<PAGE> 1
As Filed Pursuant to Rule 424(b)(4)
Registration No. 333-50771
1,000,000 SHARES
[DELICIOUS BRANDS LOGO]
COMMON STOCK
All of the 1,000,000 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. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price of the shares. The Common Stock
has been approved for quotation on the Nasdaq SmallCap Market under the symbol
"DBSI."
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 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 offering by the
Holders 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 "Concurrent Offering."
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 7 HEREOF AND
"DILUTION" ON PAGE 16 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.................................. $12.00 $1.20 $10.80
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Total(3)................................... $12,000,000 $1,200,000 $10,800,000
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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 Network 1 Financial
Securities, Inc. (the "Representative") in the form of (i) a non-accountable
expense allowance of $360,000 ($414,000 if the over-allotment option is
exercised in full) and (ii) warrants to purchase an aggregate of 100,000
shares of Common Stock at 165% 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
$700,000.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
an additional 150,000 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 $13,800,000, $1,380,000 and $12,420,000, 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 Network 1 Financial Securities, Inc., Red
Bank, New Jersey, on or about November 17, 1998.
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[NETWORK 1 FINANCIAL LOGO]
WESTPORT RESOURCES
INVESTMENT SERVICES, INC.
The date of this Prospectus is November 12, 1998
<PAGE> 2
[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.
<PAGE> 3
FOR NEW JERSEY RESIDENTS:
Offers and sales in this offering in New Jersey may only be made to
accredited investors as defined in Rule 501 under the Securities Act of 1933, as
amended. Under Rule 501, to be an accredited investor an individual must have
(A) a net worth, or joint net worth with such individual's spouse, of more than
$1,000,000 or (B) income of more than $200,000 in each of the two most recent
years or joint income with such individual's spouse of more than $300,000 in
each of those years and a reasonable expectation of reaching the same income
level in the current year. Other standards apply to investors who are not
individuals. There will be no secondary sales of the securities to persons who
are not accredited investors for 90 days after the date of this offering by the
Underwriters and selected dealers.
FOR CALIFORNIA RESIDENTS:
This offering was approved in California on the basis of a limited offering
qualification. Offers and sales in California may only be made to investors who
meet a suitability standard of either (A) $65,000 gross annual income plus an
exclusive net worth (net worth exclusive of home, home furnishings and
automobiles) of not less than $250,000; or (B) an exclusive net worth of
$500,000 liquid net worth; or (C) $1,000,000 net worth (inclusive); or (D)
$200,000 gross annual income. The Company did not have to demonstrate compliance
with some or all of the merit regulations of the Department of Corporations of
California. There will be no immediate secondary trading of the securities
because the Commissioner of Corporations will withhold the secondary trading
exemption provided under California Corporations Code Section 25104(h).
FOR OHIO RESIDENTS:
This offering was approved in Ohio on the basis of a limited offering
qualification. Offers and sales in Ohio may only be made to investors who meet a
suitability standard of either (A) $65,000 gross annual income and an exclusive
net worth (net worth exclusive of home, home furnishings and automobiles) of not
less than $250,000; or (B) an exclusive net worth of $500,000.
FOR OREGON RESIDENTS:
This offering was approved in Oregon on the basis of a limited offering
qualification. Offers and sales in Oregon may only be made to accredited
investors who meet a suitability standard of either (A) $65,000 gross annual
income and an exclusive net worth (net worth exclusive of home, home furnishings
and automobiles) of not less than $250,000; or (B) an exclusive net worth of
$500,000. These limitations shall apply to the secondary trading of the
securities for 180 days from the date of this prospectus.
3
<PAGE> 4
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.
4
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......... 1,000,000 shares
Common Stock to be outstanding after
the offering.............................. 4,282,842 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."
Nasdaq SmallCap Market symbol............... "DBSI"
</TABLE>
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(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) 150,000 shares of Common Stock to be sold by
the Company reserved for issuance upon exercise of the Underwriters'
over-allotment option; and (viii) 100,000 shares of Common Stock issuable
upon exercise of the Representative's Warrant.
