SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 000-24941
DELICIOUS BRANDS, INC.
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(Exact name of the registrant as specified in its charter)
DELAWARE 06-1225882
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
2070 MAPLE STREET, DES PLAINES, ILLINOIS 60018
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(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (847) 699-3200
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Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES /X/ NO / /
<PAGE>
As of April 7, 1999, the aggregate market value of the Registrant's Common Stock
held by non-affiliates of the Registrant was $44,710,329. Solely for the
purposes of this calculation, shares held by directors and officers of the
Registrant have been excluded. Such exclusion should not be deemed a
determination or an admission by the Registrant that such individuals are in
fact, affiliates of the Registrant.
As of April 7, 1999, there were 4,440,835 shares outstanding of the Registrant's
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
end of the Registrant's fiscal year are incorporated by reference in Part III.
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
PART I
1. BUSINESS..............................................................1
2. PROPERTIES............................................................3
3. LEGAL PROCEEDINGS.....................................................3
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................3
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS...................................................3
PART II
6. SELECTED FINANCIAL DATA...............................................5
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................5
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........10
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................10
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES............................................10
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................10
11. EXECUTIVE COMPENSATION...............................................10
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......10
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................10
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......10
15. SIGNATURES...........................................................15
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Delicious Brands, Inc. (the "Company") develops, markets and sells
cookies, crackers and related food products under the Delicious(R), Salerno(R),
Mama's(R) and Frookie(R) labels. 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.
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.
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.
RECENT HISTORY
On April 3, 1998, the Company completed the purchase of substantially
all of the assets of Salerno Foods, L.L.C. ("Salerno") for $3.3 million in cash,
a $1.5 million promissory note and the assumption of substantially all of the
liabilities of Salerno. 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 Information Resources, Inc.
("IRI").
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 ("IPO").
Proceeds of the offering were $10,690,684, net of commissions and other related
expenses totaling $3,109,316.
DESCRIPTION OF BUSINESS
Products and Distribution
The Company 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), and Raisinets(TM). The Company is the
fifth largest cookie company in the United States based on retail sales for the
52 weeks ended December 27, 1998 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.
<PAGE>
New Products
The introduction of new products was not significant to the business of
the Company in 1998. However, the Company has focused a majority of its research
and development efforts to extend and enhance its All-Natural product line. The
Company anticipates that the complete product line extensions and enhancements
will become available in May 1999.
Raw Materials
The Company relies exclusively on outside manufacturers to produce its
products. The main ingredients that these manufacturers use to produce the
Company's products are flour, sugar, chocolate, shortening and milk. The
Company's manufacturers also use paper products, as well as films and plastics
to package its products. There are no current or anticipated problems with
respect to the availability of the Company's products or any of the ingredients
or materials used in the production or packaging of these products.
Patents, Trademarks and Licenses
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 Unites 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 that own the trademarks that are
licensed to the Company.
Seasonality of Business
The Company believes it has limited seasonality influences.
Working Capital (Deficit)
As of December 31, 1998, the Company's current ratio (current assets
divided by current liabilities) was 1.0 to 1.9. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" for discussion of liquidity and plans to meet future
liquidity needs.
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
and convenience stores. For the year ended December 31, 1998, sales to the
Company's largest distributor, Milwaukee Biscuit Company, accounted for
approximately 15% of the Company's 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.
Competition
The marketing and sale of cookies, crackers and related snack foods is
highly competitive. 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.
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<PAGE>
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
has focused and currently intends to continue to focus a majority of its
research and development efforts to extend and enhance its All-Natural product
line.
Environmental Matters
To date, compliance with federal, state and local laws and regulations
enacted to regulate the discharge of materials into the environment has not had,
and is not expected to have, a material effect upon the Company's business,
financial condition or results of operations.
Employees
As of December 31, 1998, the Company had 113 full-time employees, 22 of
which are represented by Teamsters Local 734. The Company's collective
bargaining agreements with Teamsters Local 734 expire on May 12, 2001. The
Company believes its relations with its employees to be good.
ITEM 2. 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 lease expires
May 31, 2003. The Company also leases two warehouses (Michigan and New York).
