election by wire transfer or by certified or bank
cashier's check(s) in New York Clearing House funds payable to the order of the
Company at the offices of the Representative or at such other place as shall be
agreed upon by the Representative and the Company upon delivery to the
Representative of certificates representing such securities for the respective
accounts of the Underwriters. The certificates representing the Option Shares to
be delivered will be in such denominations and registered in such names as the
Representative requests not less than two full business days prior to the
Closing Date or the Option Closing Date, as the case may be, and will be made
available to the Representative for inspection, checking and packaging at the
aforesaid office of the Company's transfer agent or correspondent not less than
one full business day prior to such Closing Date.
1.3 Representative's Warrant.
1.3.1 Representative's Warrant. The Company hereby agrees to
issue and sell to the Representative (and/or its designees) on the Closing Date,
for an aggregate purchase price
2
<PAGE> 4
of $150.00, a Warrant ("Representative's Warrant") exercisable, at any time, in
whole or in part, for a period of four years commencing one year from the
Effective Date, for the purchase of an aggregate of 150,000 shares of Common
Stock ("Representative's Shares") at an initial exercise price of 150% of the
initial offering price of a share of Common Stock (i.e., $___ per Share). The
Representative's Warrant and the shares of Common Stock issuable upon exercise
of the Representative's Warrant are hereinafter referred to collectively as the
"Representative's Securities." The Public Securities and the Representative's
Securities are hereinafter referred to collectively as the "Securities."
1.3.2 Delivery and Payment. Delivery and payment for the
Representative's Warrant shall be made on the Closing Date. The Company shall
deliver to the Representative, upon payment therefor, certificates for the
Representative's Warrant in the name or names and in such authorized
denominations as the Representative may request.
2. Representations and Warranties of the Company. The Company represents
and warrants to the Representative as follows:
2.1 Filing of Registration Statement.
2.1.1 Pursuant to the Act. The Company has filed with the
Securities and Exchange Commission ("Commission") a registration statement and
an amendment or amendments thereto, on Form S-1 (No. 333-50771), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Securities under the Securities Act of 1933, as amended ("Act"), which
registration statement and amendment or amendments have been prepared by the
Company in conformity with the requirements of the Act and the rules and
regulations ("Regulations") of the Commission under the Act. Except as the
context may otherwise require, such registration statement, as amended, on file
with the Commission at the time the registration statement becomes effective
(including the prospectus, financial statements, schedules, exhibits and all
other documents filed as a part thereof or incorporated therein and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430A of the Regulations), is hereinafter called the "Registration
Statement," and the form of the final prospectus dated the Effective Date (or,
if applicable, the form of final prospectus filed with the Commission pursuant
to Rule 424 of the Regulations), is hereinafter called the "Prospectus." The
Registration Statement has been declared effective by the Commission on the date
hereof.
2.1.2 Pursuant to the Exchange Act. The Company has filed with
the Commission a registration statement on Form 8-A (No.______), as amended,
providing for the registration under the Securities Exchange Act of 1934, as
amended ("Exchange Act"), of the Common Stock. Such registration of the Common
Stock has been declared effective by the Commission on the date hereof.
2.2 No Stop Orders, Etc. Neither the Commission nor, to the best of the
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has instituted
or, to the best of the Company's knowledge, threatened to institute, any
proceedings with respect to such an order.
2.3 Disclosures in Registration Statement.
2.3.1 Securities Act and Exchange Act Representation. At the
time the Registration Statement became effective and at all times subsequent
thereto up to and including the Closing Date and the Option Closing Date, if
any, the Registration Statement and the
3
<PAGE> 5
Prospectus and any amendment or supplement thereto contained and will contain
all material statements which are required to be stated therein in accordance
with the Act and the Regulations, and conformed and will conform in all material
respects to the requirements of the Act and the Regulations; neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, during such time period and on such dates, contained or will contain
any untrue statement of a material fact or omitted or will omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, nor did they or will they contain any untrue statement
of a material fact nor did they or will they omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. When any
Preliminary Prospectus was first filed with the Commission (whether filed as
part of the Registration Statement for the registration of the Securities or any
amendment thereto or pursuant to Rule 424(a) of the Regulations) and when any
amendment thereof or supplement thereto was first filed with the Commission,
such Preliminary Prospectus and any amendments thereof and supplements thereto
complied or will comply in all material respects with the applicable provisions
of the Act and the Regulations and did not contain an untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The representation and
warranty made in this Section 2.1.3 does not apply to statements made or
statements omitted in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriters by the Representative
expressly for use in the Registration Statement or Prospectus or any amendment
thereof or supplement thereto.
2.3.2 Disclosure of Contracts. The description in the
Registration Statement and the Prospectus of contracts and other documents is
accurate and presents fairly the information required to be disclosed and there
are no contracts or other documents required to be described in the Registration
Statement or the Prospectus or to be filed with the Commission as exhibits to
the Registration Statement which have not been so described or filed. Each
contract or other instrument (however characterized or described) to which the
Company is a party or by which its property or business is or may be bound or
affected and (i) which is referred to in the Prospectus, or (ii) is material to
the Company's business, has been duly and validly executed, is in full force and
effect in all material respects and is enforceable against the parties thereto
in accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought. None of such contracts or
instruments has been assigned by the Company, and neither the Company nor, to
the best of the Company's knowledge, any other party is in default thereunder
and, to the best of the Company's knowledge, no event has occurred which, with
the lapse of time or the giving of notice, or both, would constitute a default
thereunder. None of the material provisions of such contracts or instruments
violates or will result in a violation of any existing applicable law, rule,
regulation, judgment, order or decree of any governmental agency or court having
jurisdiction over the Company or any of its assets or businesses, including,
without limitation, those relating to environmental laws and regulations.
2.3.3 Prior Securities Transactions. No securities of the
Company have been sold by the Company or by or on behalf of, or for the benefit
of, any person or persons controlling, controlled by, or under common control
with the Company within the three years prior to the date hereof, except as
disclosed in the Registration Statement.
4
<PAGE> 6
2.4 Changes After Dates in Registration Statement.
2.4.1 No Material Adverse Change. Since the respective dates
as of which information is given in the Registration Statement and the
Prospectus, except as otherwise specifically stated therein, (i) there has been
no material adverse change in the condition, financial or otherwise, or in the
results of operations, business or business prospects of the Company, including,
but not limited to, a material loss or interference with its business from fire,
storm, explosion, flood or other casualty, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or decree,
whether or not arising in the ordinary course of business, and (ii) there have
been no transactions entered into by the Company, other than those in the
ordinary course of business, which are material with respect to the condition,
financial or otherwise, or to the results of operations, business or business
prospects of the Company.
2.4.2 Recent Securities Transactions, Etc. Subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as may otherwise be indicated or contemplated
herein or therein, the Company has not (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money; or (ii)
declared or paid any dividend or made any other distribution on or in respect to
its capital stock.
2.5 Independent Accountants. Altschuler, Melvoin & Glasser LLP, Cooper,
Selvin & Strassberg, LLP and Friedman Eisenstein Raemer and Schwartz, LLP, whose
reports are filed with the Commission as part of the Registration Statement, are
each independent accountants as required by the Act and the Regulations.
2.6 Financial Statements. The financial statements, including the notes
thereto and supporting schedules included in the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company at the dates and for the periods to which they apply; and such
financial statements have been prepared in conformity with generally accepted
accounting principles, consistently applied throughout the periods involved; and
the supporting schedules included in the Registration Statement present fairly
the information required to be stated therein. The pro forma financial
information set forth in the Registration Statement reflects all significant
assumptions and adjustments relating to the business and operations of the
Company.
2.7 Authorized Capital; Options; Etc. The Company had at the date or
dates indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
Based on the assumptions and adjustments stated in the Registration Statement
and the Prospectus, the Company will have on the Closing Date the adjusted stock
capitalization set forth therein. Except as set forth in the Registration
Statement and the Prospectus, on the Effective Date and on the Closing Date
there will be no options, warrants, or other rights to purchase or otherwise
acquire any authorized but unissued shares of Common Stock of the Company,
including any obligations to issue any shares pursuant to anti-dilution
provisions, or any security convertible into shares of Common Stock of the
Company, or any contracts or commitments to issue or sell shares of Common Stock
or any such options, warrants, rights or convertible securities.
5
<PAGE> 7
2.8 Valid Issuance of Securities; Etc.
2.8.1 Outstanding Securities. All issued and outstanding
securities of the Company have been duly authorized and validly issued and are
fully paid and non-assessable; the holders thereof have no rights of rescission
with respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the Company. The outstanding options and warrants
to purchase shares of Common Stock constitute the valid and binding obligations
of the Company, enforceable in accordance with their terms. The authorized
Common Stock and outstanding options and warrants to purchase shares of Common
Stock conform to all statements relating thereto contained in the Registration
Statement and the Prospectus. The offers and sales of the outstanding Common
Stock, options and warrants to purchase shares of Common Stock were at all
relevant times either registered or qualified under the Act and the applicable
state securities or Blue Sky Laws or exempt from such registration requirements.
2.8.2 Securities Sold Pursuant to this Agreement. The
Securities have been duly authorized and, when issued and paid for, will be
validly issued, fully paid and non-assessable; the holders thereof are not and
will not be subject to personal liability by reason of being such holders; the
Securities are not and will not be subject to the preemptive rights of any
holders of any security of the Company or similar contractual rights granted by
the Company; and all corporate action required to be taken for the
authorization, issuance and sale of the Securities has been duly and validly
taken. When issued, the Representative's Warrant will constitute a valid and
binding obligation of the Company to issue and sell, upon exercise thereof and
payment therefor, the number and type of securities of the Company called for
thereby and the Representative's Warrant will be enforceable against the Company
in accordance with its terms, except (i) as such enforceability may be limited
by bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (ii) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (iii) that the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
2.9 Registration Rights of Third Parties. Except as set forth in the
Prospectus and on SCHEDULE 2.9 hereto, no holders of any securities of the
Company or of any options or warrants of the Company exercisable for or
convertible or exchangeable into securities of the Company have the right to
require the Company to register any such securities of the Company under the Act
or to include any such securities in a registration statement to be filed by the
Company.
2.10 Validity and Binding Effect of Agreements. This Agreement and the
Representative's Warrant have been duly and validly authorized by the Company,
and constitute, or when executed and delivered, will constitute, the valid and
binding agreements of the Company, enforceable against the Company in accordance
with their respective terms, except (i) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (ii) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (iii) that the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
2.11 No Conflicts, Etc. The execution, delivery, and performance by the
Company of this Agreement and the Representative's Warrant, the consummation by
the Company of the
6
<PAGE> 8
transactions herein and therein contemplated and the compliance by the Company
with the terms hereof and thereof do not and will not, with or without the
giving of notice or the lapse of time or both, (i) result in a breach of, or
conflict with any of the terms and provisions of, or constitute a default under,
or result in the creation, modification, termination or imposition of any lien,
charge or encumbrance upon any property or assets of the Company pursuant to the
terms of any indenture, mortgage, deed of trust, note, loan or credit agreement
or any other agreement or instrument evidencing an obligation for borrowed
money, or any other agreement or instrument to which the Company is a party or
by which the Company may be bound or to which any of the property or assets of
the Company is subject; (ii) result in any violation of the provisions of the
Certificate of Incorporation or the By-Laws of the Company; (iii) violate any
existing applicable law, rule, regulation, judgment, order or decree of any
governmental agency or court, domestic or foreign, having jurisdiction over the
Company or any of its properties or business; or (iv) have a material adverse
effect on any permit, license, certificate, registration, approval, consent,
license or franchise concerning the Company.
2.12 No Defaults; Violations. Except as described in the Prospectus, no
default exists in the due performance and observance of any term, covenant or
condition of any license, contract, indenture, mortgage, deed of trust, note,
loan or credit agreement, or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or instrument to which the
Company is a party or by which the Company may be bound or to which any of the
properties or assets of the Company is subject. The Company is not in violation
of any term or provision of its Certificate of Incorporation or By-Laws or in
violation of any franchise, license, permit, applicable law, rule, regulation,
judgment or decree of any governmental agency or court, domestic or foreign,
having jurisdiction over the Company or any of its properties or business.
2.13 Corporate Power; Licenses; Consents.
2.13.1 Conduct of Business. The Company has all requisite
corporate power and authority, and has all necessary authorizations, approvals,
orders, licenses, certificates and permits of and from all governmental
regulatory officials and bodies to own or lease its properties and conduct its
business as described in the Prospectus. The Company is and has been doing
business in compliance with all such authorizations, approvals, orders,
licenses, certificates and permits and all federal, state and local rules and
regulations. The disclosures in the Registration Statement concerning the
effects of federal, state and local regulation on the Company's business as
currently contemplated are correct in all material respects and do not omit to
state a material fact.
2.13.2 Transactions Contemplated Herein. The Company has all
corporate power and authority to enter into this Agreement and to carry out the
provisions and conditions hereof, and all consents, authorizations, approvals
and orders required in connection therewith have been obtained. No consent,
authorization or order of, and no filing with, any court, government agency or
other body is required for the valid issuance, sale and delivery of the
Securities pursuant to this Agreement and the Representative's Warrant, and as
contemplated by the Prospectus, except with respect to applicable federal and
state securities laws.
2.14 Title to Property; Insurance. The Company has good and marketable
title to, or valid and enforceable leasehold estates in, all items of real and
personal property (tangible and intangible) owned or leased by it, free and
clear of all liens, encumbrances, claims, security interests, defects and
restrictions of any material nature whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable. The Company has
adequately
7
<PAGE> 9
insured its properties against loss or damage by fire or other casualty and
maintains, in adequate amounts, such other insurance as is usually maintained by
companies engaged in the same or similar business.
2.15 Litigation; Governmental Proceedings. Except as set forth in the
Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or, to the
Company's knowledge, threatened against, or involving the properties or business
of, the Company which might materially and adversely affect the financial
position, prospects, value or the operation of the properties or the business of
the Company, or which questions the validity of the capital stock of the Company
or this Agreement or of any action taken or to be taken by the Company pursuant
to, or in connection with, this Agreement. The lawsuit brought by a former
distributor of the Company's products against the Company in the Supreme Court
of the State of New York, Kings County, has been settled and the Company is not
obligated to pay more than $70,000 to the plaintiff in fulfillment of the terms
of such settlement. There are no outstanding orders, judgments or decrees of any
court, governmental agency or other tribunal, domestic or foreign, naming the
Company and enjoining the Company from taking, or requiring the Company to take,
any action, or to which the Company, its properties or business is bound or
subject.
2.16 Good Standing. The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of the state of
its incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which ownership or
leasing of any properties or the character of its operations requires such
qualification or licensing, except where the failure to qualify would not have a
material adverse effect on the Company.
2.17 Taxes. The Company has filed all returns (as hereinafter defined)
required to be filed with taxing authorities prior to the date hereof or has
duly obtained extensions of time for the filing thereof. The Company has paid
all taxes (as hereinafter defined) shown as due on such returns that were filed
and has paid all taxes imposed on or assessed against the Company. The
provisions for taxes payable, if any, shown on the financial statements filed
with or as part of the Registration Statement are sufficient for all accrued and
unpaid taxes, whether or not disputed, and for all periods to and including the
dates of such consolidated financial statements. Except as disclosed in writing
to the Representative, (i) no issues have been raised (and are currently
pending) by any taxing authority in connection with any of the returns or taxes
asserted as due from the Company, and (ii) no waivers of statutes of limitation
with respect to the returns or collection of taxes have been given by or
requested from the Company. The term "taxes" means all federal, state, local,
foreign, and other net income, gross income, gross receipts, sales, use, ad
valorem, transfer, franchise, profits, license, lease, service, service use,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property, windfall profits, customs, duties or other taxes, fees, assessments,
or charges of any kind whatever, together with any interest and any penalties,
additions to tax, or additional amounts with respect thereto. The term "returns"
means all returns, declarations, reports, statements, and other documents
required to be filed in respect to taxes.
2.18 Employees' Options. No more than ________ shares of Common Stock
are eligible for sale pursuant to Rule 701 promulgated under the Act in the
12-month period following the Effective Date.
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2.19 Transactions Affecting Disclosure to NASD.
