SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
--------------------------------------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-24941
Delicious Brands, Inc.
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(Exact name of the registrant as specified in its charter)
Delaware 06-1255882
- -------------------------------------- ---------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2070 Maple Street, Des Plaines, Illinois 60018
- ------------------------------------------- ---------------------------------
(Address of Principal executive offices) (Zip code)
Registrant's telephone number including area code: (847) 699-3200
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
4,620,835 shares of Common Stock were outstanding on August 23, 1999.
<PAGE>
DELICIOUS BRANDS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
I N D E X
Part I: Financial Information Page
Item 1. Financial Statements:
Balance Sheets as of June 30, 1999 and December 31, 1998 2
Statements of Operations, Three and Six Months Ended 3
June 30, 1999 and 1998
Statements of Cash Flows, Six Months Ended June 30, 1999 4
and 1998
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 11
Part II: Other Information
Item 2. Changes in Securities and Use of Proceeds 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
1
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DELICIOUS BRANDS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
----------- ------------
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash....................................................................... $ 0 $ 981,646
Accounts receivable (including $691,090 and $324,070,
respectively, due from related parties, net of allowances of
$670,412 and $800,980, respectively)..................................... 5,333,835 5,108,747
Inventory................................................................. 1,708,411 1,879,041
Due from distributors..................................................... 99,317 99,317
Prepaid expenses and other current assets................................. 628,977 327,964
------------ -------------
7,770,540 8,396,715
------------ -------------
Property and Equipment, Net of Accumulated Depreciation......................... 330,906 381,185
------------ -------------
Other Assets:
Goodwill.................................................................. 9,736,400 10,011,946
Other .................................................................... 369,658 436,261
------------ -------------
10,106,058 10,448,207
------------ -------------
$18,207,504 $19,226,107
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank loan payable......................................................... $ 3,357,182 $ 3,665,828
Current portion of subordinated debt...................................... 393,332 393,332
Accounts payable (including $76,675 and $82,040, respectively,
due to related parties)............................................. 8,776,600 7,173,870
Due to distributors....................................................... 512,298 532,769
Accrued expenses.......................................................... 2,000,754 2,954,389
Current portion of long-term liabilities.................................. 795,098 904,838
------------- -----------
15,835,264 15,625,026
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Long-term Liabilities:
Restructuring liability................................................... 416,273 544,679
Packaging loss liability.................................................. 200,000 200,000
------------- -----------
616,273 744,679
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Stockholders' Equity:
Preferred stock, $.01 par value 1,000,000 shares authorized: Class A
designated 245,000 shares with a liquidation value of $8.00 per
share, 189,584 and 195,834 shares issued and
outstanding in 1999 and 1998, respectively.......................... 1,516,668 1,566,668
Class B designated 35,000 shares with 35,000 issued and
outstanding in 1999................................................. 350 --
Common Stock, $.01 par value, 25,000,000 shares authorized,
4,490,010 and 4,481,767 shares issued in 1999 and 1998,
respectively........................................................ 44,900 44,818
Additional paid-in capital................................................ 19,849,404 18,343,209
Accumulated deficit....................................................... (19,494,306) (16,937,244)
------------- -----------
1,917,016 3,017,451
Less, common stock in treasury at cost.................................... (161,049) (161,049)
------------- -----------
Total stockholders' equity.......................................... 1,755,967 2,856,402
============= ============
$ 18,207,504 $19,226,107
============= ============
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
DELICIOUS BRANDS, INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -----------------------------
1999 1998 1999 1998
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net Sales (including approximately
$1,277,000, $1,815,000, $2,390,000
and $3,045,000 respectively, to related
parties).............................................. $ 11,389,402 $ 15,838,609 $ 23,731,219 $ 22,331,015
Cost of Sales (including approximately
$7,000, $1,859,000, $17,000
and $1,913,000, respectively, from