All leased warehouse space is primarily used for the distribution of Salerno and
Mama's product lines.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of Fiscal
1998 to a vote of security holders, through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Market Information
The Company's Common Stock is traded over-the-counter on the Nasdaq
SmallCap Market System ("Nasdaq") (ticker symbol: DBSI). The following table
sets forth, for the periods indicated, the high and low bid quotations for the
Common Stock, as reported by Nasdaq. These quotations reflect the inter-dealer
prices, without retail markup, markdown or commission and may not necessarily
represent actual transactions.
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<PAGE>
Bid Prices
Fiscal Year 1998 High Low
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Fourth Quarter (1) $12 7/8 $11 1/2
(1) The Company's Common Stock commenced trading on November 12, 1998.
Holders
As of March 19, 1999, there were 194 holders of record of the Company's
Common Stock.
Dividends
There have been no dividends declared on the Company's Common Stock in
1998 or 1997. 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.
Changes in Securities and Use of Proceeds
Use of Proceeds
(1) Effective date: November 12, 1998.
(2) Offering date: November 12, 1998.
(3) Not applicable.
(4) (i) The offering terminated on November 17, 1998.
(ii) Managing Underwriter: Network 1 Financial Securities, Inc.
(iii) Title of Securities Registered: Common Stock, $.01 par value
per share.
(iv) Amount Registered: 1,150,000 shares by the Company, 1,042,000
shares by selling security holders; Aggregate Offering Price:
$13,800,000 by the Company; $12,504,000 by selling security
holders; Amount Sold: 1,150,000 shares by the Company; 0
shares by the selling security holders; Aggregate Offering
Price of Amount Sold to Date: $13,800,000 by the Company; $0
by selling security holders.
(v) Distribution expenses incurred during the period from the
effective date of the Securities Act registration statement
(November 12, 1998) and ending on the ending date of the
reporting period (December 31, 1998) totaled $3,109,316, and
included $1,380,000 of underwriting commissions, $414,000 of
underwriter expense allowances and $1,315,316 for printing,
professional and other costs associated with the offering.
(vi) The Company received $10,690,684 of net proceeds from the
offering. As of the end of the reporting period, $9,318,182 of
the net proceeds were used including $6,186,249 for debt
repayment and $3,131,933 for working capital.
(vii) Not applicable.
(viii) Not applicable.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
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 herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
1994(1) 1995 1996 1997 1998(2)
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<S> <C> <C> <C> <C> <C>
Net Sales $ 50,823 $ 52,722 $ 36,848 $ 30,665 $ 53,030
Net (Loss) $ (493) $ (6,955) $ (898) $ (3,398) $ (5,308)
Net (Loss) Per Share $ (0.20) $ (2.57) $ (0.32) $ (1.16) $ (1.57)
Total Assets $ 11,701 $ 9,719 $ 7,592 $ 6,487 $ 19,226
Long-term Debt (excluding $ 3,428 $ 2,151 $ 2,110 $ 1,960 $ 0
current portion
</TABLE>
(1) In March 1994, the Company acquired all the outstanding capital stock
of Delicious Cookie Company, Inc.
(2) In April 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Salerno Foods, L.L.C.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Set forth below is a discussion of the financial condition and results
of operations for the years ended December 31, 1998, 1997 and 1996. The 1998
results of operations include financial results relating to the acquisition of
Salerno Foods, L.L.C. ("Salerno") since April 3, 1998, the date of acquisition.
The following discussion of results of operations and liquidity and capital
resources should be read in conjunction with the information set forth in
"Selected Financial Data" and financial statements and the related notes thereto
appearing elsewhere in this Form 10-K.
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 (the "Salerno Acquisition").
Accordingly, the Company's results of operations for the year ended December 31,
1998 include the operating results of Salerno from the date of acquisition for
thirty-nine weeks whereas the comparable twelve months ended for the prior year
do not.
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<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
NET SALES
Net sales increased 73% to $53.0 million for the year ended December
31, 1998 from $30.7 million for the year ended December 31, 1997. The net sales
increase resulted from the inclusion of the April 3, 1998 acquisition of Salerno
which totaled $26.8 million for the period from April 3, 1998 to December 31,
1998. Sales of Frookie products declined as marketing and promotion efforts were
reduced in anticipation of the introduction of a new reformulated Frookie
product line which was partially introduced during the fourth quarter of 1998.