5
<PAGE> 6
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) $(3,358)
Total assets................................................ 19,428 19,828
Long-term debt.............................................. 1,567 --
Stockholders' equity (deficit).............................. $ (5,514) $ 5,792
</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 1,000,000 shares of Common Stock offered hereby and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
6
<PAGE> 7
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; NET WORKING CAPITAL 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 had negative net working capital (the amount
by which current liabilities exceed current assets) of $4.4 million at December
31, 1997 and $13.1 million at June 30, 1998, respectively. 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."
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<PAGE> 8
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."
NO INDEPENDENT APPRAISAL OF SALERNO
The Company did not obtain an independent appraisal of the market value of
the Salerno assets acquired in the Salerno Acquisition. Consequently, there is a
risk that the assets may not be worth as much as the Company paid for them. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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."
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<PAGE> 9
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 \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
95.9% ($9.3 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 $5.5 million.
In addition, the balance of approximately 4.1% ($400,000) 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 (23.6% upon
9
<PAGE> 10
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 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
10
<PAGE> 11
adverse effect on the business, results of operations and financial condition of
the Company. See "Business -- Industry Opportunity" and "-- Products."
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
11
<PAGE> 12
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 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 4,282,842 shares
of Common Stock outstanding. All of the 1,000,000 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 ("Restricted Shares") 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, 2,235,842 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. Beneficial owners
of the Company's securities who hold in the aggregate 3,094,904 Restricted
Shares have 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). In addition, up to 1,318,557 shares of Common
Stock ("Derivative Shares") are issuable upon exercise of currently exercisable
options and warrants and conversion of currently convertible securities.
1,149,054 of these Derivative Shares are subject to the lockup agreements
described above. 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 $(1.15) per share as compared with the initial
public offering price of $12.00 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 1,418,557 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
12
<PAGE> 13
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."
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."
13
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$9.7 million (approximately $11.3 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)...... $5.7 58.8%
Repayment of Trade Payables(2)..................... 3.6 37.1
General Corporate Purposes(3)...................... 0.4 4.1
---- -----
Total.................................... $9.7 100.0%
==== =====
</TABLE>
- ---------------
(1) The Company expects to use approximately $5.1 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) November 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
$265,000 do not bear interest and are payable contemporaneously with the
aforementioned indebtedness. The Company expects to use approximately
$560,000 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) November 30,
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 $3.6 million of the net proceeds
for the payment of outstanding trade payables.
(3) The Company expects to use the balance of the net proceeds, approximately
$400,000, 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
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.
14
<PAGE> 15
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."
15
<PAGE> 16
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 1,000,000 shares of Common Stock offered by the
Company hereby 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 ($4,913,000), or $(1.15) per share. This represents an immediate
increase in net tangible book value of $3.31 per share to existing stockholders
and an immediate dilution in net tangible book value of $13.15 per share or 100%
to investors in this offering. The following table sets forth such per share
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $12.00
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.......................... 3.31
------
Net tangible book value (deficit) per share as of June 30,
1998 giving effect to the offering........................ (1.15)
------
Dilution per share to new investors......................... $13.15
======
</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 77% $ 8,349,459 41% $ 2.54
New investors.................. 1,000,000 23 12,000,000 59 12.00
--------- --- ----------- -----
Total................ 4,282,842 100% $20,349,459 100%
========= === =========== =====
</TABLE>
16
<PAGE> 17
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 1,000,000 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. 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 $ 4,032
-------- --------
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; 4,282,842 shares issued and outstanding pro
forma, as adjusted..................................... 33 43
Additional paid-in capital................................ 7,503 18,798
Accumulated deficit....................................... (13,051) (13,051)
-------- --------
Total stockholders' equity (deficit)................... (5,514) 5,792
-------- --------
Total capitalization.............................. $ (3,947) $ 5,792
======== ========
</TABLE>
17
<PAGE> 18
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>
18
<PAGE> 19
<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.