related parties)...................................... 8,821,129 12,165,650 18,317,268 17,446,954
------------- ------------ ----------- ------------
Gross Profit................................................ 2,568,273 3,672,959 5,413,951 4,884,061
------------- ------------ ----------- ------------
Selling, general and administrative 3,760,040 4,312,284 7,671,800 5,828,954
------------- ------------ ----------- ------------
Loss from Operations........................................ (1,191,767) (639,325) (2,257,849) (944,893)
------------- ------------ ----------- ------------
Other Income (Expense):
Interest expense...................................... (175,601) (401,565) (342,076) (514,514)
Other, net............................................ 116,372 26,827 121,197 37,805
------------- ------------ ------------ ------------
(59,229) (372,738) (220,879) (476,709)
------------- ------------ ------------ ------------
Loss before Provision for Income Taxes (1,250,996) (1,014,063) (2,478,728) (1,421,602)
Provision for Income Taxes.................................. 0 0 0 0
------------- ------------ ------------ -----------
Net Loss ................................................ $ (1,250,996) $ (1,014,063) $ (2,478,728) $(1,421,602)
============= ============ ============ ===========
Earnings per Share:
Basic:
Net loss per common share....................... $ (.28) $ (.31) $ (.56) $ (.44)
============ ============ ============ ===========
Weighted average number of
common shares outstanding................. 4,441,085 3,282,828 4,438,586 3,254,983
Diluted:
Net loss per common share....................... $ (.28) $ (.31) $ (.56) $ (.44)
============ ============ ============ ===========
Weighted average number of
common shares outstanding................. 4,441,085 3,282,828 4,438,586 3,254,983
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
DELICIOUS BRANDS, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ............................................................ $ (2,478,728) $ (1,421,602)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization..................................... 394,184 421,431
Provision for bad debts........................................... 37,333 232,144
Increase (Decrease) in cash from changes in:
Accounts receivable......................................... (262,421) (131,271)
Inventory................................................... 170,630 (745,498)
Due from distributors....................................... 0 112,378
Prepaid expenses and other current assets................... (301,013) (70,098)
Other assets................................................ 49,103 59,190
Accounts payable and accrued expenses....................... 649,095 1,929,772
Due to distributors......................................... (20,471) 24,684
Accrued restructuring liabilities........................... (128,406) (114,661)
Other liabilities........................................... (109,740) (164,519)
------------- -----------
Net cash provided (used) in operating activities........................ (2,000,434) 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 (3,709,599)
Purchase of property and equipment...................................... (50,859) (63,826)
------------ -----------
Net cash used in investing activities................................... (50,859) (3,773,425)
------------ -----------
Cash Flows from Financing Activities:
Payments of long-term debt.............................................. 0 (10,120)
Payments of financing costs............................................. 0 (1,162,470)
Proceeds from (payments of) bank loan payable, net...................... (308,646) 195,121
Proceeds from issuance of notes payable................................. 0 3,500,000
Proceeds of notes payables.............................................. 0 840,000
Proceeds from issuance of preferred stock............................... 1,750,000 0
Proceeds from issuance of common stock.................................. 3,191 0
Payment of preferred stock dividend..................................... (78,334) 0
Initial public offering costs........................................... 0 (385,015)
Payments of stock issuance costs........................................ (296,564) (144,390)
------------ -----------
Net cash provided by (used in) financing activities..................... (1,069,647) 2,833,126
------------ -----------
Decrease in Cash............................................................. (981,646) (808,349)
Cash, Beginning of Period..................................................... 981,646 808,349
============ ===========
Cash, End of Period........................................................... $ 0 $ 0
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Income taxes...................................................... $ 0 $ 0
============ ===========
Interest.......................................................... $ 348,720 $ 285,986
============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Interim Financial Statements
- ----------------------------
The unaudited interim financial statements included herein were prepared
pursuant to the rules and regulations for interim reporting under the Securities
Exchange Act of 1934, as amended. Accordingly, certain information and footnote
disclosures normally accompanying the annual financial statements were omitted.