The sales volume related to the Company's Value Oriented products declined as
promotional and marketing expenses were reduced on this lower margin product
line.
GROSS PROFIT
Gross profit increased 104% to $11.2 million for the year ended
December 31, 1998 from $5.5 million for the year ended December 31, 1997. The
gross profit increase resulted primarily from the inclusion of the April 3, 1998
acquisition of Salerno which totaled $7.3 million. Gross profit as a percentage
of sales, excluding Salerno's gross profit, decreased 2.9%. The decline was
caused by lower sales in the higher margin Frookie product discussed above, as
well as higher promotional allowances required to sell inventory and introduce
new products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 115% to $14.7
million for the year ended December 31, 1998 from $6.8 million for the year
ended December 31, 1997. The increase resulted primarily from the inclusion of
the April 3, 1998 acquisition of Salerno which totaled $8.2 million. Operating
results in 1998 included the amortization of goodwill related to the Salerno
acquisition that exceeded 1997 charges by $291,000. Non-recurring expenses for
relocation of employees and the principal executive offices of the Company of
$250,000, startup costs of $275,000 to develop international sales and costs of
$165,000 associated with litigation settlement and additional insurance cost
offset the reduction in marketing and promotional expenses of $557,000 discussed
in the Net Sales analysis.
RESTRUCTURING CHARGE
The Company recognized a one-time $1.5 million restructuring charge in
1997 primarily consisting of the expensing of consulting agreements the Company
entered into with former executive officers, Richard and Randye Worth. In 1998,
a $150,000 reduction of the restructuring liability occurred based on the
revision of an estimate.
OTHER INCOME (EXPENSE)
Other expense increased 293% to $1.9 million for the year ended
December 31, 1998 from $484,000 for the year ended December 31, 1997. The
increase was primarily due to increased interest expense and financing fees of
$1.2 million related to borrowings used in the acquisition of Salerno and for
working capital needed to operate the Salerno product line.
PROVISION FOR INCOME TAX
The provision for income taxes for the year ended December 31, 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 the loss. The
valuation loss increased $1.6 million primarily due to the uncertainty of the
future utilization of the net loss generated in 1998.
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<PAGE>
NET LOSS
Net loss increased 56% to $5.3 million for the year ended December 31,
1998 from $3.4 million for the year ended December 31, 1997 as a result of 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 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 7.7% to $6.8
million for the year ended December 31, 1997 from $7.4 million for the year
ended December 31, 1996. The decrease was primarily related to 1996 charge-offs
of $246,000 related to goodwill associated with a discontinued business venture
and a $500,000 bad-debt provision for the potential expensing of a customer's
indebtedness. The year 1997 included a $700,000 increase in marketing
expenditures to compensate for the elimination of the Company's internal sales
force offset by a $380,000 reduction in personnel and travel and entertainment
costs and $251,000 of lower professional fees.
RESTRUCTURING CHARGE
In 1997, 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 the 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 $898,000 for the year ended December 31, 1996, as a result of
the factors discussed above.
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<PAGE>
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 $50,000 1998 and 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.
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.
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. The note and accrued interest thereon were
repaid from the proceeds of the November 12, 1998 initial public offering of the
Company's Common Stock.
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 December 31, 1998). Borrowings under
the revolving credit facility at December 31, 1998 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 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. 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 November 12,
1998 initial public offering of the Company's Common Stock.
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
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
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<PAGE>
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 12, 1998, the Company consummated an 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 offering.
On April 12, 1999, the Company consummated a private placement of
35,000 shares of 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 will be applied by the Company to primarily 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.
The Company believes the amount available under its revolving credit
facility, together with the net proceeds from the private placement and
anticipated improvements in operating results during the year ending December
31, 1999 will be sufficient for at least the next 12 months to finance its
operations, service interest payments on its debt and fund capital expenditures.
Thereafter, if the Company has insufficient funds for its needs, there can be no
assurance that additional funds can be obtained on acceptable terms, if at all.
If necessary funds are not available, the Company's business would be materially
adversely affected.
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.
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 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
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.