2.19.1 Finder's Fees. There are no claims, payments,
issuances, arrangements or understandings for services in the nature of a
finder's, consulting or origination fee with respect to the introduction of the
Company to the Underwriters or the sale of the Securities hereunder or any other
arrangements, agreements, understandings, payments or issuances with respect to
the Company that may affect the Underwriters' compensation, as determined by the
National Association of Securities Dealers, Inc. ("NASD").
2.19.2 Payments Within Twelve Months. Except as set forth on
SCHEDULE 2.19, other than payments to the Representative, the Company has not
made any direct or indirect payments (in cash, securities or otherwise) to (i)
any person, as a finder's fee, investing fee or otherwise, in consideration of
such person raising capital for the Company or introducing to the Company
persons who provided capital to the Company, (ii) to any NASD member, or (iii)
to any person or entity that has any direct or indirect affiliation or
association with any NASD member within the 12-month period prior to the date on
which the Registration Statement was filed with the Commission ("Filing Date")
or thereafter.
2.19.3 Use of Proceeds. None of the net proceeds of the
offering will be paid by the Company to any NASD member or any affiliate or
associate of any NASD member, except as specifically authorized herein.
2.19.4 Insiders' NASD Affiliation. Except as set forth on
SCHEDULE 2.19, no officer or director of the Company or owner of any of the
Company's unregistered securities has any direct or indirect affiliation or
association with any NASD member. The Company will advise the Representative and
the NASD if any officer, director or stockholder of the Company becomes,
directly or indirectly, an affiliate or associated person of an NASD member
participating in the offering.
2.20 Foreign Corrupt Practices Act. Neither the Company nor any of its
officers, directors, employees or agents or any other person acting on behalf of
the Company has, directly or indirectly, given or agreed to give any money, gift
or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent of a
customer or supplier, or official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or any political party
or candidate for office (domestic or foreign) or other person who was, is, or
may be in a position to help or hinder the business of the Company (or assist it
in connection with any actual or proposed transaction) which (i) might subject
the Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (ii) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company
as reflected in any of the financial statements contained in the Prospectus or
(iii) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The internal accounting
controls and procedures of the Company are sufficient to cause the Company to
comply with the Foreign Corrupt Practices Act of 1977, as amended.
2.21 Nasdaq Eligibility. As of the Effective Date, the Public
Securities have been approved for designation upon notice of issuance on the
Nasdaq SmallCap Market ("Nasdaq").
2.22 Intangibles. The Company owns or possesses the requisite licenses
or rights to use all trademarks, service marks, service names, trade names,
patents and patent applications, copyrights and other rights (collectively,
"Intangibles") described as being licensed to or owned
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by it in the Registration Statement. The Company's Intangibles which have been
registered in the United States Patent and Trademark Office have been fully
maintained and are in full force and effect. There is no claim or action by any
person pertaining to, or proceeding pending or threatened and the Company has
not received any notice of conflict with, the asserted rights of others which
challenges the exclusive right of the Company with respect to any Intangibles
used in the conduct of the Company's business except as described in the
Prospectus. The Intangibles and the Company's current products, services and
processes do not infringe on any Intangibles held by any third party. To the
best of the Company's knowledge, no others have infringed upon the Intangibles
of the Company.
2.23 Relations With Employees.
2.23.1 Employee Matters. The Company has generally enjoyed a
satisfactory employer-employee relationship with its employees and is in
compliance in all material respects with all federal, state and local laws and
regulations respecting the employment of its employees and employment practices,
terms and conditions of employment and wages and hours relating thereto. There
are no pending investigations involving the Company by the U.S. Department of
Labor, or any other governmental agency responsible for the enforcement of such
federal, state and local laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or threatened against or involving the Company or any predecessor
entity, and none has ever occurred. No question concerning representation exists
respecting the employees of the Company and no collective bargaining agreement
or modification thereof is currently being negotiated by the Company. No
grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company. The Company has entered into a
new collective bargaining agreement, dated as of May 13, 1998, with the Bakery,
Cracker, Pie and Yeast Wagon Driver's Union, Local 734 International Brotherhood
of Teamsters of America ("Teamsters Local 734"), and such collective bargaining
agreement has been approved by the membership of Teamsters Local 734 and is in
full force and effect.
2.23.2 Employee Benefit Plans. Other than as set forth in the
Registration Statement, the Company neither maintains, sponsors nor contributes
to, nor is it required to contribute to, any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a
"multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute
to, and has at no time maintained or contributed to, a defined benefit plan, as
defined in Section 3(35) of ERISA. If the Company does maintain or contribute to
a defined benefit plan, any termination of the plan on the date hereof would not
give rise to liability under Title IV of ERISA. No ERISA Plan (or any trust
created thereunder) has engaged in a "prohibited transaction" within the meaning
of Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as
amended ("Code"), which could subject the Company to any tax penalty for
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all material reporting, disclosure and other
requirements of the Code and ERISA as they relate to any such ERISA Plan.
Determination letters have been received from the Internal Revenue Service with
respect to each ERISA Plan which is intended to comply with Code Section 401(a),
stating that such ERISA Plan and the attendant trust are qualified thereunder.
The Company has never completely or partially withdrawn from a "multi-employer
plan." [MODIFY FOR COLLECTIVE BARGAINING AGREEMENT.]
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2.24 Officers' Certificate. Any certificate signed by any duly
authorized officer of the Company and delivered to the Representative or its
counsel shall be deemed a representation and warranty by the Company to the
Representative as to the matters covered thereby.
2.25 Reserved.
2.26 Lock-Up Agreements. The Company has caused to be duly executed
legally binding and enforceable agreements pursuant to which all of the officers
and directors of the Company and all holders of at least 2,500 shares of the
outstanding Common Stock of the Company or warrants or options to purchase, or
other securities convertible into, 5,000 or more shares of Common Stock
(including family members who reside in the same household as such persons and
affiliates of such persons), other than Richard and Randye Worth, agree not to
sell any shares of Common Stock or warrants or options to purchase, or other
securities convertible into Common Stock (other than the Firm Shares and Option
Shares being sold by the Selling Stockholders, except to the extent any of the
Option Shares are not sold by the Underwriters pursuant to this Agreement),
owned by them (either pursuant to Rule 144 of the Regulations or otherwise) for
a period of 12 months following the Effective Date except with the prior written
consent of the Representative. Richard and Randye Worth (together, the "Worths")
have entered into legally binding and enforceable agreements pursuant to which
each of them agrees not to sell any shares of Common Stock or warrants or
options to purchase, or other securities convertible into Common Stock, owned by
them (either pursuant to Rule 144 or otherwise) for a period of 36 months
following the Effective Date; provided that the Worths may sell up to 10% of
their aggregate holdings between the first and second anniversaries of the
Effective Date and an additional 20% of their aggregate holdings between the
second and third anniversaries of the Effective Date without the prior written
consent of the Representative. To the extent that any other lockup agreements
between the Company and any of its shareholders exist and continue to have
effect, the Company agrees that it will (i) not consent to the early release of
any securities of the Company covered by such lockup agreements without the
prior written consent of the Representative, and (ii) consent to the early
release of such securities when and as requested by the Representative.
2.27 Subsidiaries. The representations and warranties made by the
Company in this Agreement shall, in the event that the Company has one or more
subsidiaries (a "subsidiary(ies)") also apply and be true with respect to each
subsidiary, individually and taken as a whole with the Company and all other
subsidiaries, as if each representation and warranty contained herein made
specific reference to the subsidiary each time the term "Company" was used.
2.28 Voting Trust Agreement and Voting Agreement. Each of (i) the
Voting Trust Agreement dated as of December 22, 1997 by and among Richard S.
Worth, Randye Worth, Graubard Mollen & Miller, the Company and the Voting
Trustee (as defined therein) and (ii) the Voting Agreement dated as of April 29,
1998 by and between the Company and the Voting Trustee (as defined therein),
have been duly and validly authorized by the Company and constitute the valid
and binding agreements of the Company and, to the best knowledge of the Company,
the other parties to such agreements, enforceable against the Company and, to
the best knowledge of the Company, such other parties in accordance with their
respective terms, except (i) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (ii) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (iii) that the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
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2.29 Conversion of 9% Notes. All of the Company's 9% Subordinated
Convertible Notes, in the aggregate principal amount of $1,960,000, have been
converted into shares of Series A Convertible Preferred Stock of the Company.
3. Covenants of the Company. The Company covenants and agrees as follows:
3.1 Amendments to Registration Statement. The Company will deliver to
the Representative, prior to filing, any amendment or supplement to the
Registration Statement or Prospectus proposed to be filed after the Effective
Date and not file any such amendment or supplement to which the Representative
shall reasonably object.
3.2 Federal Securities Laws.
3.2.1 Compliance. During the time when a Prospectus is
required to be delivered under the Act, the Company will use all reasonable
efforts to comply with all requirements imposed upon it by the Act, the
Regulations and the Exchange Act and by the regulations under the Exchange Act,
as from time to time in force, so far as necessary to permit the continuance of
sales of or dealings in the Securities in accordance with the provisions hereof
and the Prospectus. If at any time when a Prospectus relating to the Securities
is required to be delivered under the Act any event shall have occurred as a
result of which, in the opinion of counsel for the Company or counsel for the
Representative, the Prospectus, as then amended or supplemented, includes an
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Representative promptly and prepare and file with the
Commission, subject to Section 3.1 hereof, an appropriate amendment or
supplement in accordance with Section 10 of the Act.
3.2.2 Filing of Final Prospectus. The Company will file the
Prospectus (in form and substance satisfactory to the Representative) with the
Commission pursuant to the requirements of Rule 424 of the Regulations.
3.2.3 Exchange Act Registration. For a period of five years
from the Effective Date, the Company will use its best efforts to maintain the
registration of the Common Stock under the provisions of Section 12 of the
Exchange Act.
3.3 Blue Sky Filing. The Company will endeavor in good faith, in
cooperation with the Representative, at or prior to the time the Registration
Statement becomes effective, to qualify the Securities for offering and sale
under the securities laws of such jurisdictions as the Representative may
reasonably designate, provided that no such qualification shall be required in
any jurisdiction where, as a result thereof, the Company would be subject to
service of general process or to taxation as a foreign corporation doing
business in such jurisdiction. In each jurisdiction where such qualification
shall be effected, the Company will, unless the Representative agrees that such
action is not at the time necessary or advisable, use all reasonable efforts to
file and make such statements or reports at such times as are or may be required
by the laws of such jurisdiction.
3.4 Delivery to the Underwriters of Prospectuses. The Company will
deliver to each of the several Underwriters, without charge, from time to time
during the period when the Prospectus is required to be delivered under the Act
or the Exchange Act, such number of copies of each Preliminary Prospectus and
the Prospectus as such Underwriter may reasonably request
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and, as soon as the Registration Statement or any amendment or supplement
thereto becomes effective, deliver to you two original executed Registration
Statements, including exhibits, and all post-effective amendments thereto and
copies of all exhibits filed therewith or incorporated therein by reference and
all original executed consents of certified experts.
3.5 Events Requiring Notice to the Representative. The Company will
notify the Representative immediately and confirm the notice in writing (i) of
the effectiveness of the Registration Statement and any amendment thereto, (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding for that purpose, (iii) of the issuance by any
state securities commission of any proceedings for the suspension of the
qualification of the Securities for offering or sale in any jurisdiction or of
the initiation, or the threatening, of any proceeding for that purpose, (iv) of
the mailing and delivery to the Commission for filing of any amendment or
supplement to the Registration Statement or Prospectus, (v) of the receipt of
any comments or request for any additional information from the Commission, and
(vi) of the happening of any event during the period described in Section 3.1.4
hereof which, in the judgment of the Company, makes any statement of a material
fact made in the Registration Statement or the Prospectus untrue or which
requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If the Commission or
any state securities commission shall enter a stop order or suspend such
qualification at any time, the Company will make every reasonable effort to
obtain promptly the lifting of such order.
3.6 Review of Financial Statements. For a period of five years from the
Effective Date, the Company, at its expense, shall cause its regularly engaged
independent certified public accountants to participate in the preparation and
presentation (but not audit) of the Company's financial statements for each of
the first three fiscal quarters prior to the announcement of quarterly financial
information, the filing of the Company's Form 10-Q quarterly reports and the
mailing of quarterly financial information to stockholders.
3.7 Reserved.
3.8 Secondary Market Trading and Standard & Poor's. The Company will
take all necessary and appropriate actions to achieve accelerated publication in
Standard and Poor's Corporation Records Corporate Descriptions (within thirty
(30) days after the Effective Date) and to maintain such publication with
updated quarterly information for a period of five years from the Effective
Date, including the payment of any necessary fees and expenses. The Company
shall take such action as may be reasonably requested by the Representative to
obtain a secondary market trading exemption in such states as may be requested
by the Underwriter, including the payment of any necessary fees and expenses and
the filing of a Form (e.g. 25101(b)) for secondary market trading in the State
of California on the Effective Date or as soon thereafter as is permissible.
3.9 Nasdaq Maintenance. For a period of five years from the date
hereof, the Company will use its best efforts to maintain the quotation on
Nasdaq of the Common Stock and, if the Company satisfies the inclusion standards
of the Nasdaq National Market System, apply for and maintain quotations on the
Nasdaq National Market System of such securities during such period.
3.10 Reserved.
3.11 Reserved.
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3.12 Reports to the Representative and Others.
3.12.1 Periodic Reports, Etc. For a period of five years from
the Effective Date, the Company will promptly furnish to the Representative, and
to each other Underwriter who may so request, copies of such financial
statements and other periodic and special reports as the Company from time to
time files with any governmental authority or furnishes generally to holders of
any class of its securities, and promptly furnish to the Representative (i) a
copy of each periodic report the Company shall be required to file with the
Commission, (ii) a copy of every press release with respect to the Company or
its affairs which was released by the Company, and (iii) a copy of each Form 8-K
or Schedules 13D, 13G, 14D-1 or 13E-4 received or prepared by the Company.
3.12.2 Transfer Sheets and Weekly Position Listings. For a
period of five years from the Closing Date, the Company will furnish to the
Representative at the Company's sole expense such transfer sheets and position
listings of the Company's securities as the Representative may reasonably
request, including the daily, weekly and monthly consolidated transfer sheets of
the transfer agent of the Company and the weekly position listings of the
Depository Trust Company.
3.12.3 Secondary Market Trading Memorandum. Until such time as
the Securities are listed or quoted, as the case may be, on one of the
following: the New York Stock Exchange, the American Stock Exchange or Nasdaq
National Market, the Company shall engage the Representative's legal counsel to
deliver to the Representative a written opinion detailing those states in which
Securities may be traded in non-issuer transactions under the Blue Sky laws of
the fifty states ("Secondary Market Trading Memorandum"). The Secondary Market
Trading Memorandum shall be delivered to the Representative on the Effective
Date. The Company shall pay to the Representative's legal counsel a one-time fee
of $5,000 for such services at the Closing.
3.13 Representative's Warrant. On the Closing Date, the Company will
execute and deliver the Representative's Warrant to the Representative
substantially in the form filed as an exhibit to the Registration Statement.
3.14 Disqualification of Form S-1. For a period equal to five years
from the date hereof, the Company will not take any action or actions which may
prevent or disqualify the Company's use of Form S-1 (or other appropriate form)
for the registration of the Representative's Warrant and the securities issuable
upon exercise thereof under the Act.