The interim financial statements and notes should be read in conjunction with
the annual audited financial statements and notes thereto contained in the Form
10-K of Delicious Brands, Inc. (the "Company") dated April 15, 1999. The
accompanying unaudited interim financial statements contain all adjustments,
consisting only of normal adjustments, which in the opinion of management were
necessary for a fair statement of the results for the interim periods. Results
for the interim periods are not necessarily indicative of results for the full
year.
Matters Affecting Comparability - Acquisition of Assets
- -------------------------------------------------------
On April 3, 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Salerno Foods, L.L.C. ("Salerno"). Accordingly,
the Company's results of operations for the six months ended June 30, 1999
include the operating results of Salerno whereas the comparable six months ended
for the prior year include the operating results of Salerno beginning April 3,
1998.
The following unaudited pro forma information has been prepared assuming the
acquisition had taken place at January 1, 1998. 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 what 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, 1998
-----------------
<S> <C>
Net sales ........................................... $ 30,836,000
Loss before income taxes ............................ $ (2,733,000)
Net loss ............................................ $ (2,733,000)
Net loss per share:
Basic ......................................... $ (0.83)
Diluted ....................................... $ (0.83)
</TABLE>
Business and Ownership
During the fourth quarter of 1998, the Company issued 1,150,000 shares of its
Common Stock, at $12.00 per share, in an initial public offering. Proceeds of
the offering were $10,690,684 net of commissions and other related expenses
totaling $3,109,316.
On April 12, 1999, the Company consummated a private placement of 35,000 shares
of Series B Convertible Preferred Stock, $.01 par value per share and a warrant
to purchase 700,000 shares of Common Stock, for an aggregate price of $1.75
million. Proceeds of the offering were $1,456,290 net of commissions and other
related expenses totaling $293,710. Each share of Series B Convertible Preferred
Stock is currently convertible into five shares of Common Stock, subject to
certain antidilution provisions. The warrant to purchase 700,000 shares of
Common Stock has an initial exercise price of $0.01 per share, subject to
certain antidilution provisions, for a term of ten years from the date of its
issuance.
5
<PAGE>
2. Net Income (Loss) Per Share
Basic net income (loss) per share and diluted net income (loss) per share have
been calculated using the weighted average number of shares of Common Stock
outstanding during each period. Preferred stock dividends, totaling $78,334,
were paid during the three months ended March 31, 1999 and have been included in
both the basic and diluted net income (loss) per share calculations for the six
months ended June 30, 1999. All options and warrants were omitted from the
computation of diluted net income (loss) per share because the options and
warrants are antidilutive when net losses are reported.
3. Inventory
Inventory is stated at the lower of cost or market with cost determined by the
first-in, first-out (FIFO) method.
4. Recent Account Pronouncements
Effective January 1, 1999, the Company adopted FAS No. 133, "Accounting for
Derivatives Instruments and Hedging Activities," which required the recording of
all derivatives on the balance sheet at fair value, and Statement of Position
98-5 (SOP 98-5), "Reporting on the Cost of Start-up Activities," which requires
costs of start-up activities and organization costs to be expensed as incurred.
The adoption of FAS No. 133 and SOP 98-5 had no impact on the Company's results
of operations, financial position or cash flows.
5. Subordinated Debt
On April 27, 1999, the remaining outstanding 9% Subordinated Convertible
Promissory Notes (the "9% Notes"), aggregate principal amount of approximately
$393,000, matured. The Company has not repaid the 9% Notes. The Company is
currently negotiating with the holders of the 9% Notes with regard to the
conversion of the 9% Notes to equity. As the Company failed to repay the 9%
Notes or to negotiate their conversion into equity on or before May 27, 1999,
the Company is in default of the terms of the 9% Notes.