-9-
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1998, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements listed in the accompanying Index to
Financial Statements on Page F-1 herein. Information required for financial
schedules under Regulation S-X is either not applicable or is included in the
financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 will be in the Company's definitive
proxy materials to be filed with the Securities and Exchange Commission and is
incorporated in this Annual Report on Form 10-K by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Form 10-K
1. Financial Statements
The Financial Statements listed in the accompanying
Index to Financial Statements which appears on page
F-1 herein are filed as part of this Form 10-K.
-10-
<PAGE>
2. Financial Statement Schedule
The Financial Statement Schedule listed in the
accompanying Index to Financial Statements which
appears on page F-1 herein is filed as part of this
Form 10-K.
3. Exhibits
-11-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
3.1 -- Certificate of Incorporation, as amended, of the Company.**
3.1.1 -- Amended and Restated Certificate of Incorporation of the
Company.**
3.1.2 -- Certificate of the Designations, Powers, Preferences and Rights of
the Series A Convertible Preferred Stock.**
3.1.3 -- Certificate of the Designations, Powers, Preferences and Rights of
the Series B Convertible Preferred Stock.*
3.2 -- By-laws, as amended, of the Company.**
4.1 -- Specimen Certificate of the Company's Common Stock.**
4.2 -- Form of Representative's Warrant.**
4.3 -- Warrant to Purchase 700,000 Shares of Common Stock.*
10.1 -- Employment Agreement dated as of August 11, 1997 by and between
the Company and Michael Kirby.**
10.2 -- Stock Option Agreement, dated as of August 11, 1997, by and
between the Company and Michael Kirby.**
10.3 -- Letter Agreement dated December 16, 1997 amending Michael Kirby's
Employment Agreement and Stock Option Agreement.**
10.4 -- Amended and Restated Employment Agreement dated as of December 15,
1997 by and between the Company and Jeffry Weiner.**
10.5 -- 1989 Stock Option Plan of the Company.**
10.6 -- 1995 Stock Option Plan of the Company.**
10.7 -- 1994 Formula Stock Option Plan of the Company.**
10.8 -- Trademark Sublicense Agreement dated December 16, 1993 between
Nestle Food Company and the Company.**
10.9 -- Trademark License Agreement dated September 25, 1991 by and
between Land O' Lakes, Inc. and the Company.**
10.10 -- Trademark License Agreement dated May 3, 1996 by and between
Showbiz Pizzatime Inc., and the Company.**
10.11 -- Trademark License Agreement dated May 1, 1996 by and between
Ringling Brothers and Barnum & Bailey Combined Shows and the
Company.**
10.12 -- License Agreement dated November 26, 1996 between Chiquita Brands,
Inc. and the Company.**
10.13 -- License Agreement dated June 3, 1991 by and between CPC
International Inc., and the Company.**
10.14 -- License Agreement dated May 1, 1996 between Eskimo Pie Corp. and
the Company.**
10.15 -- Amendment to License Agreement dated May 1, 1997 between Eskimo
Pie Corp. and the Company.**
10.16 -- Consulting Agreement dated August 13, 1997 between the Company and
Richard Worth.**
10.17 -- Consulting Agreement dated August 13, 1997 between the Company and
Randye Worth.**
10.18 -- Asset Purchase Agreement dated December 22, 1997 between the
Company and Richard S. Worth.**
10.19 -- Financing Agreement dated November 27, 1996 between the Company
and Republic Acceptance Corporation.**
10.20 -- Security Agreement dated November 27, 1996 between the Company and
Republic Acceptance Corp.**
10.21 -- Distribution Agreement effective March 28, 1997 between the
Company and the Old Colony Baking Company, Inc.**
10.22 -- Asset Purchase Agreement dated as of April 3, 1998 by and between
the Company and Salerno Foods, L.L.C.**
10.23 -- Escrow Agreement dated as of April 3, 1998 by and among the
Company, Salerno Foods, L.L.C. and American National Bank and
Trust Company of Chicago.**
10.24 -- Assignment of Intellectual Property Rights dated April 3, 1998 by
and between the Company and Salerno Foods, L.L.C.**
10.25 -- Restrictive Covenant and Confidentiality Agreement dated April 3,
1998 by and between the Company and Steve Coates.**
10.26 -- Restrictive Covenant and Confidentiality Agreement dated April 3,
1998 by and between the Company and Peter Rogers.**
-12-
<PAGE>
10.27 -- Restrictive Covenant and Confidentiality Agreement dated April 3,
1998 by and between the Company and Ron Davies, Jr.**
10.28 -- Manufacturing Agreement dated April 3, 1998 between the Company
and Pate's Bakery, L.L.C.**
10.29 -- Promissory Note of the Company dated April 3, 1998 in favor of
Salerno Foods, L.L.C.**
10.30 -- Security Agreement dated April 3, 1998 of the Company in favor of
Salerno Foods, L.L.C.**
10.31 -- Trademark Security Agreement dated April 3, 1998 of the Company in
favor of Salerno Foods, L.L.C.**
10.32 -- Assignment and Assumption Agreement dated April 3, 1998 by and
among the Company, Larry Polhill and American Pacific Financial
Corporation.**
10.33 -- Subordination Agreement dated as of April 3, 1998 by and between
U.S. Bancorp Republic Commercial Finance, Inc., American Pacific
Financial Corporation, Lawrence R. Polhill, Salerno Foods, L.L.C.