19
<PAGE> 20
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
20
<PAGE> 21
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
21
<PAGE> 22
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 $385,000 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 $380,000
reduction in personnel and travel and entertainment costs and $251,000 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.
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<PAGE> 23
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 $13.1 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,
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<PAGE> 24
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 224,527 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 $695,610
from the Second Closing were applied by the Company to increase cash balances
and reduce outstanding trade payables balances. The Representative 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) November 30, 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 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, bearing interest at a rate
24
<PAGE> 25
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 the Salerno Promissory Note and $100,000 as a fee for the APFC
Loan. The aggregate amount of the APFC loan will be reduced by the amount paid,
if any, by the Company of the Salerno Promissory Note. 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 matured on October
16, 1998. APFC has not paid the Salerno Promissory Note. The Company has
unconditionally guaranteed for the benefit of Salerno the full and prompt
payment when due of all of the principal, interest and other obligations
evidenced by the Salerno Promissory Note. Such guaranty is an absolute guaranty
of payment and is not a guaranty of collection. The APFC Loan and the Fee Note
each mature on the earlier of (i) November 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. However, pursuant to a subordination agreement among the
Company, Republic, Larry Polhill, APFC and Salerno, the subordinated lenders
thereunder (Larry Polhill, APFC and Salerno) have agreed (i) not to exercise any
collection rights with respect to the collateral securing the Salerno Promissory
Note and the APFC Loan, (ii) not to take possession of, or otherwise deal with,
such collateral, and (iii) not to exercise or enforce any right or remedy which
may be available to the subordinated lenders with respect to such collateral
until December 1, 1998 without the prior written consent of Republic. 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.
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<PAGE> 26
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
26
<PAGE> 27
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
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<PAGE> 28
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
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<PAGE> 29
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-
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<PAGE> 30
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.
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<PAGE> 31
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.
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<PAGE> 32
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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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> 34
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........... 50,350(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
$3,000.
(3) Consists of a payout of accrued vacation time.
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<PAGE> 35
(4) Mr. Worth resigned as Chairman of the Board and Chief Executive Officer of
the Company effective August 13, 1997.
(5) Consists of automobile and insurance expenses.
OPTION GRANTS TABLE
The following table sets forth certain information regarding stock option
grants made to each of the Named Executive Officers during the year ended
December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS RATES OF ANNUAL
------------------------------------------------------------------ STOCK PRICE
PERCENT OF TOTAL APPRECIATION FOR
NUMBER OF SECURITIES OPTIONS GRANTED EXERCISE OR OPTION TERM(1)
UNDERLYING OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#) FISCAL YEAR(%) ($/SH) DATE 5%($) 10%($)
---- -------------------- ---------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Kirby.......... 90,000 74 6.00- 8/11/08 -- 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 65,000 150,000 --
Jeffry W. Weiner........................... 75,000 -- 450,000 --
Richard S. Worth........................... 257,750 -- 2,197,600 --
</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 initial public offering price of $12.00
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> 36
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> 37
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> 38
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.
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<PAGE> 39
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 (23.6% 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 $230,000, respectively, principal amount
of the 9% Notes for 16,250 and 28,750 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> 40
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)........................... 51,000 1.5 1.2
Jeffry W. Weiner(4)........................... 75,000 2.2 1.7
Donald C. Schmitt(5).......................... 104,500 3.1 2.4
Jay G. Shoemaker(6)........................... 1,000 * *
John H. Wyant(7).............................. 26,000 * *
Edward Sousa(8)............................... 1,011,000 30.8 23.6
Richard S. Worth(8)(9)(10).................... 768,250 21.7 16.9
1497 Rail Head Blvd., Unit 2
Naples, Florida 74110-8444
Randye Worth(8)(9)(11)........................ 561,750 16.8 13.0
3757 Ascot Bend Court
Bonita Springs, Florida 34134
Robert L. Moody, Jr.(12)...................... 203,419 6.2 4.7
2302 Post office, Suite 601
Galveston, Texas 77550
Union Bank of Switzerland..................... 210,000 6.4 4.9(13)
(f/k/a Swiss Bank Corp.)