3.15 Payment of Expenses.
3.15.1 General Expenses. The Company hereby agrees to pay on
each of the Closing Date and, to the extent not paid on the Closing Date, the
Option Closing Date, if any, all expenses incident to the performance of the
obligations of the Company under this Agreement, including but not limited to
the preparation, printing, filing, delivery and mailing (including the payment
of postage with respect to such mailing) of the Registration Statement, the
Prospectus and the Preliminary Prospectuses and the printing and mailing of this
Agreement and related documents, including the cost of all copies thereof and
any amendments thereof or supplements thereto supplied to the Underwriters in
quantities as may be reasonably required by the Underwriters, (iv) the printing,
engraving, issuance and delivery of the shares of Common Stock and the
Representative's Warrant, including any transfer or other taxes payable thereon,
(v) the qualification of the Securities under state or foreign securities or
Blue Sky laws, including the
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filing fees under such Blue Sky laws, the costs of printing and mailing the
"Preliminary Blue Sky Memorandum," and all amendments and supplements thereto,
fees up to an aggregate of $35,000 and disbursements of the Representative's
counsel, and a one-time fee of $5,000 payable to the Representative's counsel
for the preparation of the Secondary Market Trading Memorandum, (vi) costs
associated with applications for assignments of a rating of the Securities by
qualified rating agencies, (vii) filing fees, costs and expenses (including fees
up to an aggregate of $5,000 and disbursements for the Representative's counsel)
incurred in registering the offering with the NASD, (viii) costs up to an
aggregate of $30,000 of placing "tombstone" advertisements in The Wall Street
Journal, The New York Times and a third publication to be mutually selected by
the Representative and the Company, fees and disbursements of the transfer
agent, the Company's expenses associated with "due diligence" meetings arranged
by the Representative; the preparation, binding and delivery of transaction
"bibles" in quantity, form and style satisfactory to the Representative and
transaction lucite cubes or similar commemorative items in a style and quantity
as requested by the Representative, (ix) any listing of the Securities on Nasdaq
and any securities exchange and any listing in Standard & Poor's, (x) fees and
disbursements of any counsel engaged to review the Company's intellectual
property rights, and (xi) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section 3.15.1. Since an important part of the public
offering process is for the Company to describe appropriately and accurately the
background of the principals of the Company, the Company has engaged and will
pay for an investigative search firm of the Representative's choice to conduct
an investigation of Edward R. Sousa. The Representative may deduct from the net
proceeds of the offering payable to the Company on the Closing Date, or the
Option Closing Date, if any, the expenses set forth herein to be paid by the
Company to the Representative and/or to third parties.
3.15.2 Non-Accountable Expenses. The Company further agrees to
pay to the Representative a non-accountable expense allowance equal to three
percent (3%) of the gross proceeds from the sale of the Firm Shares and the
Option Shares on the Closing Date and any additional monies owed attributable to
the Option Shares or otherwise on the Option Closing Date by certified or bank
cashier's check or, at the election of the Representative, by deduction from the
proceeds of the offering contemplated herein. If the offering contemplated by
this Agreement is not consummated for any reason whatsoever other than a breach
by the Representative of this Agreement, then the following provisions shall
apply: The Company's liability for payment to the Representative of the
non-accountable expense allowance shall be equal to the sum of the
Representative's actual out-of-pocket expenses (including, but not limited to,
counsel fees, "road-show" and due diligence expenses).
3.16 Application of Net Proceeds. The Company will apply the net
proceeds from the offering received by it in a manner consistent in all material
respects with the application described under the caption "Use of Proceeds" in
the Prospectus. The Company hereby agrees that, except as so described, the
Company will not apply any net proceeds from the offering to pay (i) any debt
for borrowed funds, or (ii) any debt or obligation owed to any officer, director
or holder of 5,000 or more shares of Common Stock or warrants or options to
purchase, or other securities convertible into, 5,000 or more shares of Common
Stock.
3.17 Delivery of Earnings Statements to Security Holders. The Company
will make generally available to its security holders as soon as practicable,
but not later than the first day of the fifteenth full calendar month following
the Effective Date, an earnings statement (which need not be certified by
independent public or independent certified public accountants unless required
by the Act or the Regulations, but which shall satisfy the provisions of Rule
158(a) under
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Section 11(a) of the Act) covering a period of at least twelve consecutive
months beginning after the Effective Date.
3.18 Key Person Life Insurance. The Company will maintain key person
life insurance in an amount not less than $1,000,000 each on the lives of
Michael J. Kirby and Jeffry Weiner, to be in effect as of the Effective Date,
and pay the annual premiums therefor naming the Company as the sole beneficiary
thereof for at least three years following the Effective Date.
3.19 Stabilization. Neither the Company, nor, to its knowledge, any of
its employees, directors or stockholders has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
3.20 Internal Controls. The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization, (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
3.21 Accountants and Lawyers. For a period of five years from the
Effective Date, the Company shall retain independent public accountants and
securities lawyers acceptable to the Representative.
3.22 Transfer Agent. For a period ending on the five year anniversary
of the Effective Date the Company shall retain a transfer agent for the Common
Stock acceptable to the Representative. Continental Stock Transfer & Trust
Company ("Transfer Agent") is acceptable to the Representative.
3.23 Sale of Securities. The Company agrees not to permit or cause a
private or public sale or private or public offering (except for such private
transfers as are permitted under the terms of the lockup agreements described in
Section 2.26) of any of its securities (in any manner, including pursuant to
Rule 144 under the Act) owned nominally or beneficially by the persons described
in Section 2.26 for a period of 12 months following the Effective Date without
obtaining the prior written approval of the Representative; provided, however,
that with respect the Worths, the Company shall refuse to permit or cause any
such sale or offering for 24 months following the Effective Date, except that
the Company will permit the Worths to sell up to 10% of their aggregate holdings
between the first and second anniversaries of the Effective Date and an
additional 20% of their aggregate holdings between the second and third
anniversaries of the Effective Date.
3.24 Exercise Price of Options. For a period of three years after the
Effective Date, the Company will not grant any option, pursuant to any of the
Company's stock option or incentive plans or otherwise, at an exercise price
less than the fair market value of the Common Stock on the date of the grant.
4. Conditions of the Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Securities, as provided herein,
shall be subject to the continuing
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accuracy of the representations and warranties of the Company as of the date
hereof and as of each of the Closing Date and the Option Closing Date, if any,
to the accuracy of the statements of officers of the Company made pursuant to
the provisions hereof and to the performance by the Company of its obligations
hereunder and to the following conditions:
4.1 Regulatory Matters.
4.1.1 Effectiveness of Registration Statement. The
Registration Statement has been declared effective on the date of this Agreement
and, at each of the Closing Date and the Option Closing Date, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for such purpose shall have been instituted or shall
be pending or, to the best knowledge of the Company, contemplated by the
Commission and any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
Graubard Mollen & Miller, counsel to the Representative.
4.1.2 NASD Clearance. By the Effective Date, the
Representative shall have received clearance from the NASD as to the amount of
compensation allowable or payable to the Underwriters as described in the
Registration Statement.
4.1.3 No Blue Sky Stop Orders. No order suspending the sale of
the Securities in any jurisdiction designated by the Representative pursuant to
Section 3.3 hereof shall have been issued on or before either the Closing Date
or the Option Closing Date, and no proceedings for that purpose shall have been
instituted or, to the best knowledge of the Company, shall be contemplated.
4.2 Opinions of Counsel.
4.2.1 Opinion of Company Counsel. On the Closing Date and the
Option Closing Date, if any, the Representative shall have received the
favorable opinion of Olshan Grundman Frome & Rosenzweig LLP, counsel to the
Company, dated the Closing Date (or the Option Closing Date, if any), addressed
to the Representative and in form and substance satisfactory to Graubard Mollen
& Miller, counsel to the Representative, to the effect that:
(i) The Company (which for purposes of this Section
4.2.1 shall mean Delicious Brands, Inc. ("DBI") and each subsidiary
(collectively, the "Subsidiaries") of DBI individually) has been duly organized
and is validly existing as a corporation and in good standing under the laws of
its state of organization and is duly qualified and in good standing in each
jurisdiction in which it owns or leases any real property or the character of
its operations requires such qualification, except where the failure to so
qualify would not have a material adverse effect on the business of the Company.
(ii) The Company has all requisite corporate power
and authority, and, to the best of such counsel's knowledge, has all necessary
authorizations, approvals, orders, licenses, certificates and permits of and
from all governmental or regulatory officials and bodies to own or lease its
properties and conduct its business as described in the Prospectus, and, to the
best of such counsel's knowledge, is and has been doing business in compliance
with all such authorizations, approvals, orders, licenses, certificates and
permits, except where the failure to obtain or to comply would not have a
material adverse effect on the business of DBI and the Subsidiaries taken as a
whole. DBI has all corporate power and authority to enter into this Agreement
and the Representative's Warrant and to carry out the provisions and conditions
hereof and thereof, and all consents, authorizations, approvals and orders
required in connection
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therewith have been obtained. No consents, approvals, authorizations or orders
of, and no filing with, any court or governmental agency or body (other than
such as may be required under the Act and applicable Blue Sky laws), is required
for the valid offer, authorization, issuance, sale and delivery of the
Securities, and the consummation of the transactions and agreements contemplated
by this Agreement and the Representative's Warrant, and as contemplated by the
Prospectus or if so required, all such authorizations, approvals, consents,
orders, registrations, licenses and permits have been duly obtained and are in
full force and effect and have been disclosed to the Representative.
(iii) All issued and outstanding securities of DBI
have been duly authorized and validly issued and, based upon the records of DBI,
are fully paid and non-assessable; the holders thereof have no rights of
rescission with respect thereto, and are not subject to personal liability by
reason of being such holders; and none of such securities was issued in
violation of preemptive rights of any holders of any securities of the Company
or, to such counsel's knowledge, similar contractual rights granted by the
Company. The outstanding options and warrants to purchase shares of Common Stock
constitute the valid and binding obligations of the Company, enforceable in
accordance with their terms. The offers and sales of the outstanding Common
Stock and options and warrants to purchase shares of Common Stock of DBI were,
based upon such counsel's review of DBI's records, at all relevant times either
registered under the Act or exempt from the registration requirements thereof.
The authorized and, to such counsel's knowledge, outstanding capital stock of
DBI is as set forth under the caption "Capitalization" in the Prospectus.
(iv) The Securities have been duly authorized and,
when issued and paid for, will be validly issued, fully paid and non-assessable;
the holders thereof are not and will not be subject to personal liability by
reason of being such holders. The Securities are not and will not be subject to
the preemptive rights of any holders of any security of DBI or, to the best of
such counsel's knowledge, similar contractual rights granted by DBI. All
corporate action required to be taken for the authorization, issuance and sale
of the Securities has been duly and validly taken. The certificates representing
the Securities are in due and proper form.
(v) To the best of such counsel's knowledge, except
as set forth in the Prospectus and on Schedule 2.9 hereto, no holders of any
securities of DBI or of any options, warrants or securities of DBI exercisable
for or convertible or exchangeable into securities of DBI have the right to
require DBI to register any such securities of DBI under the Act or to include
any such securities in a registration statement to be filed by DBI.
(vi) To the best of such counsel's knowledge, after
due inquiry, the shares of Common Stock are eligible for listing on the AMEX.
(vii) This Agreement and the Representative's Warrant
have each been duly and validly authorized and, when executed and delivered by
the Company, will constitute valid and binding obligations of DBI, enforceable
against DBI in accordance with their respective terms, except (a) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (b) as enforceability of any
indemnification provisions may be limited under the federal and state securities
laws, and (c) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to the equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
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(viii) The execution, delivery and performance by DBI
of this Agreement and the Representative's Warrant, the issuance and sale of the
Securities, the consummation of the transactions contemplated hereby and thereby
and the compliance by the Company with the terms and provisions hereof and
thereof, do not and will not, with or without the giving of notice or the lapse
of time, or both, (a) conflict with, or result in a breach of, any of the terms
or provisions of, or constitute a default under, or result in the creation or
modification of any lien, security interest, charge or encumbrance upon any of
the properties or assets of the Company pursuant to the terms of, any material
mortgage, deed of trust, note, indenture, loan, contract, commitment or other
material agreement or instrument to which the Company is a party or by which the
Company or any of its properties or assets may be bound, (b) result in any
violation of the provisions of the Certificate of Incorporation or the By-Laws
of the Company, (c) violate any statute or any judgment, order or decree, rule
or regulation applicable to the Company of any court, domestic or foreign, or of
any federal, state or other regulatory authority or other governmental body
having jurisdiction over the Company, its properties or assets, except for such
violations that would not have a material adverse effect on the Company, singly
or in the aggregate, or (d) have a material adverse effect on any permit,
certification, registration, approval, consent, license or franchise of the
Company.
(ix) The Registration Statement, each Preliminary
Prospectus and the Prospectus and any post-effective amendments or supplements
thereto (other than the financial statements included therein, as to which no
opinion need be rendered) comply as to form in all material respects with the
requirements of the Act and Regulations. The Securities and all other securities
issued or issuable by DBI conform in all material respects to the description
thereof contained in the Registration Statement and the Prospectus. The
statements in the Prospectus under "Risk Factors," "Business," "Management,"
"Certain Transactions," "Principal Stockholders," "Selling Securityholders,"
"Description of Capital Stock" and "Shares Eligible for Future Sale" have been
reviewed by such counsel, and insofar as they refer to statements of law,
descriptions of statutes, licenses, Intangibles, rules or regulations or legal
conclusions are correct in all material respects. No statute or regulation or
legal or governmental proceeding required to be described in the Prospectus is
not described as required, nor to such counsel's knowledge are any contracts or
documents of a character required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement not
so described or filed as required.
(x) Counsel has participated in conferences with
officers and other representatives of DBI, representatives of the independent
public accountants for DBI and representatives of the Representative at which
the contents of the Registration Statement, the Prospectus and related matters
were discussed and although such counsel is not passing upon, and does not
assume any responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement and Prospectus (except as
otherwise set forth in counsel's opinion), no facts have come to the attention
of such counsel which lead them to believe that either the Registration
Statement or the Prospectus or any amendment or supplement thereto contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (it being understood
that such counsel need express no opinion with respect to the financial
statements and other financial and statistical data included in the Registration
Statement or Prospectus).
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(xi) The Registration Statement is effective under
the Act, and, to the best of such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or threatened
under the Act or applicable state securities laws.
(xii) To the best of such counsel's knowledge, the
Company has good and marketable title to, or valid and enforceable leasehold
estates in, all items of real and personal property (tangible and intangible)
stated in the Prospectus to be owned or leased by it, free and clear of all
liens, encumbrances, claims, security interests, defects and restrictions of any
material nature whatsoever, other than those referred to in the Prospectus and
liens for taxes not yet due and payable.
(xiii) Except as described in the Prospectus, to the
best of such counsel's knowledge, no default exists in the due performance and
observance of any term, covenant or condition of any material license, contract,
indenture, mortgage, deed of trust, note, loan or credit agreement, commitment,
or any other material agreement or instrument to which the Company is a party or
by which the Company may be bound or to which any of its properties or assets is
subject. DBI is not in violation of any term or provision of its Certificate of
Incorporation or ByLaws. To the best of such counsel's knowledge, the Company is
not in violation of any franchise, license, permit, law, rule or regulation
applicable to the Company, or of any judgment or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company or
any of its properties or business, except for such violations which, singly or
in the aggregate, would not have a material adverse effect on the Company.
(xiv) To the best of such counsel's knowledge, after
due inquiry, except as described in the Prospectus and on SCHEDULE 2.27 hereto,
the Company does not own an interest in any corporation, partnership, joint
venture, trust or other business entity.
(xv) To the best of such counsel's knowledge, after
due inquiry, except as set forth in the Prospectus, there is no action, suit or
proceeding before or by any court or governmental agency or body, domestic or
foreign, now pending or threatened against the Company, that might result in any
material and adverse change in the condition (financial or otherwise), business
or prospects of the Company, or might materially and adversely affect the
properties or assets thereof.
(xvi) DBI is not, and upon consummation of the
transactions contemplated by this Agreement will not be, an "investment company"
within the meaning of Section 3 of the Investment Company Act of 1940, as
amended.
The opinion of counsel for the Company and any opinion relied
upon by such counsel for the Company shall include a statement to the effect
that it may be relied upon by counsel for the Representative in its opinion
delivered to the Representative.