6. Borrowings
On August 18, 1999, the Company borrowed $360,000 and issued promissory notes
(the "Notes") in respect of this loan. Interest on the Notes accrue at a rate of
10% per annum. Interest on the Notes shall be paid monthly in arrears. The Notes
shall be due and payable on the earliest of (i) the one-year anniversary of the
date first written above, (ii) consummation of a private placement equity
financing of the Company's capital stock or any sale of assets or any business
unit or division from which the Company receives gross proceeds of at least
$2,000,000 or (iii) upon a change of control of voting power of the Company's
stockholders.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Matters Affecting Comparability - Acquisition of Assets
- -------------------------------------------------------
On April 3, 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Salerno Foods, L.L.C. ("Salerno"). Accordingly,
the Company's results of operations for the six months ended June 30, 1999
include the operating results of Salerno whereas the comparable six months ended
for the prior year include the results of Salerno beginning April 3, 1998.
Results of Operations
- ---------------------
Net Sales. Net sales decreased 28% to $11.4 million for the three months ended
June 30, 1999. Delicious brand product sales decreased $2.3 million primarily as
a result of changes in the buying habits of customers as well as increased
competition from private label and national brands. Additionally, distributors
formerly visited retailers multiple times each week and relied on unit volume to
earn profits. Distributors currently rely on less visits per week, and lower
volume sales at a higher gross margin. Salerno brand product sales as compared
to 1998 decreased $1.8 million primarily as a result of reduced distribution in
two regions of the country and lower volume sales to certain national accounts
for the three months ended June 30, 1999. Net sales increased 6% to $23.7
million for the six months ended June 30, 1999. The net sales increase, $1.4
million, resulted primarily from the inclusion of the April 3, 1998 acquisition
of Salerno, partially offset by the sales reduction in Delicious and Salerno
discussed above.
Effective August 2, 1999, the Company terminated business with its largest
distributor of Delicious brand products due to poor performance and replaced it
with new distributors. Initially, the Company expects a decline in sales due to
the start up process, but ultimately higher sales are anticipated.
Gross Profit. Gross profit decreased 30% to $2.6 million for the three months
ended June 30,1999. The gross profit decrease, $1.2 million, resulted primarily
from the sales reduction discussed above. Gross profit as a percentage of sales
decreased 1.3% for the three months ended June 30,1999 as Frookie and Delicious
gross margins increased 3.6% while Salerno's gross profit decreased by 3.8%. The
gross margin percentage increased for Frookie and Delicious product lines as the
Company concentrated on raising gross margins by reducing promotion costs and
obtaining lower supplier costs. Salerno's decrease in gross margin percentage
was a result of increased promotional allowances caused by competitive pressures
in the premium sector of the cookie market. Gross profit increased 11% to $5.4
million and gross profit as a percentage of sales increased .9% for the six
months ended June 30, 1999. The gross profit increase, $500,000, resulted
primarily from the inclusion of the April 3, 1998 acquisition of Salerno,
partially offset by reduced sales and the gross margin variance discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 14% to $3.8 million for the three months ended
June 30, 1999. The selling, general and administrative expense decrease,
$600,000, resulted primarily from lower selling expenses related to reduced
sales and a decline in general and administrative expenses caused by the
elimination of additional redundant expenses associated with the April 3, 1998
acquisition of Salerno. Selling, general and administrative expenses increased
32% to $7.7 million for the six months ended June 30, 1999. The selling, general
and administrative expense increase, $1.8 million, resulted from the inclusion
of the April 3, 1998 acquisition of Salerno partially offset by decreases noted
above.
Other Income (Expense). Other expenses decreased 84% to $59,000 and 54% to
$221,000 for the three and six months ended June 30, 1999, respectively. For the
three and six months ended June 30, 1999 interest expense declined $226,000 and
$172,000, respectively. This decrease was primarily due to additional interest
expense related to the April 3, 1998 acquisition of Salerno during the three
months ended June 30, 1998.