and the Company.**
10.34 -- Loan Agreement dated as of April 3, 1998 between the Company and
American Pacific Financial Corporation.**
10.35 -- Security Agreement dated as of April 3, 1998 of the Company in
favor of American Pacific Financial Corporation.**
10.36 -- Promissory Note dated April 3, 1998 of the Company in favor of
American Pacific Financial Corporation in the aggregate principal
amount of $4.6 million.**
10.37 -- Promissory Note dated April 3, 1998 of the Company in favor of
American Pacific Financial Corporation in the aggregate principal
amount of $100,000.**
10.38 -- First Amendment dated as of April 3, 1998 to the Financing
Agreement by and between the Company and U.S. Bancorp Republic
Commercial Finance, Inc.**
10.39 -- Agreement between Salerno Foods, L.L.C. and Bakery, Cracker, Pie
Yeast Wagon Drivers Union, Local 734 International Brotherhood of
Teamsters of America (Cracker Drivers).**
10.40 -- Agreement between Salerno Foods, L.L.C. and Bakery, Cracker, Pie
Yeast Wagon Drivers Union, Local 734 International Brotherhood of
Teamsters of America (Insider Div.).**
10.41 -- Form of Indemnification Agreement between the Company and its
officers and directors.**
10.42 -- Voting Trust Agreement dated December 22, 1997 by and among
Richard S. Worth, Randye Worth, Graubard, Mollen & Miller, the
Company and Robert Rubin.**
10.43 -- Form of Voting Agreement by and between the Company and Edward R.
Sousa, as Voting Trustee.**
10.44 -- Registration Rights Letter Agreement from the Company dated
October 21, 1997.**
10.45 -- Sublease Amendment Agreement and Consent to Agreement dated as of
April 2, 1998 among Maple Properties Company, L.L.C., Salerno
Foods, L.L.C. and the Company.**
10.46 -- Form of Trucklease and Service Agreement by and between Ryder
Transportation Services and the Company.**
10.47 -- Memorandum of Agreement by and between the Company and Bakery,
Cracker, Pie and Yeast Wagon Drivers, Local 734, International
Brotherhood of Teamsters of America dated May 13, 1998.**
10.48 -- Commercial Lease by and between Maple Properties Company and the
Company dated as of June 1, 1998.**
10.49 -- Promissory Note dated March 30, 1998 of the Company in favor of
Yapton Developments, Limited.**
10.50 -- Letter Agreement by and between the Company and Yapton
Developments, Limited dated July 6, 1998 extending the maturity of
the promissory note to Yapton Developments, Limited.**
10.51 -- Letter Agreement by and between the Company and American Pacific
Financial Corporation dated July 13, 1998, extending the maturity
of the promissory note to American Pacific Financial
Corporation.**
10.52 -- Form of Letter Agreement by and between the Company and Yapton
Developments, Limited extending the maturity of the promissory
note to Yapton Developments, Limited.**
10.53 -- Letter Agreement by and between the Company and American Pacific
Financial Corporation dated October 9, 1998 extending the maturity
of the $4.6 million promissory note to American Pacific Financial
Corporation.**
10.54 -- Letter Agreement by and between the Company and American Pacific
Financial Corporation dated October 23, 1998 extending the
maturity of the $100,000 promissory note to American Pacific
Financial Corporation.**
10.55 -- Securities Purchase Agreement, dated April 12, 1999, by and
between the Company and Little Meadow Corp.*
24.1 -- Powers of Attorney (included on the signature page to this Form
10-K).***
-13-
<PAGE>
27.1 -- Financial Data Schedule.***
* Incorporated by reference to the Company's Current Report on Form
8-K dated on April 14, 1999.