4.2.2 Opinion of Intellectual Property Counsel. On the Closing
Date and the Option Closing Date, if any, the Representative also shall have
received the favorable opinion of Stoll Miskin Previto & Badie, intellectual
property counsel to the Company, dated the Closing Date (or the Option Closing
Date, if any), addressed to the Representative and in form and substance
satisfactory to Graubard Mollen & Miller, counsel to the Representative, to the
effect that, to the best of such counsel's knowledge, the Company and its
predecessor, R.W. Frookies, Inc. (collectively, for purposes of this Section
4.2.2, the "Company"), owns or possesses, free and clear of all recorded liens
or encumbrances and rights thereto or therein by third parties, other
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than as described in the Prospectus, the requisite licenses or other rights to
use all Intangibles necessary to conduct its business (including, without
limitation, any such licenses or rights described in the Prospectus as being
licensed to or owned or possessed by the Company) and, to the best of such
counsel's knowledge, there is no claim or action by any person pertaining to, or
proceeding, pending or threatened which challenges the exclusive rights of the
Company with respect to any Intangibles used in the conduct of its business
(including without limitation any such licenses or rights described in the
Prospectus as being owned or possessed by the Company). To the best of such
counsel's knowledge, the Company's current products, services and processes do
not infringe on any Intangible held by third persons. The Company's Intangible's
currently registered in the United States Patent and Trademark Office are in
full force and effect. For purposes of this Section 4.2.2, "Intangibles" means
all copyrights, trademarks and service marks and the good will associated
therewith, patents and patent applications and trade names of the Company.
4.2.3 Reliance. In rendering such opinions, such counsel may
rely (i) as to matters involving the application of laws other than the laws of
the United States and jurisdictions in which they are admitted, to the extent
such counsel deem proper and to the extent specified in such opinions, if at
all, upon an opinion or opinions (in form and substance reasonably satisfactory
to Representative's counsel) of other counsel reasonably acceptable to
Representative's counsel, familiar with the applicable laws, and (ii) as to
matters of fact, to the extent they deem proper, on certificates or other
written statements of officers of departments of various jurisdictions having
custody of documents respecting the corporate existence or good standing of the
Company, provided that copies of any such statements or certificates shall be
delivered to Representative's counsel if requested. Any opinion or opinions
relied upon by counsel for the Company, intellectual property counsel for the
Company or counsel for the Selling Stockholders shall include a statement to the
effect that it may be relied upon by counsel for the Representative in its
opinion delivered to the Representative.
4.2.4 Secondary Market Trading Memorandum. On the Effective
Date the Representative shall have received the written Secondary Market Trading
Memorandum.
4.3 Cold Comfort Letters.
4.3.1 Cold Comfort Letter of Altschuler, Melvoin and Glasser
LLP. At the time this Agreement is executed, and at each of the Closing Date and
the Option Closing Date, if any, you shall have received a letter, addressed to
the Representative and in form and substance satisfactory in all respects
(including the non-material nature of the changes or decreases, if any, referred
to in clause (iii) below) to you and to Graubard Mollen & Miller, counsel for
the Representative, from Altschuler, Melvoin and Glasser LLP, dated,
respectively, as of the date of this Agreement and as of the Closing Date and
the Option Closing Date, if any:
(i) confirming that they are independent accountants
with respect to the Company and Salerno Foods, L.L.C. ("Salerno") within the
meaning of the Act and the applicable Regulations;
(ii) stating that in their opinion the financial
statements of the Company as of December 31, 1996 and December 31, 1997 and for
each of the two years in the period ended December 31, 1997 and the financial
statements of Salerno as of December 31, 1997 and for the year then ended
included in the Registration Statement and Prospectus comply as to form in all
material respects with the applicable accounting requirements of the Act and the
published Regulations thereunder;
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(iii) stating that, based on the performance of
procedures specified by the American Institute of Certified Public Accountants
for a review of the latest available unaudited interim financial statements of
the Company (as described in Statement on Auditing Standards ("SAS") No. 71 --
"Interim Financial Information"), with an indication of the date of the latest
available unaudited interim financial statements, a reading of the latest
available minutes of the stockholders and board of directors and the various
committees of the board of directors, consultations with officers and other
employees of the Company responsible for financial and accounting matters and
other specified procedures and inquiries, nothing has come to their attention
which would lead them to believe that (a) the unaudited financial statements of
the Company included in the Registration Statement do not comply as to form in
all material respects with the applicable accounting requirements of the Act and
the Regulations or any material modification should be made to the unaudited
interim financial statements included in the Registration Statement for them to
be in conformity with generally accepted accounting principles applied on a
basis substantially consistent with that of the audited financial statements of
the Company included in the Registration Statement, and (b) at a date not later
than five days prior to the Effective Date, Closing Date or Option Closing Date,
as the case may be, there was any change in the capital stock or long-term debt
of the Company, or any decrease in the stockholders' equity of the Company as
compared with amounts shown in the December 31, 1997 balance sheet included in
the Registration Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there was any decrease, setting forth the amount
of such decrease;
(iv) setting forth, at a date not later than five
days prior to the Effective Date, the amount of liabilities of the Company
(including a break-down of commercial papers and notes payable to banks);
(v) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company and Salerno set forth in
the Prospectus, in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, and work sheets, of the Company and of Salerno with the
results obtained from the application of specified readings, inquiries and other
appropriate procedures (which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set forth in the letter
and found them to be in agreement;
(vi) statements as to such other matters incident to
the transaction contemplated hereby as you may reasonably request.
4.3.2 Cold Comfort Letter of Cooper, Selvin & Strassberg, LLP.
At the time this Agreement is executed, and at each of the Closing Date and the
Option Closing Date, if any, you shall have received a letter, addressed to the
Representative and in form and substance satisfactory in all respects to you and
to Graubard Mollen & Miller, counsel for the Representative, from Cooper, Selvin
& Strassberg, LLP, dated, respectively, as of the date of this Agreement and as
of the Closing Date and the Option Closing Date, if any:
(i) confirming that they are independent accountants
with respect to the Company within the meaning of the Act and the applicable
Regulations;
(ii) stating that in their opinion the financial
statements of the Company for the year ended December 31, 1995 included in the
Registration Statement and Prospectus
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comply as to form in all material respects with the applicable accounting
requirements of the Act and the published Regulations thereunder;
(iii) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings, statements and
other financial information pertaining to the Company (but only relating to the
year ended December 31, 1995) set forth in the Prospectus in each case to the
extent that such amounts, numbers, percentages, statements and information may
be derived from the general accounting records, and work sheets, of the Company
with the results obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures do not constitute an
examination in accordance with generally accepted auditing standards) set forth
in the letter and found them to be in agreement;
(iv) statements as to such other matters incident to
the transaction contemplated hereby as you may reasonably request.
4.3.3 Cold Comfort Letter of Friedman Eisenstein Raemer and
Schwartz, LLP. At the time this Agreement is executed, and at each of the
Closing Date and the Option Closing Date, if any, you shall have received a
letter, addressed to the Representative and in form and substance satisfactory
in all respects to you and to Graubard Mollen & Miller, counsel for the
Representative, from Friedman Eisenstein Raemer and Schwartz, LLP, dated,
respectively, as of the date of this Agreement and as of the Closing Date and
the Option Closing Date, if any:
(i) confirming that they are independent accountants
with respect to Salerno within the meaning of the Act and the applicable
Regulations;
(ii) stating that in their opinion the financial
statements of Salerno as of December 31, 1996 and for the period January 23,
1996 (Date of Inception) through December 31, 1996 included in the Registration
Statement and Prospectus comply as to form in all material respects with the
applicable accounting requirements of the Act and the published Regulations
thereunder;
(iii) stating that they have compared specific dollar
amounts, number of shares, percentages of revenues and earnings, statements and
other financial information pertaining to Salerno (but only relating to the
period January 23, 1996 (Date of Inception) through December 31, 1996) set forth
in the Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, and work sheets, of Salerno with the results obtained from
the application of specified readings, inquiries and other appropriate
procedures (which procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in the letter and found them to
be in agreement;
(iv) statements as to such other matter incident to
the transaction contemplated hereby as you may reasonably request.
4.4 Officers' Certificates.
4.4.1 Officers' Certificate. At each of the Closing Date and
the Option Closing Date, if any, the Representative shall have received a
certificate of the Company signed by the President and the Chief Financial
Officer of the Company, dated the Closing Date or the Option Closing Date, as
the case may be, respectively, to the effect that the Company has performed all
covenants and complied with all conditions required by this Agreement to be
performed or
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complied with by the Company prior to and as of the Closing Date, or the Option
Closing Date, as the case may be, and that the conditions set forth in Section
4.6 hereof have been satisfied as of such date and that, as of the Closing Date
and the Option Closing Date, as the case may be, the representations and
warranties of the Company set forth in Section 2 hereof are true and correct. In
addition, the Representative will have received such other and further
certificates of officers of the Company as the Representative may reasonably
request.
4.4.2 Secretary's Certificate. At each of the Closing Date and
the Option Closing Date, if any, the Representative shall have received a
certificate of the Company signed by the Secretary of the Company, dated the
Closing Date or the Option Date, as the case may be, respectively, certifying
(i) that the By-Laws and Certificate of Incorporation, as amended, of the
Company are true and complete, have not been modified and are in full force and
effect, (ii) that the resolutions relating to the public offering contemplated
by this Agreement are in full force and effect and have not been modified, all
correspondence between the Company or its counsel and the Commission, all
correspondence between the Company or its counsel and Nasdaq concerning
inclusion of the Securities on Nasdaq, and as to the incumbency of the
officers of the Company. The documents referred to in such certificate shall be
attached to such certificate.
4.5 No Material Changes. Prior to and on each of the Closing Date and
the Option Closing Date, if any, (i) there shall have been no material adverse
change or development involving a prospective material change in the condition
or prospects or the business activities, financial or otherwise, of the Company
from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus, (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the Company
from the latest date as of which the financial condition of the Company is set
forth in the Registration Statement and Prospectus which is materially adverse
to the Company, taken as a whole, (iii) the Company shall not be in default
under any provision of any instrument relating to any outstanding indebtedness
which default would have a material adverse effect on the Company, (iv) no
material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus, (v)
no action, suit or proceeding, at law or in equity, shall have been pending or
threatened against the Company or affecting any of its property or business
before or by any court or federal or state commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
materially adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus, (vi) no stop order shall have been issued under the
Act and no proceedings therefor shall have been initiated or threatened by the
Commission, and (vii) the Registration Statement and the Prospectus and any
amendments or supplements thereto contain all material statements which are
required to be stated therein in accordance with the Act and the Regulations and
conform in all material respects to the requirements of the Act and the
Regulations, and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
4.6 Delivery of Representative's Warrant. The Company has delivered to
the Representative an executed copy of the Representative's Warrant.
4.7 Opinion of Counsel for the Representative. All proceedings taken in
connection with the authorization, issuance or sale of the Securities as herein
contemplated shall be reasonably satisfactory in form and substance to you and
to Graubard Mollen & Miller, counsel
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to the Representative, and you shall have received from such counsel a favorable
opinion, dated the Closing Date and the Option Closing Date, if any, with
respect to such of these proceedings as you may reasonably require. On or prior
to the Effective Date, the Closing Date and the Option Closing Date, as the case
may be, counsel to the Representative shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in this Section
4.7, or in order to evidence the accuracy, completeness or satisfaction of any
of the representations, warranties or conditions herein contained.
4.8 Unaudited Financials. The Company has furnished to the
Representative a copy of the latest available unaudited interim financial
statements for the period ended __________, 1998 ("Unaudited Financials") of the
Company which have been read by Altschuler, Melvoin and Glasser LLP, as stated
in their letter dated as of the Closing Date to be furnished pursuant to Section
4.3.1 hereof.
5. Indemnification.
5.1 Indemnification of the Underwriters.
5.1.1 General. Subject to the conditions set forth below, the
Company and each Selling Stockholder, jointly and severally, agrees to indemnify
and hold harmless each of the Underwriters, their respective directors,
officers, agents and employees and each person, if any, who controls any such
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, against any and all loss, liability,
claim, damage and expense whatsoever (including but not limited to any and all
legal or other expenses reasonably incurred in investigating, preparing or
defending against any litigation, commenced or threatened, whether arising out
of any action between any of the Underwriters and the Company or between any of
the Underwriters and any third party or otherwise) to which they or any of them
may become subject under the Act, the Exchange Act or any other statute or at
common law or otherwise or under the laws of foreign countries, arising out of
or based upon any untrue statement or alleged untrue statement of a material
fact directly relating to the transactions effected by the Underwriters in
connection with this offering contained in (i) any Preliminary Prospectus, the
Registration Statement or the Prospectus (as from time to time each may be
amended and supplemented); (ii) in any post-effective amendment or amendments or
any new registration statement and prospectus in which are included securities
of the Company issued or issuable upon exercise of the Representative's Warrant;
or (iii) any application or other document or written communication (in this
Section 5 collectively called "application") executed by the Company or based
upon written information furnished by the Company in any jurisdiction in order
to qualify the Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, Nasdaq or any securities
exchange; or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
unless such statement or omission was made in reliance upon, and in strict
conformity with, written information furnished to the Company with respect to an
Underwriter by or on behalf of such Underwriter expressly for use in any
Preliminary Prospectus, the Registration Statement or Prospectus, or any
amendment or supplement thereof, or in any application, as the case may be;
provided, however, that the indemnification hereunder shall not be applicable to
any Preliminary Prospectus if the untrue statement or alleged untrue statement
was contained in a Preliminary Prospectus and was corrected in the Prospectus.
The Company agrees promptly to notify the Representative of the commencement of
any litigation or proceedings against the
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Company or any of its officers, directors or controlling persons in connection
with the issue and sale of the Securities or in connection with the Registration
Statement or Prospectus.
5.1.2 Procedure. If any action is brought against an
Underwriter or controlling person in respect of which indemnity may be sought
against the Company pursuant to Section 5.1.1, such Underwriter shall promptly
notify the Company in writing of the institution of such action and the Company
shall assume the defense of such action, including the employment and fees of
counsel (subject to the approval of such Underwriter) and payment of actual
expenses. Such Underwriter or controlling person shall have the right to employ
its or their own counsel in any such case, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling person
unless (i) the employment of such counsel shall have been authorized in writing
by the Company in connection with the defense of such action, (ii) the Company
shall not have employed counsel to have charge of the defense of such action, or
(iii) such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from or
additional to those available to the Company (in which case the Company shall
not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events the fees and expenses of
not more than one additional firm of attorneys selected by the Underwriter
and/or controlling person shall be borne by the Company. Notwithstanding
anything to the contrary contained herein, if an Underwriter or controlling
person shall assume the defense of such action as provided above, the Company
shall have the right to approve the terms of any settlement of such action which
approval shall not be unreasonably withheld.
5.2 Indemnification of the Company. Each Underwriter, severally and not
jointly, agrees to indemnify and hold harmless the Company against any and all
loss, liability, claim, damage and expense described in the foregoing indemnity
from the Company to the several Underwriters, as incurred, but only with respect
to untrue statements or omissions, or alleged untrue statements or omissions, by
the Underwriters made in any Preliminary Prospectus, the Registration Statement
or Prospectus or any amendment or supplement thereto or in any application in
reliance upon, and in strict conformity with, written information furnished to
the Company with respect to such Underwriter by or on behalf of such Underwriter
expressly for use in such Preliminary Prospectus, the Registration Statement or
Prospectus or any amendment or supplement thereto or in any such application. In
case any action shall be brought against the Company or any other person so
indemnified based on any Preliminary Prospectus, the Registration Statement or
Prospectus or any amendment or supplement thereto or any application, and in
respect of which indemnity may be sought against any Underwriter, such
Underwriter shall have the rights and duties given to the Company and the
Company and each other person so indemnified shall have the rights and duties
given to the several Underwriters by the provisions of Section 5.1.2.
5.3 Contribution.
5.3.1 Contribution Rights. In order to provide for just and
equitable contribution under the Act in any case in which (i) any person
entitled to indemnification under this Section 5 makes claim for indemnification
pursuant hereto but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 5 provides for indemnification in such case, or (ii) contribution
under the Act, the Exchange Act or otherwise may be required on the part of any
such person in circumstances for which indemnification is provided under this
Section 5, then, and in each such case, the Company and the Underwriters shall
contribute to the aggregate
26
<PAGE> 28
losses, liabilities, claims, damages and expenses of the nature contemplated by
said indemnity agreement incurred by the Company and the Underwriters, as
incurred, in such proportion that the Underwriters are responsible for that
portion represented by the percentage that the underwriting discount appearing
on the cover page of the Prospectus bears to the initial offering price thereon
and the Company is responsible for the balance; provided, however, that no
person guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Notwithstanding the provisions of
this Section 5.3.1, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay in respect of such losses, liabilities, claims, damages and
expenses. For purposes of this Section, each director, officer and employee of
an Underwriter, and each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act, shall have the same rights to contribution as
such Underwriter, each director, officer and employee of the Company, and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act, shall have the same rights to contribution as the Company.