Provision for Income Tax. The provision for income tax for the three and six
months ended June 30, 1999 was zero as a result of there being a net operating
loss for the period for which a valuation allowance was provided to
7
<PAGE>
reduce the tax benefit of this loss. The valuation allowance for the three and
six months ended June 30, 1999 increased $488,000 and $967,000, respectively.
The valuation allowance increases were primarily due to the uncertainty of the
future utilization of the net operating losses generated. The variation of the
Company's effective tax rate from the federal statutory tax rate is principally
due to non-deductible amortization of intangible assets and the effect of the
increase in the valuation allowance.
Net Loss. Net loss increased 23% to $1.3 million for the three months ended June
30, 1999 and 74% to $2.5 million for the six months ended June 30, 1999. The
increased losses were a result of the factors discussed above.
Liquidity and Capital Resources
- -------------------------------
In recent periods, the Company has utilized its working capital and proceeds
from both private placements and public offerings to cover operating deficits.
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 Company's introduction
of new products represents an immaterial capital expenditure because co-packers
are responsible for the research, development and ingredients costs. The only
costs incurred by the Company are packaging design costs, which did not exceed
$100,000 in 1998 and are not expected to increase significantly in 1999.
Consequently, additions to property and equipment are not expected to be
material in future periods.
On February 6, 1998, the Company consummated a second closing of a private
placement (the "Second Closing") pursuant to which it issued an aggregate of
140,000 shares of common stock, $.01 par value per share ("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.
On March 30, 1998, the Company borrowed $500,000 (the "Acquisition Loan"). Such
indebtedness bore interest at the rate of 12% per annum and matured on the
consummation of the Company's initial public offering of Common Stock on
November 17, 1998 (the "Initial Public Offering"). The Acquisition Loan and
accrued interest thereon were repaid from the proceeds of the Initial Public
Offering.
On April 3, 1998, the Company entered into an amendment to a revolving credit
facility with U.S. Bancorp Republic Commercial Finance, Inc. ("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 (9.25% at June 30, 1999). Borrowings under the revolving
credit facility at June 30, 1999 were $3.7 million. 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 acquisition of Salerno. 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. In connection therewith, the
Company entered into a loan agreement with American Pacific Financial
Corporation ("APFC") pursuant to which the Company borrowed $4.6 million,
bearing interest at a rate of 12% per annum through August 3, 1998 and 15% per
annum thereafter, from APFC (the "APFC Loan") consisting of $3.0 million in cash
used by the Company to fund a portion of the cash purchase price for Salerno,
$1.5 million in the form of APFC assuming the Salerno Promissory Note and
$100,000 as a fee for the APFC Loan. In addition, the Company issued to APFC a
promissory note in the principal amount of $100,000, bearing interest at a rate
of 12% per annum, as a fee for assuming the Salerno Promissory Note. The notes
and accrued interest thereon were repaid from the proceeds of the Initial Public
Offering.
As of August 1, 1998, holders of approximately $1.6 million aggregate principal
amount of 9% Subordinated Convertible Promissory Notes (the "9% Notes")
exchanged such notes for an aggregate of 195,834 shares of Series A Convertible
Preferred Stock, $.01 par value per share ("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
8
<PAGE>
A Preferred Stock out of the assets of the Company legally available for payment
thereof. 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.
On November 17, 1998, the Company consummated the Initial Public Offering of
1,000,000 shares of Common Stock, at a price of $12.00 per share. On December
31, 1998, the Company consummated the sale of 150,000 shares of Common Stock, at
a price of $12.00 per share, pursuant to the underwriters' exercise of the
over-allotment option on December 29, 1998. After deducting underwriting
discounts and expenses, the Company received approximately $10.7 million of net
proceeds from the Initial Public Offering.