** Incorporated by reference to the Company's Registration Statement
on Form S-1 (Commission File No. 333- 50771).
*** Filed herewith.
(b) Reports on Form 8-K filed during the fourth quarter of 1998:
None
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DELICIOUS BRANDS, INC.
(Registrant)
Dated: April 14, 1999 /S/ MICHAEL J. KIRBY
-----------------------------------------------
Michael J. Kirby
President, Director and Chief Executive Officer
Dated: April 14, 1999 /S/ JEFFRY W. WEINER
-----------------------------------------------
Jeffry W. Weiner
Executive Vice President and Chief Financial
Officer
Known all men by these presents, that each person whose signature
appears below hereby constitutes and appoints Michael J. Kirby and Jeffry W.
Weiner his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Form 10-K and to file
the same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or either of them, or their or his substitutes or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DATE SIGNATURE
- ---- ---------
April 14, 1999 /S/ DONALD C. SCHMITT
--------------------------------------------------
Donald C. Schmitt
Director and Chairman
April 14, 1999 /S/ MICHAEL P. SCHALL
--------------------------------------------------
Michael P. Schall
Director
April 14, 1999 /S/ EDWARD R. SOUSA
--------------------------------------------------
Edward R. Sousa
Director
April 14, 1999 /S/ JOHN H. WYANT
--------------------------------------------------
John H. Wyant
Director
April 14, 1999 /S/ MICHAEL J. KIRBY
--------------------------------------------------
Michael J. Kirby
President, Chief Executive Officer and Director
-15-
<PAGE>
--------------------------------------------------
Russell D. Glass
Director
--------------------------------------------------
George W. Hebard III
Director
-16-
<PAGE>
DELICIOUS BRANDS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS:
Balance Sheets, December 31, 1998 and 1997
(Exhibit A) F-3
Statement of Operations, Years Ended December 31,
1998, 1997 and 1996 (Exhibit B) F-4
Statement of Stockholders' Equity (Deficit),
Years Ended December 31, 1998, 1997 and 1996
(Exhibit C) F-5
Consolidated Statement of Cash Flows, Years Ended
December 31, 1998, 1997 and 1996 (Exhibit D) F-6 - F-7
Notes to Financial Statements F-8 - F-19
ADDITIONAL FINANCIAL DATA:
Independent Auditors' Report on Schedules S-1
Valuation and Qualifying Accounts (Schedule II) S-2
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Delicious Brands, Inc.
We have audited the accompanying balance sheets of DELICIOUS BRANDS, INC. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
/s/ Altschuler, Melvoin and Glasser LLP
Chicago, Illinois
March 29, 1999, except for Note 1
which is as of April 12, 1999
F-2
<PAGE>
Exhibit A
DELICIOUS BRANDS, INC.