5.3.2 Contribution Procedure. Within fifteen days after
receipt by any party to this Agreement (or its representative) of notice of the
commencement of any action, suit or proceeding, such party will, if a claim for
contribution in respect thereof is to be made against another party
("contributing party"), notify the contributing party of the commencement
thereof, but the omission to so notify the contributing party will not relieve
it from any liability which it may have to any other party other than for
contribution hereunder. In case any such action, suit or proceeding is brought
against any party, and such party notifies a contributing party or its
representative of the commencement thereof within the aforesaid fifteen days,
the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any such
contributing party shall not be liable to any party seeking contribution on
account of any settlement of any claim, action or proceeding effected by such
party seeking contribution on account of any settlement of any claim, action or
proceeding which was effected by the party seeking contribution without the
written consent of the contributing party. The contribution provisions contained
in this Section are intended to supersede, to the extent permitted by law, any
right to contribution under the Act, the Exchange Act or otherwise available.
6. Default by an Underwriter.
6.1 Default Not Exceeding 10% of Firm Shares or Option Shares. If any
Underwriter or Underwriters shall default in its or their obligations to
purchase the Firm Shares or the Option Shares if exercised, hereunder, and if
the number of the Firm Shares or Option Shares with respect to which such
default relates does not exceed in the aggregate 10% of the number of Firm
Shares or Option Shares which all Underwriters have agreed to purchase
hereunder, then such Firm Shares or Option Shares to which the default relates
shall be purchased by the non-defaulting Underwriters in proportion to their
respective commitments hereunder.
6.2 Default Exceeding 10% of Firm Shares or Option Shares. In the event
that such default relates to more than 10% of the Firm Shares or Option Shares,
you may in your discretion arrange for yourself or for another party or parties
to purchase such Firm Shares or Option Shares to which such default relates on
the terms contained herein. If within one business day after such default
relating to more than 10% of the Firm Shares or Option Shares you do not arrange
for the purchase of such Firm Shares or Option Shares, then the Company shall be
entitled to a further period of one business day within which to procure another
party or parties
27
<PAGE> 29
satisfactory to you to purchase said Firm Shares or Option Shares on such terms.
In the event that neither you nor the Company arrange for the purchase of the
Firm Shares or Option Shares to which a default relates as provided in this
Section 6, this Agreement may be terminated by you or the Company without
liability on the part of the Company (except as provided in Sections 3.15 and
5.1 hereof) or the several Underwriters; provided, however, that if such default
occurs with respect to the Option Shares, this Agreement will not terminate as
to the Firm Shares, and provided further that nothing herein shall relieve a
defaulting Underwriter of its liability, if any, to the other several
Underwriters and to the Company for damages occasioned by its default hereunder.
6.3 Postponement of Closing Date. In the event that the Firm Shares or
Option Shares to which the default relates are to be purchased by the
non-defaulting Underwriters, or are to be purchased by another party or parties
as aforesaid, you or the Company shall have the right to postpone the Closing
Date or Option Closing Date for a reasonable period, but not in any event
exceeding five business days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus or in any other
documents and arrangements, and the Company agrees to file promptly any
amendment to the Registration Statement or the Prospectus which in the opinion
of counsel for the Underwriters may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any party substituted
under this Section 6 with like effect as if it had originally been a party to
this Agreement with respect to such Securities.
7. Additional Covenants.
7.1 Press Releases. The Company will not issue a press release or
engage in any other publicity out of the ordinary course until 25 days after the
Effective Date without the Representative's prior written consent unless
required by law.
7.2 Form S-8 or any Similar Form. The Company shall not file a
registration statement on Form S-8 (or any similar or successor form) for the
registration of shares of Common Stock underlying stock options for a period of
one year from the Effective Date without the Representative's prior written
consent.
7.3 Compensation and Other Arrangements. The Company hereby agrees that
for a period of three years from the Effective Date, all compensation and other
arrangements between the Company and its officers, directors and affiliates
shall be approved by the Compensation Committee of the Company's Board of
Directors, a majority of the members of which shall have no affiliation or other
relationship with the Company other than as directors.
8. Representations and Agreements to Survive Delivery. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Dates and such representations, warranties and
agreements of the Underwriters and the Company, including the indemnity
agreements contained in Section 5 hereof, shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
Underwriter, the Company or any controlling person, and shall survive
termination of this Agreement or the issuance and delivery of the Securities to
the several Underwriters until the earlier of the expiration of any applicable
statute of limitations and the seventh anniversary of the later of the Closing
Date or the Option Closing Date, if any, at which time the representations,
warranties and agreements shall terminate and be of no further force and effect.
28
<PAGE> 30
9. Effective Date of This Agreement and Termination Thereof.
9.1 Effective Date. This Agreement shall become effective on the
Effective Date at the time that the Registration Statement is declared
effective.
9.2 Termination. You shall have the right to terminate this Agreement
at any time prior to any Closing Date, (i) if any domestic or international
event or act or occurrence has materially disrupted, or in your opinion will in
the immediate future materially disrupt, general securities markets in the
United States; or (ii) if trading on the New York Stock Exchange, the American
Stock Exchange or in the over-the-counter market shall have been suspended, or
minimum or maximum prices for trading shall have been fixed, or maximum ranges
for prices for securities shall have been fixed, or maximum ranges for prices
for securities shall have been required on the over-the-counter market by the
NASD or by order of the Commission or any other government authority having
jurisdiction, or (iii) if the United States shall have become involved in a war
or major hostilities, or (iv) if a banking moratorium has been declared by a New
York State or federal authority, or (v) if a moratorium on foreign exchange
trading has been declared which materially adversely impacts the United States
securities market, or (vi) if the Company shall have sustained a material loss
by fire, flood, accident, hurricane, earthquake, theft, sabotage or other
calamity or malicious act which, whether or not such loss shall have been
insured, will, in your opinion, make it inadvisable to proceed with the delivery
of the Securities, or (vii) if either Michael J. Kirby or Jeffry Weiner shall no
longer serve the Company in his present capacity, or (viii) if the Company has
breached any of its respective representations, warranties or obligations
hereunder, or (ix) if the Representative shall have become aware after the date
hereof of such a material adverse change in the condition (financial or
otherwise), business, or prospects of the Company, or such adverse material
change in general market conditions, as in the Representative's judgment would
make it impracticable to proceed with the offering, sale and/or delivery of the
Securities or to enforce contracts made by the Underwriters for the sale of the
Securities.
9.3 Notice. If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, the
Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
9.4 Expenses. In the event that this Agreement shall not be carried out
for any reason whatsoever, within the time specified herein or any extensions
thereof pursuant to the terms herein, the obligation of the Company to pay the
expenses related to the transactions contemplated herein shall be governed by
Section 3.15 hereof.
9.5 Indemnification. Notwithstanding any contrary provision contained
in this Agreement, any election hereunder or any termination of this Agreement,
and whether or not this Agreement is otherwise carried out, the provisions of
Section 5 shall not be in any way affected by such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
10. Miscellaneous.
10.1 Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed
29
<PAGE> 31
If to the Representative:
Gaines, Berland Inc.
712 Fifth Avenue, 21st Floor
New York, New York 10019
Attention: __________________________
Copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016-2097
Attention: David Alan Miller, Esq.
If to the Company:
Delicious Brands, Inc.
2070 Maple Street
Des Plaines, Illinois 60018
Attention: Michael J. Kirby, President and Chief Executive Officer
Copy to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attention: Steven Wolosky, Esq.
10.2 Headings. The headings contained herein are for the sole
purpose of convenience of reference, and shall not in any way limit or
affect the meaning or interpretation of any of the terms or provisions
of this Agreement.
10.3 Amendment. This Agreement may be amended only by a
written instrument executed by each of the parties hereto.
10.4 Entire Agreement. This Agreement (together with the other
agreements and documents being delivered pursuant to or in connection
with this Agreement) constitutes the entire agreement of the parties
hereto with respect to the subject matter hereof, and supersedes all
prior agreements and understandings of the parties, oral and written,
with respect to the subject matter hereof.
10.5 Binding Effect. This Agreement shall inure solely to the
benefit of and shall be binding upon, the Representative, the
Underwriters, the Company, the controlling persons, directors and
officers referred to in Section 5 hereof, and their respective
successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy
or claim under or in respect of or by virtue of this Agreement or any
provisions herein contained.
10.6 Governing Law, Jurisdiction. This Agreement shall be
governed by and construed and enforced in accordance with the law of
the State of New York, without giving effect to conflicts of law. The
Company hereby agrees that any action, proceeding
30
<PAGE> 32
or claim against it arising out of, relating in any way to this
Agreement shall be brought and enforced in the courts of the State of
New York or the United States District Court for the Southern District
of New York, and irrevocably submits to such jurisdiction, which
jurisdiction shall be exclusive. The Company hereby waives any
objection to such exclusive jurisdiction and that such courts represent
an inconvenient forum. Any such process or summons to be served upon
the Company may be served by transmitting a copy thereof by registered
or certified mail, return receipt requested, postage prepaid, addressed
to it at the address set forth in Section 10.1 hereof. Such mailing
shall be deemed personal service and shall be legal and binding upon
the Company in any action, proceeding or claim. The parties hereto
agree that the prevailing party(ies) in any such action shall be
entitled to recover from the other party(ies) all of its reasonable
attorneys' fees and expenses relating to such action or proceeding
and/or incurred in connection with the preparation therefor.
10.7 Execution in Counterparts. This Agreement may be executed
in one or more counterparts, and by the different parties hereto in
separate counterparts, each of which shall be deemed to be an original,
but all of which taken together shall constitute one and the same
agreement, and shall become effective when one or more counterparts has
been signed by each of the parties hereto and delivered to each of the
other parties hereto.
10.8 Waiver, Etc. The failure of any of the parties hereto at
any time to enforce any of the provisions of this Agreement shall not
be deemed or construed to be a waiver of any such provision, nor in any
way to affect the validity of this Agreement or any provision hereof or
the right of any of the parties hereto thereafter to enforce each and
every provision of this Agreement. No waiver of any breach,
non-compliance or non-fulfillment of any of the provisions of this
Agreement shall be effective unless set forth in a written instrument
executed by the party or parties against whom or which enforcement of
such waiver is sought; and no waiver of any such breach, non-compliance
or non-fulfillment shall be construed or deemed to be a waiver of any
other or subsequent breach, non-compliance or non-fulfillment.
If the foregoing correctly sets forth the
understanding among the Representative and the Company, please so
indicate in the space provided below for that purpose, whereupon this
letter shall constitute a binding agreement between us.
Very truly yours,
DELICIOUS BRANDS, INC.
By: ____________________________________
Name: Michael J. Kirby
Title: President and Chief Executive
Officer
31
<PAGE> 33
Accepted as of the date first
above written.
New York, New York
GAINES, BERLAND INC.
By: ____________________________________
Name: Steven Blumberg
Title: Senior Director
32
<PAGE> 34
SCHEDULE I
THE DELICIOUS FROOKIE COMPANY, INC.
1,500,000 SHARES OF COMMON STOCK
Number of Firm
Shares
Underwriter to be Purchased
Gaines, Berland Inc.
33
<PAGE> 1
EXHIBIT 3.1.2
CERTIFICATE OF THE DESIGNATIONS, POWERS,
PREFERENCES AND RIGHTS
OF THE
SERIES A CONVERTIBLE PREFERRED STOCK
($.01 PAR VALUE PER SHARE)
OF
DELICIOUS BRANDS, INC.
A DELAWARE CORPORATION
----------
PURSUANT TO SECTION 151 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
----------
DELICIOUS BRANDS, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: That, pursuant to authority conferred upon the Board of
Directors of the Corporation (the "Board") by the Certificate of Incorporation
of said Corporation, and pursuant to the provisions of Section 151 of the
Delaware General Corporation Law, there hereby is created, out of the 1,000,000
shares of Preferred Stock of the Corporation authorized in Article FOURTH of the
Certificate of Incorporation (the "Preferred Stock"), a series of the Preferred
stock consisting of 245,000 shares, $.01 par value per share, to be designated
"Series A Convertible Preferred Stock," and to that end the Board adopted a
resolution providing for the designations, powers, preferences and rights, and
the qualifications, limitations and restrictions, of the Series A Convertible
Preferred Stock, which resolution is as follows:
RESOLVED, that the Certificate of the Designations, Powers,
Preferences and Rights of the Series A Convertible Preferred Stock
("Certificate of Designation") be and is hereby authorized and
approved, which Certificate of Designation shall be filed with the
Delaware Secretary of State in the form as follows:
1. Designations and Amount. Two Hundred Forty-Five Thousand
(245,000) shares of the Preferred Stock of the Corporation, $.01 par value per
share, shall constitute a class of Preferred Stock designated as "Series A
Convertible Preferred Stock" (the "Series A Preferred Stock").
<PAGE> 2
2. Dividends.
(a) The holders of each share of Series A Preferred Stock
shall be entitled to receive, when and as declared by the Board out of assets of
the Corporation legally available for payment, dividends at the rate per share
of Ten Percent (10%) per annum of the aggregate Stated Value (the "Aggregate
Stated Value") of the Series A Preferred Stock (the "Preferred Dividends"). The
"Stated Value" of each share of Series A Preferred Stock shall be $8.00. Such
Preferred Dividends shall accrue semi-annually at the rate of Five Percent (5%)
per six-month period of the Aggregate Stated Value from the date of issuance or
the last Dividend Record Date (as hereinafter defined) and be payable to holders
of record of Series A Preferred Stock on each Dividend Record Date (each January
15 and July 15 being hereinafter called a "Dividend Record Date" and each of the
six-month periods, or portions thereof, ending on the last day of the preceding
month, respectively, being hereinafter called a "Dividend Period") and shall be
paid in cash on each January 31 and July 31 only if, when and as declared by the
Board of Directors of the Corporation, out of funds legally available for that
purpose, unless sooner declared by the Board of Directors. Preferred Dividends
on shares of Series A Preferred Stock shall be cumulative (whether or not there
shall be net profits or net assets of the Corporation legally available for the
payment of such dividends), so that if at any time the Preferred Dividends upon
the Series A Preferred Stock to the end of the last completed Dividend Period
shall not have been paid or declared and a sum sufficient for the payment
thereof set apart, the amount of the deficiency in such Preferred Dividends
shall be fully paid (but without interest), or Preferred Dividends in such
amounts shall have been declared on the shares of the Series A Preferred Stock
and a sum sufficient for the payment thereof shall have been set apart for such
payment, before any dividend shall be declared or paid or any other distribution
ordered or made upon any class of stock ranking as to dividends or upon
liquidation junior to the Series A Preferred Stock (other than a dividend
payable in such junior stock) and before any sum or sums shall be set aside for
or applied to the purchase or redemption of any shares of any class of stock
ranking as to dividends or upon liquidation junior to the Series A Preferred
Stock (with respect to rights to dividends and on liquidation, the Series A
Preferred Stock shall rank prior to the Common Stock (as hereinafter defined)),
the Preferred Dividends must be paid. All Preferred Dividends declared upon the
Series A Preferred Stock shall be declared pro rata per share. Holders of shares
of Series A Preferred Stock shall not be entitled to any Preferred Dividends,
whether payable in cash, property or stock, in excess of the Preferred Dividends
at the rate set forth above. All payments due under this Section 2 to any holder
of shares of Series A Preferred Stock shall be made to the nearest cent.
(b) The Corporation may not declare or pay any dividend or
make any distribution of assets on, or redeem, purchase or
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<PAGE> 3
otherwise acquire, shares of common stock, $.01 par value, of the Corporation
(the "Common Stock") or of any other capital stock of the Corporation ranking
junior to the Series A Preferred Stock as to the payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, unless all
declared and unpaid Preferred Dividends on the Series A Preferred Stock have
been or contemporaneously are paid.
3. Rights on Liquidation, Dissolution or Winding Up,
Etc.