On April 12, 1999, the Company consummated a private placement of 35,000 shares
of Series B Convertible Preferred Stock, $.01 par value per share ("Series B
Preferred Stock"), and a warrant to purchase 700,000 shares of Common Stock, for
an aggregate price of $1.75 million. The net proceeds of $1.5 million were
applied by the Company primarily to reduce outstanding trade payables balances.
Each share of Series B Preferred Stock is currently convertible into five shares
of Common Stock, subject to certain antidilution provisions. The warrant to
purchase 700,000 shares of Common Stock has an initial exercise price of $0.01
per share, subject to certain antidilution provisions, for a term of ten years
from the date of its issuance.
On April 27, 1999, 9% promissory notes in the aggregate principal amount of
approximately $393,000 matured. The Company did not repay the promissory notes
and currently does not have funds to repay the promissory notes.
On August 18, 1999, the Company borrowed $360,000 and issued promissory notes
(the "Notes") in respect of this loan. Interest on the Notes accrue at a rate of
10% per annum. Interest on the Notes shall be paid monthly in arrears. The Notes
shall be due and payable on the earliest of (i) the one-year anniversary of the
date first written above, (ii) consummation of a private placement equity
financing of the Company's capital stock or any sale of assets or any business
unit or division from which the Company receives gross proceeds of at least
$2,000,000 or (iii) upon a change of control of voting power of the Company's
stockholders.
On August 18, 1999, options to purchase 60,000 shares of Common Stock were
exercised at a per share price of $4.00, resulting in the receipt of $240,000 by
the Company.
Currently, the Company has insufficient funds for its needs. The Company is
seeking additional debt and/or equity financing; however, there can be no
assurance that additional funds can be obtained on acceptable terms, if at all.
If the Company is unable to obtain additional financing or generate positive
cash flow, the Company's business will be materially adversely affected.
On August 23, 1999, the Company and two individuals executed a non-binding
letter of intent in respect of the issuance and sale of convertible promissory
notes, $5,000,000 aggregate principal amount (the "August Notes"). The August
Notes will automatically convert into 1,000,000 shares of Common Stock upon
approval of The Nasdaq Stock Market of the additional listing application of the
Shares, so long as the Shares represent less than 20% of (i) the issued and
outstanding shares of Common Stock and (ii) the outstanding voting power of the
Company's securities. The closing of this transaction is subject to negotiation
and signing of the transaction documents and the proposed investors' due
diligence review of the Company. There can be no assurance that the documents
will be signed or that this transaction will ever be consummated. Also, the
transaction is subject to a number of conditions, including the execution of a
definitive agreement and various regulatory and corporate approvals, including
the approval of the Company's senior lender It is expected that the definitive
agreements will be signed and the transaction will be consummated by August 31,
1999.
Forward-Looking Statements
- --------------------------
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate and are dependent on
certain risks and uncertainties, and therefore, there can be no assurance that
the forward-looking statements included in this report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
9
<PAGE>
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. Certain of these
major risks and uncertainties are described below.
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.
Certain Factors that may Affect Future Results
- ----------------------------------------------
Previous Default on Repayment of Promissory Notes
- -------------------------------------------------
In April 1999, promissory notes in the aggregate principal amount of
approximately $393,000 matured. The Company did not repay the promissory notes
and currently does not have funds to repay the promissory notes and believes its
credit facility with Republic prohibits repayment of the principal portion of
these promissory notes. There can be no assurance that the noteholders will not
utilize any or all legal means necessary to recover the principal amount of the
promissory notes, including an action for judgment or the filing of an
involuntary petition for bankruptcy. One noteholders' success in any of these
possible actions may have a material adverse effect on the Company's business,
results of operations and financial condition.