Paradeplatz 6
CH-8010 Zurich, Switzerland
All directors and officers as a group (6
persons)(3)(4)(5)(6)(7)(8).................. 1,268,500 36.0 28.0
</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,
(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 and
(iii) 6,000 shares of Common Stock issuable upon exercise of options
exercisable through August 11, 1998, at a price of $24.00 per share.
Excludes 39,000 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;
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<PAGE> 41
(iii) 37,500 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 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 1,500 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) 40,750 shares of Common Stock
held by Donald Schmitt's adult children, of which shares Mr. Schmitt
disclaims beneficial ownership; (ii) 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 (iii) 28,750
shares of Common Stock issuable upon conversion of 28,750 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 1,000 shares of Common Stock issuable upon exercise of options
exercisable through December 21, 2007, at a price of $6.00 per share.
Excludes 500 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) 9,750 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
1,000 shares, all at a price of $6.00 per share. Excludes 500 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> 42
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 no sale by Union Bank of Switzerland of 210,000 shares of Common
Stock in the Concurrent Offering. See "Concurrent Offering."
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<PAGE> 43
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> 44
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 Common Stock has been approved for quotation on the Nasdaq SmallCap
Market under the symbol "DBSI."
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<PAGE> 45
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have outstanding
4,282,842 shares of Common Stock (4,432,842 if the Underwriters' over-allotment
is exercised in full), not including Derivative Shares. Of those shares, the
1,000,000 shares of Common Stock sold to the public in this offering (1,150,000
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 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, 2,235,842 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. Beneficial owners of
the Company's securities other than Richard and Randye Worth, who hold in the
aggregate 2,083,904 Restricted Shares, have 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 (who hold in the aggregate 1,011,000 Restricted Shares) 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 consent of the Representative.
In addition, up to 1,318,557 Derivative Shares are issuable upon exercise
of currently exercisable options and warrants and conversion of currently
convertible securities. 830,054 of these Derivative Shares are subject to the
12-month lockup agreements described above. The 319,000 Derivative Shares held
by Richard and Randye Worth, in the aggregate, are subject to the 36-month
lockup agreements described above.
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.
45
<PAGE> 46
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"). Except for the 500,000 shares underlying the Worth Options, the
shares of Common Stock being offered by the Holders were acquired from the
Company in the October Private Placement. The Worth Options were acquired by the
Holders from Richard and Randye Worth, former principal stockholders, officers
and directors of the Company, in a private transaction that occurred
contemporaneously with the October Private Placement. 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."
There are no material relationships between any of the Holders and the
Company or any of its officers or directors, and none of the Holders has been an
officer or director of the Company, Delicious or Salerno within the past five
years.
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.
46
<PAGE> 47
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Network 1
Financial Securities, 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>
Network 1 Financial Securities, Inc......................... 200,000
Westport Resources Investment Services, Inc. ............... 200,000
Kashner Davidson Securities Corporation..................... 200,000
EBI Securities Corporation.................................. 100,000
Neidiger, Tucker, Bruner, Inc. ............................. 100,000
Smith, Moore & Co. ......................................... 100,000
WIN Capital Corp. .......................................... 100,000
---------
Total............................................. 1,000,000
=========
</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 $.72 per share; and that such dealers may
reallow a concession of $.36 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 45-day over-allotment option
to purchase up to 150,000 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 1,000,000
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.
Beneficial owners of the Company's securities other than Richard and Randye
Worth, who hold in the aggregate 2,083,904 Restricted Shares, have 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 (who hold in the aggregate 1,011,000 Restricted Shares)
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 consent of the Representative.
In addition, up to 1,318,557 Derivative Shares are issuable upon exercise
of currently exercisable options and warrants and conversion of currently
convertible securities. 830,054 of these Derivative Shares are subject to the
12-month lockup agreements described above. The 319,000 Derivative Shares held
by Richard and Randye Worth, in the aggregate, are subject to the 36-month
lockup agreements described above.