(a) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation (each, a
"Liquidation"), the assets of the Corporation available for distribution to its
stockholders, whether from capital, surplus or earnings, shall be distributed in
the following order of priority:
(i) The holders of Series A Preferred Stock shall be
entitled to receive, prior and in preference to any
distribution to the holders of Common Stock, any other series
or class of Preferred Stock or any other class of the
Corporation's capital stock, whether now existing or hereafter
created, an amount equal to the sum of (A) the amount they
would have received had they converted all of the shares of
Series A Preferred Stock into shares of Common Stock
immediately prior to such Liquidation and (B) an amount equal
to all declared but unpaid dividends on such share of Series A
Preferred Stock as of the date of such Liquidation. If, upon
the occurrence of a Liquidation, the assets and funds thus
distributed among the holders of the Series A Preferred Stock
shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then the entire
assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of
the Series A Preferred Stock, in proportion to the
preferential amount each such holder is otherwise entitled to
receive.
(ii) After distribution of the amounts set forth in
Section 3(a)(i) hereof, the remaining assets of the
Corporation available for distribution, if any, to the
stockholders of the Corporation shall be distributed to the
holders of issued and outstanding shares of Common Stock. If,
upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Common Stock shall be
insufficient to permit the payment to such holders of the full
aforesaid aggregate amount, then the entire remaining assets
and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of
the Common Stock
-3-
<PAGE> 4
in proportion to the number of shares of Common Stock
held by each such holder.
4. Voting Rights. The holders of Series A Preferred Stock
shall not be entitled to vote on any matter except as required by law.
5. Conversion of Series A Preferred Stock.
(a) Each holder of Series A Preferred Stock shall have the
right, at such holder's option, at any time or from time to time beginning on
the day immediately following the date the Series A Preferred Stock is first
issued and until July 31, 2001, to convert each share of Series A Preferred
Stock into one share of Common Stock. The holder of any shares of Series A
Preferred Stock, exercising the aforesaid right to convert such shares into
shares of Common Stock shall be entitled to receive, in cash, an amount equal to
all declared dividends with respect to such shares of Series A Preferred Stock
up to and including the respective conversion date of such shares of Series A
Preferred Stock.
(b) Each share of Series A Preferred Stock shall, subject to
adjustment in accordance with this Section 5, automatically be converted into
one share of Common Stock in accordance with Section 5(a) hereof on August 1,
2001.
(c) Before any holder of Series A Preferred Stock shall be
entitled to convert the same into shares of Common Stock, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Corporation or of any transfer agent for the Series A Preferred Stock,
and shall give written notice to the Corporation at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series A Preferred
Stock to be converted, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock as of such date.
(d) The number of shares of Common Stock into which the Series
A Preferred Stock is convertible shall be subject to adjustment from time to
time as follows:
-4-
<PAGE> 5
(i) In the event the Corporation should at any time or from
time to time after the date on which the shares of Series A Preferred Stock are
issued (the "Series A Issuance Date") fix a record date for the effectuation of
a split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or Common Stock
equivalents without payment of any consideration by such holder for the
additional shares of Common Stock or the Common Stock equivalents (including the
additional shares of Common Stock issuable upon conversion or exercise thereof),
then, as of such record date (or the date of such dividend distribution, split
or subdivision if no record date is fixed), the number of shares of Common Stock
issuable upon conversion of each share of such Series A Preferred Stock shall be
increased in proportion to such increase in the aggregate number of shares of
Common Stock outstanding and those issuable with respect to such Common Stock
equivalents.
(ii) If the number of shares of Common Stock outstanding at
any time after the Series A Issuance Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the number of shares of Common Stock issuable upon conversion of
each share of Series A Preferred Stock shall be decreased in proportion to such
decrease in outstanding shares.
(e) In the event the Corporation shall declare a distribution
payable in securities of other persons, evidences of indebtedness issued by the
Corporation or other persons, assets (excluding cash dividends) or options or
rights not referred to in Section 5(d) hereof to the holders of Common Stock,
then, in each such case for the purpose of this Section 5(e), the holders of the
Series A Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Series A Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
(f) If at any time or from time to time there shall be a
recapitalization of the Common Stock (other than a subdivision, combination or
merger or sale of assets transaction provided for elsewhere in this Section 5,
provision shall be made so that the holders of the Series A Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series A
Preferred Stock the number of shares of stock or other securities or property of
the Corporation or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 5 with respect to the rights of the holders of the Series A
Preferred Stock after the recapitalization to the end that the provisions of
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<PAGE> 6
this Section 5 (including adjustment of the number of shares issuable upon
conversion of the Series A Preferred Stock) shall be applicable after that event
as nearly equivalent as may be practicable.
(g) The Corporation will not, by amendment of its Certificate
of Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series A Preferred Stock against impairment.
(h) If any capital reorganization or reclassification of the
capital stock of the Corporation, or consolidation or merger of the Corporation
with and into another corporation, or the sale of all or substantially all of
its assets to another corporation, shall be effected while any shares of Series
A Preferred Stock are outstanding in such a manner that holders of shares of
Common Stock shall be entitled to receive stock, securities or assets with
respect to or in exchange for Common Stock, then, as a condition of such
reorganization or reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby each holder of Series A Preferred Stock
shall thereafter have the right to receive upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore receivable upon conversion of Series A Preferred Stock,
such shares of stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately theretofore
so receivable had such reorganization or reclassification, consolidation, merger
or sale not taken place, and in such case appropriate provision shall be made
with respect to the rights and interests of the holders of Series A Preferred
Stock to the end that the provisions hereof (including, without limitation,
provisions for adjustment of the number of shares of Common Stock issuable upon
conversion thereof) shall thereafter be applicable, as nearly as may be
possible, in relation to any shares of stock, securities or assets thereafter
deliverable upon the conversion of such shares of Series A Preferred Stock. The
Corporation shall not effect any such consolidation, merger or sale unless (i)
approved by the holders of Series A Preferred Stock, if such approval is
required by law, and (ii) prior to or simultaneously with the consummation
thereof, the survivor or successor corporation (if other than the Corporation)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume by written instrument executed and mailed or delivered to
each holder of Series A Preferred Stock,
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<PAGE> 7
the obligation to deliver to such holders of Series A Preferred Stock such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder of Series A Preferred Stock may be entitled to receive,
and containing the express assumption of such successor corporation of the due
and punctual performance and observance of every provision of this Certificate
of Designation to be performed and observed by the Corporation and of all
liabilities and obligations of the Corporation hereunder with respect to the
Series A Preferred Stock.
(i) (A) No fractional shares shall be issued upon the
conversion of any share or shares of the Series A Preferred Stock. In lieu of
any fractional shares to which the holder would otherwise be entitled, the
Corporation shall make a cash payment equal to the Fair Market Value (as
hereinafter defined) of the Common Stock as of two business days prior to
payment multiplied by such fraction. "Fair Market Value" shall mean the closing
price of the Common Stock on the national securities exchange on which the
Common Stock is listed (if the Common Stock is so listed) or on the Nasdaq
National Market or Small Cap Market (if the Common Stock is regularly quoted on
the Nasdaq National Market or Small Cap Market), or, if not so listed or
regularly quoted or if there is no such closing price, the mean between the
closing bid and asked prices of the Common Stock in the over-the-counter market
or on such exchange or on Nasdaq, or, if such bid and asked prices shall not be
available, as reported by any nationally recognized quotation service, or if the
price is not so reported, as determined in good faith by the Board.
(B) Upon the occurrence of each adjustment or
readjustment of the number of shares of Common Stock issuable upon conversion of
the Series A Preferred Stock pursuant to this Section 5, the Corporation, at its
expense, shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each holder of Series A
Preferred Stock a statement, signed by its independent certified public
accountants, setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Series A Preferred
Stock, furnish or cause to be furnished to such holder a like certificate
setting forth (A) such adjustment and readjustment and (B) the number of shares
of Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of a share of such Series A Preferred
Stock.
(j) In the event of any taking by the Corporation of a record
of the holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend (other than a cash
dividend) or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to
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<PAGE> 8
receive any other right, the Corporation shall mail to each holder of Series A
Preferred Stock, at least 20 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
(k) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the shares of the Series A Preferred
Stock, such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of the Series A
Preferred Stock; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A Preferred Stock, in addition to such other
remedies as shall be available to the holder of such Series A Preferred Stock,
the Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to these provisions.
(l) The Corporation shall pay all documentary, stamp or other
transactional taxes attributable to the issuance or delivery of shares of
capital stock of the Corporation upon conversion of any shares of Series A
Preferred Stock; provided, however, that the Corporation shall not be required
to pay any taxes which may be payable in respect of any transfer involved in the
issuance or delivery of any certificate for such shares in a name other than
that of the holder of the shares of Series A Preferred Stock in respect of which
such shares are being issued.
(m) All shares of Common Stock which may be issued in
connection with the conversion provisions set forth herein will, upon issuance
by the Corporation, be validly issued, fully paid and nonassessable and free
from all taxes, liens or charges with respect thereto.
(n) Any notice required by the provisions of this Section 5 to
be given to the holders of shares of Series A Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his address appearing on the stock books of the
Corporation.
(o) In the event any shares of Series A Preferred Stock shall
be converted pursuant to Section 5 hereof or otherwise reacquired by the
Corporation, the shares so converted or reacquired shall be cancelled. The
Certificate of Incorporation of
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<PAGE> 9
the Corporation may be appropriately amended from time to time to effect the
corresponding reduction in the Corporation's authorized capital stock.
6. No Pre-emptive Rights. No holder of shares of the Series A
Preferred Stock will possess any preemptive rights to subscribe for or acquire
any unissued shares of capital stock of the Corporation (whether now or
hereafter authorized) or securities of the Corporation convertible into or
carrying a right to subscribe to or acquire shares of capital stock of the
Corporation.
IN WITNESS WHEREOF, Delicious Brands, Inc. has caused this
Certificate of Designation to be executed this 31st day of August, 1998.
DELICIOUS BRANDS, INC.
By:/s/Michael J. Kirby
--------------------------
Name: Michael J. Kirby
Title: President
By:/s/Jeffry W. Weiner
--------------------------
Name: Jeffry W. Weiner
Title: Secretary
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<PAGE> 1
EXHIBIT 4.2
THE REGISTERED HOLDER OF THIS WARRANT, BY ITS ACCEPTANCE HEREOF, AGREES THAT IT
WILL NOT SELL, TRANSFER OR ASSIGN THIS WARRANT EXCEPT AS HEREIN PROVIDED.
NOT EXERCISABLE PRIOR TO _______, 1999. VOID AFTER 5:00 P.M. EASTERN TIME,
________, 2003.
WARRANT
FOR THE PURCHASE OF
150,000 SHARES OF COMMON STOCK
OF
DELICIOUS BRANDS, INC.
(A DELAWARE CORPORATION)
1. Warrant.
THIS CERTIFIES THAT, in consideration of $150 duly paid by or
on behalf of Gaines Berland, Inc. ("Holder"), as registered owner of this
Warrant, to Delicious Brands, Inc. ("Company"), Holder is entitled, at any time
or from time to time at or after _______, 1999 ("Commencement Date"), and at or
before 5:00 p.m., Eastern Time, _______, 2003 ("Expiration Date"), but not
thereafter, to subscribe for, purchase and receive, in whole or in part, up to
150,000 shares of Common Stock of the Company, $.01 par value ("Common Stock").
This Warrant is one of a series of similar Warrants of like tenor to purchase up
to _________ shares of Common Stock (collectively, the "Warrants"). The shares
of Common Stock are sometimes collectively referred to herein as the
"Securities." If the Expiration Date is a day on which banking institutions are
authorized by law to close, then this Warrant may be exercised on the next
succeeding day that is not such a day in accordance with the terms herein.
During the period ending on the Expiration Date, the Company agrees not to take
any action that would terminate this Warrant. This Warrant is initially
exercisable at $_____ per share of Common Stock purchased; provided, however,
that upon the occurrence of any of the events specified in Section 6 hereof, the
rights granted by this Warrant, including the exercise price and the number of
shares of Common Stock to be received upon such exercise, shall be adjusted as
therein specified. The term "Exercise Price" shall mean the initial exercise
price or the adjusted exercise price, depending on the context, of a share of
Common Stock.
2. Exercise.
2.1 Exercise Form. In order to exercise this Warrant, the exercise form
attached hereto must be duly executed and completed and delivered to the
Company, together with this Warrant and payment of the Exercise Price in cash or
by certified check or official bank check for the Securities being purchased. If
the subscription rights represented hereby shall not be exercised at or before
5:00 p.m., Eastern time, on the Expiration Date this Warrant shall become and be
void without further force or effect, and all rights represented hereby shall
cease and expire.
<PAGE> 2
2.2 Legend. Each certificate for Securities purchased under this
Warrant shall bear a legend as follows unless such Securities have been
registered under the Securities Act of 1933, as amended:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended
("Act"), or applicable state law. The securities may not be
offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement under the Act,
or pursuant to an exemption from registration under the Act
and applicable state law."
2.3 Conversion Right.
2.3.1 Determination of Amount. In lieu of the payment of the
Exercise Price in the manner required by Section 2.1, the Holder shall have the
right (but not the obligation) to convert any exercisable but unexercised
portion of this Warrant into securities ("Conversion Right") as follows: Upon
exercise of the Conversion Right, the Company shall deliver to the Holder
(without payment by the Holder of any of the Exercise Price in cash) that number
of shares of Common Stock equal to the quotient obtained by dividing (x) the
"Value" (as defined below) of the portion of the Warrant being converted by (y)
the Market Price (as defined below). The "Value" of the portion of this Warrant
being converted shall equal the remainder derived from subtracting (a) the
Exercise Price multiplied by the number of shares of Common Stock underlying the
portion of this Warrant being converted from (b) the Market Price of the shares
of Common Stock multiplied by the number of shares of Common Stock underlying
the portion of this Warrant being converted. As used herein, the term "Market
Price" at any date shall be deemed to be the last reported sale price of the
Common Stock on such date, or, in case no such reported sale takes place on such
day, the average of the last reported sale prices for the immediately preceding
three trading days, in either case as officially reported by the principal
securities exchange on which the Common Stock is listed or admitted to trading,
or, if the Common Stock is not listed or admitted to trading on any national
securities exchange or if any such exchange on which the Common Stock is listed
is not its principal trading market, the last reported sale price as furnished
by the NASD through the Nasdaq National Market or SmallCap Market, or, if
applicable, the OTC Bulletin Board, or if the Common Stock is not listed or
admitted to trading on the Nasdaq National Market or SmallCap Market or OTC
Bulletin Board or similar organization, as determined in good faith by
resolution of the Board of Directors of the Company, based on the best
information available to it.
2.3.2 Mechanics of Conversion. The Conversion Right may be
exercised by the Holder on any business day on or after the Commencement Date
and not later than the Expiration Date by delivering the Warrant with a duly
executed exercise form attached hereto with the cashless exercise section
completed to the Company, exercising the Conversion Right and specifying the
total number of shares of Common Stock the Holder will purchase pursuant to such
Conversion Right.
3. Transfer.
3.1 General Restrictions. Subject to Section 3.2, the registered Holder
of this Warrant, by its acceptance hereof, agrees that it will not sell,
transfer or assign or hypothecate this Warrant prior to the Commencement Date to
anyone other than (i) an officer or partner of such Holder, (ii) an officer of
Gaines, Berland Inc. ("Underwriter") or an officer or partner of any Selected
Dealer or member of the underwriting syndicate in connection with the Company's
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<PAGE> 3
public offering with respect to which this Warrant has been issued, or (iii) any
Selected Dealer. On and after the Commencement Date, transfers to others may be
made in accordance with the terms of this Warrant subject to compliance with or
exemptions from applicable securities laws. In order to make any permitted
assignment, subject to Section 3.2 hereof, the Holder must deliver to the
Company the assignment form attached hereto duly executed and completed,
together with the Warrant and payment of all transfer taxes, if any, payable in
connection therewith. Unless the Company can show that the transfer may not be
effected in accordance with applicable securities laws, the Company shall
immediately transfer this Warrant on the books of the Company and shall execute
and deliver a new Warrant or Warrants of like tenor to the appropriate
assignee(s) expressly evidencing the right to purchase the aggregate number of
shares of Common Stock purchasable hereunder or such portion of such number as
shall be contemplated by any such assignment.