Historical and Projected Future Losses;
Accumulated Deficit; Net Working Capital Deficit
- ------------------------------------------------
Since 1994, the Company has not operated profitably and has incurred continued
net losses. Additionally, the Company's negative net working capital (the amount
by which current liabilities exceed current assets) continues to increase and is
currently insufficient to operate the Company. The Company expects to incur
additional net losses through 1999. Management of the Company is unable to
predict the extent of any future losses or the time required to achieve
profitability. 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 maintaining and expanding its distribution
channels, the ability of the Company to develop and market products and to
control costs and general economic conditions.
Reliance on Outside Product Manufacturing
- -----------------------------------------
The Company relies exclusively on outside manufacturers to produce and deliver
its products to its distributors. The Company does not have any long-term
contracts with its manufacturers. Due to the Company's current negative net
working capital, many of the Company's outside manufacturers have restricted or
eliminated credit terms and currently require payment upon delivery of the
Company's products. One manufacturer has given written notice to the Company and
Republic of the Company's alleged breach of its manufacturing agreement with
that manufacturer for failure to timely pay its invoices, but continues to ship
product to the Company. No assurance can be given 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 a result of it streamlining of its
supplier base.
10
<PAGE>
Potential Nasdaq Delisting for Violation of Marketplace Rule
- ------------------------------------------------------------
In May 1999, the Company received a letter from The Nasdaq Stock Market
("Nasdaq") stating that the Company had violated a Nasdaq marketplace rule as a
result of the Company's sale and issuance of shares of Series B Convertible
Preferred Stock, $.01 par value per share, and warrants to purchase shares of
Common Stock (the "Violation Letter"). The Violation Letter stated that Nasdaq
would initiate its delisting procedure in respect of the Common Stock if the
Company failed to propose a satisfactory plan of compliance. In accordance with
Nasdaq's instructions, the Company submitted to Nasdaq a proposed plan of
compliance that the Company believed would cure the alleged violation of a
Nasdaq marketplace rule. Nasdaq reviewed and commented on the Company's
proposed plan of compliance and has given the Company until August 23, 1999 to
submit additional components to its proposed plan that are satisfactory to
Nasdaq. If Nasdaq determines that the proposal is not satisfactory and that the
Common Stock does not warrant continued listing, Nasdaq will issue a formal
notice of deficiency, and, pending the outcome of a hearing, if one is requested
by the Company, the Common Stock may be delisted from Nasdaq. Moreover, Nasdaq
has discretionary power to delist companies from Nasdaq even if they satisfy the
requirements for continued listing. There can be no assurance that Nasdaq will
approve of the Company's proposal or, if a delisting hearing is conducted, that
the Company will prevail at the delisting hearing. If the Company's Common Stock
is delisted from Nasdaq, trading, if any, of the Common Stock would thereafter
be conducted on the OTC Bulletin Board. See "Potential Nasdaq Delisting for
Failure to Meeting Maintenance Requirements."
Potential Nasdaq Delisting for Failure to Meet Maintenance Requirements
- -----------------------------------------------------------------------
The Company currently does not satisfy all of the Nasdaq SmallCap Market
maintenance criteria, and its continued failure 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 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. On August 18, 1999, Nasdaq notified the Company that the Company no
longer met the maintenance criteria described in (ii) above, and gave the
Company until September 1, 1999 to submit its plan to achieve compliance with
all of the maintenance criteria. If Nasdaq delists the Common Stock from the
Nasdaq SmallCap Market, 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, require additional disclosure relating to the market for penny stocks.
Commission regulations generally define a penny stock to be an equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. A disclosure schedule explaining the penny stock market and the
risks associated therewith is required to be delivered to a purchaser and
various sales practice requirements are imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, the broker-dealer must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. If the Company's securities become subject to the
regulations applicable to penny stocks, the market liquidity for the Company's
securities could be severely affected. In such an event, the regulations on
penny stock could limit 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.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
At June 30, 1999, the Company had no outstanding derivative financial
instruments. All of the Company's transactions occur in U.S. dollars. Therefore,
the Company is not subject to significant foreign currency exchange risk.