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 100,000 shares of Common Stock. The
Representative's Warrants is exercisable, in whole or in part, at an exercise
price equal to 165% 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
47
<PAGE> 48
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 or partners thereof in compliance with the applicable provisions of the
Corporate Financing Rule of the NASD.
In connection with this offering, the Company has agreed that, for the
five-year period commencing on the date of this Prospectus, the Representative
has the right to appoint a designee as an observer at all meetings of the
Company's Board of Directors. This designee has the right to attend all meetings
of the Board of Directors and shall be entitled to receive the same
reimbursement for all expenses of attendance at such meetings as it paid to
Board members.
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 $360,000 ($414,000 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 has been determined through
negotiations between the Company and the Representative. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, were 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. 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 150,000 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.
48
<PAGE> 49
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.
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.
49
<PAGE> 50
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> 51
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> 52
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> 53
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> 54
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. Goodwill related to the
acquisition of Salerno amounted to approximately $6,314,500 and is being
amortized over 20 years.
(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> 55
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 and 12
as to which the date is August 1, 1998 and Note 13
as to which the date is October 21, 1998
F-6
<PAGE> 56
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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 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 -- (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> 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)
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> 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 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> 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 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> 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 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> 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 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> 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 -- (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> 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)
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> 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 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> 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 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 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 matured on October 16, 1998. APFC has not paid the
Salerno Promissory Note. The Company has unconditionally guaranteed for the
benefit of Salerno the full and prompt payment when due of all of the principal,
interest and other obligations evidenced by the Salerno Promissory Note. Such
guaranty is an absolute guaranty of payment and is not a guaranty of collection.
However, pursuant to a subordination agreement, the subordinated lenders
thereunder have agreed (i) not to exercise any collection rights with respect to
the collateral securing the Salerno Promissory Note and the APFC Loan, (ii) not
to take possession of, or otherwise deal with, such collateral, and (iii) not to
exercise or enforce any right or remedy which may be available to the
subordinated lenders with respect to such collateral until December 1, 1998
without the prior written consent of U.S. Bancorp. The APFC Loan matures on the
earlier of (a) November 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
F-24
<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 13 -- ACQUISITION OF ASSETS OF SALERNO FOODS, L.L.C. -- (CONTINUED)
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) November 30, 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.
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> 75
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> 76
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> 77
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 6,153,851
----------- ---------- ----------
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) (94,204)
----------- ---------- ----------
Net (Loss)............................................ $ (838,625) $ (213,303) $ (271,741)
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-28
<PAGE> 78
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> 79
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............. 65,075 408,951 765,642
--------- --------- ---------
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> 80
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 the
promissory note to American Pacific Financial Corporation and a stockholder of
American Pacific Financial Corporation who 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> 81
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> 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 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> 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 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> 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 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> 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 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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
- ------------------------------------------------------
- ------------------------------------------------------
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.................... 4
Cautionary Statement Regarding
Forward-Looking Statements.......... 7
Risk Factors.......................... 7
Use of Proceeds....................... 14
Dividend Policy....................... 15
Dilution.............................. 16
Capitalization........................ 17
Selected Historical Financial Data.... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 26
Management............................ 33
Certain Transactions.................. 39
Principal Stockholders................ 40
Description of Capital Stock.......... 43
Shares Eligible For Future Sale....... 45
Concurrent Offering................... 46
Underwriting.......................... 47
Legal Matters......................... 49
Experts............................... 49
Available Information................. 49
Index to Financial Statements......... F-1
</TABLE>
UNTIL DECEMBER 7, 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.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,000,000 SHARES
[DELICIOUS BRANDS LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
[NETWORK 1 FINANCIAL LOGO]
WESTPORT RESOURCES
INVESTMENT SERVICES, INC.
NOVEMBER 12, 1998
- ------------------------------------------------------
- ------------------------------------------------------