3.2 Restrictions Imposed by the Act. This Warrant and the Securities
underlying this Warrant shall not be transferred unless and until (i) the
Company has received the opinion of counsel for the Holder that this Warrant or
the Securities, as the case may be, may be transferred pursuant to an exemption
from registration under the Act and applicable state law, the availability of
which is established to the reasonable satisfaction of the Company (the Company
hereby agreeing that the opinion of Graubard Mollen & Miller shall be deemed
satisfactory evidence of the availability of an exemption), or (ii) a
registration statement relating to such Warrant or Securities, as the case may
be, has been filed by the Company and declared effective by the Securities and
Exchange Commission and in compliance with applicable state law.
4. New Warrants to be Issued.
4.1 Partial Exercise or Transfer. Subject to the restrictions in
Section 3 hereof, this Warrant may be exercised or assigned in whole or in part.
In the event of the exercise or assignment hereof in part only, upon surrender
of this Warrant for cancellation, together with the duly executed exercise or
assignment form and funds sufficient to pay any Exercise Price and/or transfer
tax, the Company shall cause to be delivered to the Holder without charge a new
Warrant of like tenor to this Warrant in the name of the Holder evidencing the
right of the Holder to purchase the aggregate number of shares of Common Stock
purchasable hereunder as to which this Warrant has not been exercised or
assigned.
4.2 Lost Certificate. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
and of reasonably satisfactory indemnification, the Company shall execute and
deliver a new Warrant of like tenor and date. Any such new Warrant executed and
delivered as a result of such loss, theft, mutilation or destruction shall
constitute a substitute contractual obligation on the part of the Company.
5. Registration Rights.
5.1 Demand Registration.
5.1.1 Grant of Right. The Company, upon written demand
("Initial Demand Notice") of the Holder(s) of at least 51% of the Warrants
and/or the underlying shares of Common Stock ("Majority Holders"), agrees to
register on one occasion, all or any portion of the Warrants requested by the
Majority Holders in the Initial Demand Notice and all of the Common Stock
underlying the Warrants (collectively the "Registrable Securities"). On such
occasion, the
3
<PAGE> 4
Company will file a Registration Statement covering the Registrable Securities
within sixty days after receipt of the Initial Demand Notice and use its best
efforts to have such registration statement declared effective promptly
thereafter. If the Company fails to comply with the provisions of this Section
5.1.1, the Company shall, in addition to any other equitable or other relief
available to the Holder(s), be liable for any and all incidental, special and
consequential damages sustained by the Holder(s). The demand for registration
may be made at any time during a period of four years commencing on the first
anniversary of the Effective Date. The Company covenants and agrees to give
written notice of its receipt of any Initial Demand Notice by any Holder(s) to
all other registered Holders of the Warrants and/or the Registrable Securities
within ten days from the date of the receipt of any such Initial Demand Notice.
5.1.2 Terms. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall pay
any and all underwriting commissions and the expenses of any legal counsel
selected by the Holders to represent them in connection with the sale of the
Registrable Securities. The Company agrees to use its best efforts to cause the
filing required herein to become effective promptly and to qualify or register
the Registrable Securities in such states as are reasonably requested by the
Holder(s); provided, however, that in no event shall the Company be required to
register the Registrable Securities in a state in which such registration would
cause (i) the Company to be obligated to register or license to do business in
such state, or (ii) the principal stockholders of the Company to be obligated to
escrow their shares of capital stock of the Company. The Company shall cause any
registration statement filed pursuant to the demand rights granted under Section
5.1.1 to remain effective until all of the Registrable Securities covered by
such registration statement have been sold.
5.2 "Piggy-Back" Registration.
5.2.1 Grant of Right. In addition to the demand right of
registration, the Holders of the Warrants shall have the right for a period of
seven years commencing on the Effective Date to include the Registrable
Securities as part of any other registration of securities filed by the Company
(other than in connection with a transaction contemplated by Rule 145(a)
promulgated under the Act or pursuant to Form S-8).
5.2.2 Terms. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall pay
any and all underwriting commissions and the expenses of any legal counsel
selected by the Holders to represent them in connection with the sale of the
Registrable Securities. In the event of such a proposed registration, the
Company shall furnish the then Holders of outstanding Registrable Securities
with not less than thirty days written notice prior to the proposed date of
filing of such registration statement. Such notice to the Holders shall continue
to be given for each registration statement filed by the Company until such time
as all of the Registrable Securities have been sold by the Holder. The holders
of the Registrable Securities shall exercise the "piggy-back" rights provided
for herein by giving written notice, within twenty days of the receipt of the
Company's notice of its intention to file a registration statement. The Company
shall cause any registration statement filed pursuant to the above "piggyback"
rights to remain effective until all of the Registrable Securities covered by
such registration statement have been sold.
5.3 General Terms.
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<PAGE> 5
5.3.1 Indemnification. The Company shall indemnify the
Holder(s) of the Securities to be sold pursuant to any registration statement
hereunder and each person, if any, who controls such Holders within the meaning
of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of
1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or
liability (including all reasonable attorneys' fees and other expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same
extent and with the same effect as the provisions pursuant to which the Company
has agreed to indemnify the Underwriter contained in Section 5 of the
Underwriting Agreement between the Underwriter and the Company, dated the
Effective Date. The Holder(s) of the Securities to be sold pursuant to such
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, against all loss, claim, damage, expense or
liability (including all reasonable attorneys' fees and other expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which they may become subject under the Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such Holders,
or their successors or assigns, in writing, for specific inclusion in such
registration statement to the same extent and with the same effect as the
provisions contained in Section 5 of the Underwriting Agreement pursuant to
which the Underwriter has agreed to indemnify the Company.
5.3.2 Exercise of Warrants. Nothing contained in this Warrant
shall be construed as requiring the Holder(s) to exercise their Warrants prior
to or after the initial filing of any registration statement or the
effectiveness thereof.
5.3.3 Documents Delivered to Holders. The Company shall
furnish to each Holder participating in an offering contemplated by Section 5.1
hereof and to each underwriter of any such offering, if any, a signed
counterpart, addressed to such Holder or underwriter, of (i) an opinion of
counsel to the Company, dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, an opinion
dated the date of the closing under any underwriting agreement related thereto),
and (ii) a "cold comfort" letter dated the effective date of such registration
statement (and, if such registration includes an underwritten public offering, a
letter dated the date of the closing under the underwriting agreement) signed by
the independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities. The Company shall also deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below and to the managing underwriter copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. ("NASD"). Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such Holder
shall reasonably request.
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<PAGE> 6
5.3.4 Underwriting Agreement. The Company shall enter into an
underwriting agreement with the managing underwriter(s) selected by any Holders
whose Registrable Securities are being registered pursuant to Section 5.1. Such
agreement shall be reasonably satisfactory in form and substance to the Company,
each Holder and such managing underwriters, and shall contain such
representations, warranties and covenants by the Company and such other terms as
are customarily contained in agreements of that type used by the managing
underwriter. The Holders shall be parties to any underwriting agreement relating
to an underwritten sale of their Securities and may, at their option, require
that any or all the representations, warranties and covenants of the Company to
or for the benefit of such underwriters shall also be made to and for the
benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders, their shares and their
intended methods of distribution.
5.3.5 Documents to be Delivered by Holder(s); Cooperation.
Each of the Holder(s) participating in any of the foregoing offerings shall
furnish to the Company a completed and executed questionnaire provided by the
Company requesting information customarily sought of selling securityholders and
shall otherwise cooperate with the Company's reasonable requests.
6. Adjustments.
6.1 Adjustments to Exercise Price and Number of Securities. The
Exercise Price and the number of shares of Common Stock issuable upon exercise
of the Warrant shall be subject to adjustment from time to time as hereinafter
set forth:
6.1.1 Stock Dividends, Split-Ups. If after the date hereof,
and subject to the provisions of Section 6.3 below, the number of outstanding
shares of Common Stock is increased by a stock dividend payable in shares of
Common Stock or by a split-up of shares of Common Stock or other similar event,
then, on the effective date of such stock dividend or split-up, the number of
shares of Common Stock issuable on exercise of this Warrant shall be increased
in proportion to such increase in outstanding shares.
6.1.2 Aggregation of Shares. If after the date hereof, and
subject to the provisions of Section 6.3, the number of outstanding shares of
Common Stock is decreased by a consolidation, combination or reclassification of
shares of Common Stock or other similar event, then, upon the effective date of
such consolidation, combination or reclassification, the number of shares of
Common Stock issuable on exercise of this Warrant shall be decreased in
proportion to such decrease in outstanding shares.
6.1.3 Adjustments in Exercise Price. Whenever the number of
shares of Common Stock purchasable upon the exercise of this Warrant is
adjusted, as provided in this Section 6.1, the Exercise Price shall be adjusted
(to the nearest cent) by multiplying such Exercise Price immediately prior to
such adjustment by a fraction (x) the numerator of which shall be the number of
shares of Common Stock purchasable upon the exercise of this Warrant immediately
prior to such adjustment, and (y) the denominator of which shall be the number
of shares of Common Stock so purchasable immediately thereafter.
6.1.4 Replacement of Securities Upon Reorganization, etc. If
after the date hereof any capital reorganization or reclassification of the
Common Stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or
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<PAGE> 7
substantially all of its assets to another corporation or other similar event
shall be effected, then, as a condition of such reorganization,
reclassification, consolidation, merger, or sale, lawful and fair provision
shall be made whereby the Holders shall thereafter have the right to purchase
and receive, upon the basis and upon the terms and conditions specified in this
Warrant and in lieu of the securities of the Company immediately theretofore
purchasable and receivable upon the exercise of the rights represented thereby,
such shares of stock, securities, or assets as may be issued or payable with
respect to or in exchange for the number of securities equal to the number of
securities immediately theretofore purchasable and receivable upon the exercise
of the rights represented by this Warrant, had such reorganization,
reclassification, consolidation, merger, or sale not taken place and in such
event appropriate provision shall be made with respect to the rights and
interests of the Holders to the end that the provisions hereof (including,
without limitation, provisions for adjustments of the Exercise Price and of the
number of securities purchasable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be in relation to any share of stock,
securities, or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger, or sale unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger, or the corporation purchasing such
assets, shall assume by written instrument executed and delivered to the Holders
evidencing its obligation to deliver such shares of stock, securities, or assets
as, in accordance with the foregoing provisions, such Holders may be entitled to
purchase.
6.1.5 Changes in Form of Warrant. This form of Warrant need
not be changed because of any change pursuant to this Section, and Warrants
issued after such change may state the same Exercise Price and the same number
of shares of Common Stock as are stated in the Warrants initially issued
pursuant to this Agreement. The acceptance by any Holder of the issuance of new
Warrants reflecting a required or permissive change shall not be deemed to waive
any rights to a prior adjustment or the computation thereof.
6.2 [Intentionally Omitted]
6.3 Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise or transfer of this Warrant, nor shall it be required to issue
scrip or pay cash in lieu of any fractional interests, it being the intent of
the parties that all fractional interests shall be eliminated by rounding any
fraction up or down to the nearest whole number of shares of Common Stock or
other securities, properties or rights.
7. Reservation and Listing. The Company shall at all times reserve and
keep available out of its authorized shares of Common Stock, solely for the
purpose of issuance upon exercise of the Warrants, such number of shares of
Common Stock or other securities, properties or rights as shall be issuable upon
the exercise thereof. The Company covenants and agrees that, upon exercise of
the Warrants and payment of the Exercise Price therefor, all shares of Common
Stock and other securities issuable upon such exercise shall be duly and validly
issued, fully paid and non-assessable and not subject to preemptive rights of
any stockholder. As long as the Warrants shall be outstanding, the Company shall
use its best efforts to cause all shares of Common Stock issuable upon exercise
of the Warrants to be listed (subject to official notice of issuance) on all
securities exchanges (or, if applicable, on Nasdaq) on which the Common Stock
issued to the public in connection herewith is then listed and/or quoted.
8. Certain Notice Requirements.
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<PAGE> 8
8.1 Holders' Right to Receive Notice. Nothing herein shall be construed
as conferring upon the Holders the right to vote or consent or to receive notice
as a stockholder for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the events
described in Section 8.2 shall occur, then, in one or more of said events, the
Company shall give written notice of such event at least fifteen days prior to
the date fixed as a record date or the date of closing the transfer books for
the determination of the stockholders entitled to such dividend, distribution,
conversion or exchange of securities or subscription rights, or entitled to vote
on such proposed dissolution, liquidation, winding up or sale. Such notice shall
specify such record date or the date of the closing of the transfer books, as
the case may be.
8.2 Events Requiring Notice. The Company shall be required to give the
notice described in this Section 8 upon one or more of the following events: (i)
if the Company shall take a record of the holders of its shares of Common Stock
for the purpose of entitling them to receive a dividend or distribution payable
otherwise than in cash, or a cash dividend or distribution payable otherwise
than out of retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company, or (ii) the Company shall
offer to all the holders of its Common Stock any additional shares of capital
stock of the Company or securities convertible into or exchangeable for shares
of capital stock of the Company, or any option, right or warrant to subscribe
therefor, or (iii) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business shall be proposed.
8.3 Notice of Change in Exercise Price. The Company shall, promptly
after an event requiring a change in the Exercise Price pursuant to Section 6
hereof, send notice to the Holders of such event and change ("Price Notice").
The Price Notice shall describe the event causing the change and the method of
calculating same and shall be certified as being true and accurate by the
Company's President and Chief Financial Officer.
8.4 Transmittal of Notices. All notices, requests, consents and other
communications under this Warrant shall be in writing and shall be deemed to
have been duly made on the date of delivery if delivered personally or sent by
overnight courier, with acknowledgment of receipt to the party to which notice
is given, or on the fifth day after mailing if mailed to the party to whom
notice is to be given, by registered or certified mail, return receipt
requested, postage prepaid and properly addressed as follows: (i) if to the
registered Holder of this Warrant, to the address of such Holder as shown on the
books of the Company, or (ii) if to the Company, to its principal executive
office.
9. Miscellaneous.
9.1 Amendments. The Company and the Representative may from time to
time upon mutual agreement in writing supplement or amend this Warrant without
the approval of any of the Holders in order to cure any ambiguity, to correct or
supplement any provision contained herein that may be defective or inconsistent
with any other provisions herein, or to make any other provisions in regard to
matters or questions arising hereunder that the Company and the Representative
may deem necessary or desirable and that the Company and the Representative deem
shall not adversely affect the interest of the Holders. All other modifications
or amendments shall require the written consent of the party against whom
enforcement of the modification or amendment is sought.
8
<PAGE> 9
9.2 Headings. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Warrant.
9.3 Entire Agreement. This Warrant (together with the other agreements
and documents being delivered pursuant to or in connection with this Warrant)
constitutes the entire agreement of the parties hereto with respect to the
subject matter hereof, and supersedes all prior agreements and understandings of
the parties, oral and written, with respect to the subject matter hereof.
9.4 Binding Effect. This Warrant shall inure solely to the benefit of
and shall be binding upon, the Holder and the Company and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Warrant or any provisions herein contained.
9.5 Governing Law; Submission to Jurisdiction. This Warrant shall be
governed by and construed and enforced in accordance with the law of the State
of New York, without giving effect to principles of conflicts of law. The
Company hereby agrees that any action, proceeding or claim against it arising
out of, or relating in any way to, this Warrant shall be brought and enforced in
the courts of the State of New York or of the United States of America for the
Southern District of New York, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company hereby waives any objection
to such exclusive jurisdiction and that such courts represent an inconvenient
forum. Any process or summons to be served upon the Company may be served by
transmitting a copy thereof by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
8.4 hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the Company in any action, proceeding or claim. The Company agrees
that the prevailing party(ies) in any such action shall be entitled to recover
from the other party(ies) all of its reasonable attorneys' fees and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
9.6 Waiver, Etc. The failure of the Company or the Holder to at any
time enforce any of the provisions of this Warrant shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Warrant or any provision hereof or the right of the Company or
any Holder to thereafter enforce each and every provision of this Warrant. No
waiver of any breach, non-compliance or non-fulfillment of any of the provisions
of this Warrant shall be effective unless set forth in a written instrument
executed by the party or parties against whom or which enforcement of such
waiver is sought; and no waiver of any such breach, non-compliance or
non-fulfillment shall be construed or deemed to be a waiver of any other or
subsequent breach, non-compliance or non-fulfillment.