11
<PAGE>
Part II: Other Information
Item 2: Changes in Securities and Use of Proceeds
The following unregistered securities were issued by the Company
during the three months ended June 30, 1999:
<TABLE>
<CAPTION>
Date of Description of Number of Shares Issued Exercise or Purchase
Issuance Securities Issued or Subject to Options Price per Share
-------- ----------------- ----------------------- --------------------
<S> <C> <C> <C>
4/7/99 Common Stock Options 53,000 $10.00
4/7/99 Common Stock Options 3,000 $10.25
4/12/99 Common Stock Options 3,000 $10.125
4/12/99 Series B Convertible Preferred Stock 35,000 $50.00
4/12/99 Common Stock Purchase Warrants 700,000 $0.01
</TABLE>
The above options were granted to non-employee directors pursuant to the 1994
Formula Stock Option Plan or to an existing employee under the 1995 Stock Option
Plan except for the 3,000 options at $10.25 which vest in two years and have a
life of ten years. These other options have a vesting period of either two
years or three years and a life of ten years.
Each share of Series B Convertible Preferred Stock is currently convertible into
five shares of Common Stock, subject to certain antidilution provisions. A
commission of $175,000 was paid to the placement agent in connection with the
issuance of the Series B Convertible Preferred Stock.
The issuance of these securities is claimed to be exempt from registration
pursuant to Section 4(2) of the Securities of Act of 1933, as amended, as
transactions by an issuer not involving a public offering. There were no
underwriting discounts or commissions paid in connection with the issuance of
any of the options.
Irem 5: Other Information:
On August 18, 1999, Nasdaq notified the Company that it no longer meets the net
tangible assets/market capitalization/net income requirement for continued
listing on The Nasdaq SmallCap Market. The Company has until September 1, 1999
to submit its plan for achieving compliance with all continued listing
requirements. If Nasdaq concludes that the Company's plan is deficient and that
the Company's continued listing is not warranted, it will send a notice of
deficiency and commence the formal delisting process. Delisting action will not
be taken until the Company has had adequate time to respond to the formal
notice.
Item 6: Exhibits and reports on Form 8-K:
a) Exhibits: 27 - Financial Data Schedule
b) Form 8-K: On April 14, 1999, the Company filed a Form 8-K
disclosing under Item 5 the sale and issuance of the Series B
Convertible Stock and Warrants to Purchase 700,000 shares of
Common Stock.
12
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DELICIOUS BRANDS, INC.
(Registrant)
August 23, 1999 /s/ Michael J. Kirby
- ----------------------------- -----------------------------------
Date Michael J. Kirby
President, Director and
Chief Executive Officer
August 23, 1999 /s/ Jeffry W. Weiner
- ----------------------------- -----------------------------------
Date Jeffry W. Weiner
Executive Vice President and
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains a summary of financial information extracted from
Delicious Brands, Inc. financial statement as of June 30, 1999 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 6,004,247
<ALLOWANCES> 670,412
<INVENTORY> 1,708,411
<CURRENT-ASSETS> 7,770,540
<PP&E> 978,465
<DEPRECIATION> 647,559
<TOTAL-ASSETS> 18,207,504
<CURRENT-LIABILITIES> 15,835,264
<BONDS> 0
350
1,516,668
<COMMON> 44,900
<OTHER-SE> 194,399
<TOTAL-LIABILITY-AND-EQUITY> 18,207,504
<SALES> 23,731,219
<TOTAL-REVENUES> 23,731,219
<CGS> 18,317,268
<TOTAL-COSTS> 18,317,268
<OTHER-EXPENSES> 7,634,467
<LOSS-PROVISION> 37,333
<INTEREST-EXPENSE> 342,076
<INCOME-PRETAX> (2,478,728)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,478,728)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,478,728)
<EPS-BASIC> (.58)
<EPS-DILUTED> (.58)
</TABLE>