9
<PAGE> 10
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its duly authorized officer as of the ____ day of ______________,
1998.
DELICIOUS BRANDS, INC.
By:__________________________
Name: Michael J. Kirby
Title: President and Chief Executive
Officer
10
<PAGE> 11
Form to be used to exercise the within Warrant:
DELICIOUS BRANDS, INC.
2070 Maple Street
Des Plaines, Illinois 60018
Date:_________________, 19__
The undersigned hereby elects irrevocably to exercise the
within Warrant and to purchase ____ shares of Common Stock of Delicious Brands,
Inc. and hereby makes payment of $____________ (at the rate of $_________ per
share of Common Stock) in payment of the Exercise Price pursuant thereto. Please
issue the Common Stock as to which this Warrant is exercised in accordance with
the instructions given below.
or
The undersigned hereby elects irrevocably to convert the
within Warrant and to purchase _________ shares of Common Stock of Delicious
Brands, Inc. by surrender of the unexercised portion of the within Warrant (with
a "Value" of $__________ based on a "Market Price" of $___________). Please
issue the Common Stock in accordance with the instructions given below.
------------------------------
Signature
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE WITHIN WARRANT IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name ________________________________________________________
(Print in Block Letters)
Address ________________________________________________________
11
<PAGE> 12
Form to be used to assign the within Warrant:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer
of the within Warrant):
FOR VALUE RECEIVED,___________________________________________
does hereby sell, assign and transfer unto______________________________________
the right to purchase _______________________ shares of Common Stock of
Delicious Brands, Inc. ("Company") evidenced by the within Warrant and does
hereby authorize the Company to transfer such right on the books of the Company.
Dated:___________________, 19__
------------------------------
Signature
- ------------------------------
Signature Guaranteed
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE WITHIN WARRANT IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE MEDALLION
GUARANTEED.
12
<PAGE> 1
EXHIBIT 5.1
[OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP LETTERHEAD]
September 16, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Delicious Brands, Inc.
Gentlemen:
We have acted as counsel to Delicious Brands, Inc., a Delaware
corporation (the "Company"), in connection with its filing of a registration
statement on Form S-1 (the "Registration Statement") relating to 1,725,000
shares (the "Shares") of its Common Stock, $.01 par value (the "Common Stock"),
including up to 225,000 Shares subject to an over-allotment option, all as more
particularly described in the Registration Statement.
In our capacity as counsel to the Company, we have examined
the Company's Certificate of Incorporation and By-Laws, as amended to date,
corporate proceedings and such other documents as we have considered appropriate
for purposes of this opinion.
With respect to factual matters, we have relied upon
statements and certificates of officers of the Company and public officials. We
have also reviewed such other matters of law and examined and relied upon such
other documents, records and certificates as we have deemed relevant hereto. In
all such examinations we have assumed conformity with the original documents of
all documents submitted to us as conformed or photostatic copies, the
authenticity of all documents submitted to us as
<PAGE> 2
Olshan Grundman Frome & Rosenzweig LLP
Securities and Exchange Commission
September 16, 1998
Page -2-
originals and the genuineness of all signatures on all documents
submitted to us.
On the basis of the foregoing, we are of the opinion that the
Shares have been validly authorized and will, when sold as contemplated by the
Registration Statement, be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference made to us under the caption
"Legal Matters" in the prospectus constituting part of the Registration
Statement.
Very truly yours,
/s/ Olshan Grundman Frome & Rosenzweig LLP
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP
<PAGE> 1
EXHIBIT 10.41
INDEMNIFICATION AGREEMENT
This Agreement made and entered into this _____ day of __________, 1998,
by and between DELICIOUS BRANDS, INC., a Delaware corporation, hereinafter
called the "Company," and ________________, hereinafter called "Indemnitee."
W I T N E S S E T H :
WHEREAS, the Company is desirous of providing Indemnitee with limitation
of liability and indemnification to the fullest extent permitted by law;
WHEREAS, the Company desires to have Indemnitee serve or continue to serve
as a director or officer of the Company or any other corporation, subsidiary,
partnership, joint venture, trust, or other enterprise (herein called
"Affiliate") of which he has been or is serving at the request, for the
convenience, or to represent the interest of the Company, with the assurance
that the Company will indemnify him, and use its best efforts to obtain adequate
insurance to indemnify him or that the combination of the two will be sufficient
to indemnify him against costs and risks of claims for damages by reason of his
being a director or officer of the Company or of an Affiliate, or by reason of
his decisions or actions on their behalf;
WHEREAS, although the Company believes that the coverage of any directors'
and officers' liability insurance obtained will be adequate to protect and
indemnify Indemnitee from liability, to ensure Indemnitee sufficient protection,
the Company has agreed to provide Indemnitee with the benefits contemplated by
this Agreement, which benefits are intended to supplement, if necessary, the
Company's proposed directors' and officers' liability insurance policy; and
<PAGE> 2
WHEREAS, Indemnitee desires to serve or to continue to serve as such
director or officer provided that he is furnished with the indemnity provided
for hereinafter, in one or more of such capacities.
NOW, THEREFORE, for and in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
1. AGREEMENT TO SERVE. Indemnitee will serve and/or continue to serve
the Company or an Affiliate of the Company, at the will of the Company as a
director and/or officer faithfully and to the best of his ability so long as he
is duly elected and qualified in accordance with the provisions of the
Certificate of Incorporation and the By-laws thereof, or until such time as he
tenders his resignation in writing.
2. MAINTENANCE OF D&O INSURANCE.
(a) The Company hereby represents and warrants that Exhibit A
contains a summary description of the proposed policies of directors' and
officers' liability insurance that the Company will use its best efforts to
obtain and that upon the effectiveness of a Registration Statement on Form S-1
relating to the Company's initial public offering of shares of the Company's
Common Stock, par value $.01, filed by the Company with the Securities and
Exchange Commission, such policies are anticipated to be in full force and
effect.
(b) The Company hereby covenants and agrees that, so long as
Indemnitee shall continue to serve as a director or officer of the Company or an
Affiliate and thereafter so long as Indemnitee shall be subject to any possible
claim or threatened, pending or completed action, suit or proceeding, whether
civil, criminal or investigative, by reason of the fact that Indemnitee was a
director or officer of the Company or an Affiliate, the Company shall use
-2-
<PAGE> 3
its best efforts to maintain in full force and effect directors' and officers'
liability insurance; provided, however, that the Company shall no longer be
required to maintain such insurance to the extent that the cost thereof in the
sole discretion of the Company becomes excessive.
(c) In all policies of directors' and officers' liability
insurance, Indemnitee shall be named as an insured in such a manner as to
provide Indemnitee the same rights and benefits, subject to the same
limitations, as are accorded to the Company's or its Affiliates' directors or
officers most favorably insured by such policy.
3. INDEMNIFICATION.
(a) The Company hereby agrees to indemnify and hold harmless
Indemnitee to the fullest extent permitted by the Certificate of Incorporation,
By-laws, the Delaware General Corporation Law (the "DGCL") or any other
applicable law as may be amended from time to time, against any and all amounts
which he is or becomes obligated to pay because of any charge, claim or claims,
whether civil or criminal, made against him because of any act or omission or
neglect or breach of duty, including any actual or alleged error or misstatement
or misleading statement or other act done or wrongfully attempted, which he
commits or suffers while acting in his capacity as an officer or director of the
Company or an Affiliate thereof and because of his being such an officer or
director; provided, however, that if the DGCL is repealed or modified the result
of which limits Indemnitee's indemnification rights and/or protection under the
DGCL, then with respect to any event occurring prior to such repeal or
modification, Indemnitee shall be entitled to the rights and protection provided
under the DGCL as if such repeal or modification would not result in the Company
violating any provision of the DGCL or other applicable law. The payments which
the Company will be obligated to
-3-
<PAGE> 4
make hereunder shall include but shall not be limited to all expenses (including
attorney's fees), damages, judgments, fines, settlements and costs, cost of
investigation and costs of defense of actual or threatened legal actions, claims
or judicial administrative or other proceedings and appeals therefrom and costs
of attachment or similar bonds and shall be payable within 30 days after the
Indemnitee has given the Company a written claim for such funds, as set forth in
Section 3(b) hereof; provided, however, that the Company shall not be obligated
to pay fines or other obligations or fees imposed by law or otherwise which is
prohibited by applicable law from paying as indemnity. To the full extent so
permitted, the foregoing shall apply to actions by or in the right of the
Company and require the Company to pay expenses, including bail bonds, if any,
in advance of final disposition as set forth above.
(b) If a claim under this Agreement is not paid by the Company, or
on its behalf, within 30 days after a written claim has been given to the
Company, the Indemnitee may at any time thereafter bring suit against the
Company to recover the unpaid amount of the claim and if successful, the
Indemnitee shall also be entitled to be paid all costs and expenses of
prosecuting such claim, including attorney's fees and interest. As a condition
precedent to his right to be indemnified hereunder, Indemnitee shall give the
Company notice of writing as soon as reasonably practicable of any claim made
against him for which indemnity will or could be sought under this Agreement.
Notice to the Company shall be directed to Delicious Brands, Inc., 2070 Maple
Street, Des Plaines, Illinois 60018, Attention: Chief Executive Officer and
shall be deemed received if sent by registered or certified mail, return receipt
requested.
(c) In the event of payment under this Agreement, the Company shall
be subrogated to the extent of such payment to all of the rights of recovery of
the Indemnitee.
-4-
<PAGE> 5
4. LIMITATIONS. The Company shall not be liable under this Agreement to
make any payment in connection with any claim:
(a) for which payment is actually made to the Indemnitee under a
valid and collectable Company insurance policy, which premiums are paid by the
Company or any of its Affiliates, except in respect of any deductible and excess
beyond the amount of payment under such insurance;
(b) for which the Indemnitee is indemnified by the Company
otherwise than pursuant to this Agreement, provided such amount has previously
been paid to the Indemnitee;
(c) based upon or attributable to the Indemnitee gaining in fact
any personal profit or advantage to which he was not legally entitled;
(d) for an accounting of profits in fact made from the purchase or
sale by the Indemnitee of securities of the Company within the meaning of
applicable law;
(e) brought about or contributed to by the dishonesty of the
Indemnitee seeking payment hereunder; provided, however, notwithstanding the
foregoing, the Indemnitee shall be protected under this Agreement as to any
claims upon which suit may be brought against him by reason of any alleged
dishonesty on his part, unless a judgment or other final and nonappealable
adjudication thereof adverse to the Indemnitee shall establish that he committed
acts of active and deliberate dishonesty with actual dishonest purpose and
intent, which acts were material and an essential element to the cause of
actions so adjudicated; and
(f) by an Indemnitee who acts as a plaintiff suing other directors
or officers of the Company or its Affiliates.
-5-
<PAGE> 6
5. CUMULATIVE RIGHTS AND SEVERABILITY. Nothing herein shall be deemed
to diminish or otherwise restrict the Indemnitee's right to indemnification
under the Company's directors' and officers' liability insurance, any provision
of the Certificate of Incorporation, By-laws, vote of stockholders or
disinterested directors, or under the DGCL or any other applicable law. On the
contrary, the rights granted to Indemnitee hereunder are intended to protect
Indemnitee to the fullest extent permitted by law and shall be cumulative and in
addition to any rights that Indemnitee may have from any other source. If any
provision or provisions of this Agreement shall be held to be invalid, illegal
or unenforceable for any reason whatsoever, (i) the validity, legality and
enforceability of the remaining provisions of this Agreement shall not in any
way be affected or impaired thereby and (ii) to the fullest extent possible the
provisions of this Agreement shall be construed so as to give effect to the
intent manifested by the provisions held invalid, illegal or unenforceable.
6. SURVIVAL. The provisions of this Agreement shall inure to the
benefit of Indemnitee, his heirs, executors and administrators, and shall be
binding on the successors and assigns of the Company whether by operation of law
or otherwise. The obligations of the Company hereunder will survive (i) any
actual or purported termination of this Agreement by the Company or its
successors or assigns, whether by operation of law or otherwise, (ii) any change
in the Company's Certificate of Incorporation or By-laws and (iii) termination
of the indemnity services to the Company (whether such services were terminated
by the Company or the Indemnitee), whether or not a claim is made or an action
or proceeding is threatened or commenced before or after the actual or purported
termination of the Agreement, change in the Certificate of Incorporation or
By-laws, or termination of the Indemnitee's services.
-6-
<PAGE> 7
7. GOVERNING LAW. The parties hereto agree that this Agreement shall be
construed and enforced in accordance with and governed by the internal laws of
the State of Delaware.
8. SUCCESSORS AND ASSIGNS. This Agreement shall be (i) binding upon all
successors and assigns of the Company (including any transferee of all or
substantially all of its assets and any successor by merger or otherwise by
operation of law) and (ii) shall be binding on and inure to the benefit of the
heirs, personal representatives and estate of the Indemnitee.
9. BOARD APPROVAL. This Agreement has been approved by the Board of
Directors of the Company.
10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first above written.
Delicious Brands, Inc.
_____________________________________
Name: Michael J. Kirby
Title: Chief Executive Officer
INDEMNITEE
_____________________________________
Name:
-7-
<PAGE> 8
EXHIBIT "A" TO
INDEMNIFICATION AGREEMENT
DATED ____________ , 1998
TERMS AND CONDITIONS:
- - Co-insurance:
- - Retroactive Date:
- - Arbitration Endorsement:
- - Service of Suit:
- - Broad Form Prior Acts exclusion:
- - Provide defense cost coverage only of:
- $_______________per claim
$_______________aggregate for following named perils:
- - Provides Broad Form outside directorship liability for non-profit
organizations.
- - ________months discovery period at __% additional premium.
-8-
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use in this Prospectus constituting part of this
Amendment No. 2 Registration Statement on Form S-1 of our report dated January
22, 1998, relating to the financial statements of Delicious Brands, Inc.
(formerly The Delicious Frookie Company, Inc.) and our report dated March 24,
1998, relating to the financial statements of Salerno Foods, L.L.C., which
appears in such Prospectus. We also consent to the references to us under the
heading "Experts".
/s/ Altschuler, Melvoin and Glasser LLP
---------------------------------------
Altschuler, Melvoin and Glasser LLP
Chicago, Illinois
September 17, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Amendment No. 2 to Form S-1
Registration Statement of our report dated March 5, 1997 on our audit of the
financial statements of Salerno Foods, L.L.C. as of December 31, 1996 and for
the period January 23, 1996 (Date of Inception) through December 31, 1996. We
also consent to the references to our firm under the heading "Experts" in this
S-1 Registration Statement.
/s/ FRIEDMAN EISENSTEIN RAEMER AND SCHWARTZ, LLP
--------------------------------------------
FRIEDMAN EISENSTEIN RAEMER AND SCHWARTZ, LLP
Chicago, Illinois
Dated: September 17, 1998
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No.2 to Registration No. 333-50771
of Delicious Brands, Inc. (formerly The Delicious Frookie Company, Inc.) of our
report dated July 18, 1996, appearing in the Prospectus, which is part of such
Registration Statement, and to the reference to us under the heading "Experts".
/s/ Cooper, Selvin & Strassberg, LLP
------------------------------------
Cooper, Selvin & Strassberg, LLP
Great Neck, New York
September 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 6,626,351
<ALLOWANCES> 1,085,358
<INVENTORY> 2,447,617
<CURRENT-ASSETS> 8,625,840
<PP&E> 1,520,097
<DEPRECIATION> 501,408
<TOTAL-ASSETS> 19,427,876
<CURRENT-LIABILITIES> 21,724,181
<BONDS> 3,218,139
0
0
<COMMON> 33,318
<OTHER-SE> (5,547,762)
<TOTAL-LIABILITY-AND-EQUITY> 19,427,876
<SALES> 22,331,015
<TOTAL-REVENUES> 22,331,015
<CGS> 17,446,954
<TOTAL-COSTS> 17,446,954
<OTHER-EXPENSES> 5,596,810
<LOSS-PROVISION> 232,144
<INTEREST-EXPENSE> 514,514
<INCOME-PRETAX> (1,421,602)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,421,602)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,421,602)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