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
Current Assets: ---- ----
<S> <C> <C>
Cash $ 981,646 $ 808,349
Accounts receivable (including $324,070, and $276,294,
respectively, due from related parties), net of allowances
of $800,980 and $575,000, respectively 5,108,747 1,924,390
Inventory (Note 2) 1,879,041 152,399
Due from distributors (Note 2) 99,317 172,176
Prepaid expenses and other current assets 327,964 141,925
------------ ------------
8,396,715 3,199,239
------------ ------------
Property and Equipment, Net of Accumulated
Depreciation (Notes 2 and 3) 381,185 177,852
------------ ------------
Other Assets:
Goodwill (Note 2) 10,011,946 2,698,174
Other 436,261 411,340
------------ ------------
10,448,207 3,109,514
------------ ------------
$ 19,226,107 $ 6,486,605
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Bank loan payable (Note 4) $ 3,665,828 $ 1,498,382
Current portion of subordinated debt (Note 5) 393,332 0
Accounts payable (including $82,040 and $62,530,
respectively, due to related parties) 7,173,870 3,425,980
Due to distributors (Note 2) 532,769 326,012
Accrued expenses 2,954,389 1,191,572
Current portion of long-term liabilities 904,838 1,120,544
------------ ------------
15,625,026 7,562,490
------------ ------------
Long-term Liabilities:
Subordinated debt (Note 5) 0 1,960,000
Restructuring liability (Note 11) 544,679 880,573
Packaging loss liability (Note 6) 200,000 870,075
Other 0 1,919
------------ ------------
744,679 3,712,567
------------ ------------
Commitments and Contingencies (Note 10)
Stockholders' Equity (Deficit) (Notes 1 and 8):
Preferred stock, $.01 par value, with a liquidation value of
$8.00 per share, 1,000,000 shares authorized, 195,834
shares issued and outstanding in 1998 1,566,668 0
Class A common stock, voting, $.01 par value, 25,000,000
shares authorized, 4,481,767 and 3,191,767 shares issued
in 1998 and 1997, respectively 44,818 31,918
Additional paid-in capital 18,343,209 6,969,815
Accumulated deficit (16,937,244) (11,629,136)
------------ ------------
3,017,451 (4,627,403)
Less, common stock in treasury at cost (161,049) (161,049)
------------ ------------
Total stockholders' equity (deficit) 2,856,402 (4,788,452)
------------ ------------
$ 19,226,107 $ 6,486,605
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
Exhibit B
DELICIOUS BRANDS, INC.
Statement of Operations
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Sales (including approximately $5,920,000,
$5,325,000 and $5,656,000, respectively, to
related parties) $ 53,030,115 $ 30,664,723 $36,847,650
Cost of Sales (including approximately
$589,000, $395,000 and $744,000,
respectively, from related parties) 41,855,211 25,193,264 29,837,075
------------- ------------ -----------
Gross Profit 11,174,904 5,471,459 7,010,575
------------- ------------ -----------
Operating Expenses:
Selling, general and administrative 14,729,305 6,836,996 7,406,969
Restructuring charge (Note 11) (150,382) 1,548,035 0
------------- ------------ -----------
14,578,923 8,385,031 7,406,969
------------- ------------ -----------
Loss from Operations (3,404,019) (2,913,572) (396,394)
------------- ------------ -----------
Other Income (Expense):
Amortization of deferred financing costs (700,629) (33,418) (96,263)
Interest expense (1,213,168) (416,913) (408,873)
Other, net 9,708 (34,223) 3,396
------------- ------------ -----------
(1,904,089) (484,554) (501,740)
------------- ------------ -----------
Loss before Provision for Income Taxes (5,308,108) (3,398,126) (898,134)
Provision for Income Taxes (Note 7) 0 0 0
------------- ------------ -----------
Net Loss $ (5,308,108) $ (3,398,126) $ (898,134)
============= ============ ===========
Earnings per Share (Note 2):
Basic and diluted:
Net loss per common share $( 1.57) $( 1.16) $( 0.32)
============= ============ ===========
Weighted average number of
common shares outstanding 3,389,993 2,933,623 2,814,079
============= ============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
Exhibit C
DELICIOUS BRANDS, INC.
Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additional
----Preferred Stock--- -----Common Stock----- Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 0 $ 0 2,752,240 $27,523 $4,668,574
Conversion of 8%
Subordinated Debentures
to Class A Common Stock 224,527 2,245 1,344,920
Net Loss
------- ----------- --------- ------- ----------
Balance, December 31, 1996 0 0 2,976,767 29,768 6,013,494
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 0 0 3,191,767 31,918 6,969,815
Proceeds from Issuance of
Common Stock, Net of
$144,390 in Expenses 140,000 1,400 694,210
Conversion of 9%
Subordinated Convertible
Notes to Preferred Stock 195,834 1,566,668
Proceeds from Issuance of
Common Stock in an Initial
Public Offering, Net of
$3,109,316 in Expenses 1,150,000 11,500 10,679,184
Net Loss
------- ----------- --------- ------- ------------
Balance, December 31, 1998 195,834 $ 1,566,668 4,481,767 $44,818 $18,343,209
======= =========== ========= ======= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Stockholders'
Accumulated Treasury Stock Equity
(Deficit) Shares Amount (Deficit)
------- ------ ------ ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $(7,332,876) (48,925) $(161,049) $(2,797,828)
Conversion of 8%
Subordinated Debentures
to Class A Common Stock 1,347,165
Net Loss (898,134) (898,134)
----------- -------- ---------- ------------
Balance, December 31, 1996 (8,231,010) (48,925) (161,049) (2,348,797)
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 (11,629,136) (48,925) (161,049) (4,788,452)
Proceeds from Issuance of
Common Stock, Net of
$144,390 in Expenses 695,610
Conversion of 9%
Subordinated Convertible
Notes to Preferred Stock 1,566,668
Proceeds from Issuance of
Common Stock in an Initial
Public Offering, Net of
$3,109,316 in Expenses 10,690,684
Net Loss (5,308,108) (5,308,108)
------------- -------- ---------- -------------
Balance, December 31, 1998 $(16,937,244) (48,925) $(161,049) $ 2,856,402
============ ======== ============ =============
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
Exhibit D
DELICIOUS BRANDS, INC.
Statement of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net loss $(5,308,108) $(3,398,126) $(898,134)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,326,714 352,320 560,106
Provision for bad debts 444,330 40,487 583,337
Loss on disposal of property and
equipment 0 50,899 0
Restructuring charge (150,382) 1,548,035 0
Issuance of common stock for
services 0 2,300 0
Increase (Decrease) in cash (exclusive
of Salerno acquisition) from
changes in:
Accounts receivable 1,724 (76,217) 537,559
Inventory ( 334,943) 616,248 798,807
Due from distributors 72,859 15,653 (42,654)
Prepaid expenses and other
current assets 67,366 240,652 307,834
Refundable income taxes 0 0 71,678
Other assets 90,336 (90,020) 11,420
Accounts payable and accrued
expenses 176,235 437,799 (1,197,562)
Due to distributors 206,757 158,460 (408,750)
Accrued restructuring liabilities (224,814) (399,128) 0
Other liabilities (827,297) 186,964 (222,778)
---------- -------- -----------
Net cash provided by (used in) operating
activities (4,459,223) (313,674) 100,863
---------- -------- -----------
Cash Flows from Investing Activities:
Payment for purchase of assets of Salerno
Foods, L.L.C. (net of cash acquired of
$12,564) (5,129,943) 0 0
Purchase of property and equipment ( 107,400) ( 47,730) (88,131)
---------- -------- -----------
Net cash used in investing activities (5,237,343) ( 47,730) (88,131)
Cash Flows from Financing Activities:
Payments of long-term debt (21,101) (17,420) (16,953)
Payments of financing costs (692,621) 0 0
Proceeds (Payments) of bank loan payable, net (1,135,465) (430,704) 617,801
Proceeds from issuance of notes payable 5,200,000 0 0
Payments of notes payable (5,200,000) 0 0
Proceeds from issuance of common stock 14,640,000 1,260,000 0
Payment of stock issuance costs (2,920,950) (303,829) 0
---------- -------- -----------
Net cash provided by financing activities 9,869,863 508,047 600,848
---------- -------- -----------
Increase in Cash 173,297 146,643 613,580
Cash, Beginning of Year 808,349 661,706 48,126
---------- -------- -----------
Cash, End of Year $ 981,646 $808,349 $ 661,706
========== ======== ===========
</TABLE>
F-6
<PAGE>
Exhibit D, Continued
DELICIOUS BRANDS, INC.
Statement of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for:
Interest $1,201,291 $ 420,296 $ 338,197
========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
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 12). In conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired, including goodwill and
transaction costs $ 13,447,134
Cash paid (net of $220,000 purchase price adjustment) (4,780,000)
Transaction costs (362,507)
-------------
Liabilities assumed $ 8,304,627
=============
</TABLE>
During 1998, in exchange for 9% Subordinated Convertible
Notes of $1,566,668, the Company issued 195,834 shares
of Series A Preferred Stock.
As of December 31, 1998, unpaid transaction costs of
$332,756 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 common
stock.
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
DELICIOUS BRANDS, INC.
Notes to the Financial Statements
NOTE 1--NATURE OF ACTIVITIES
Delicious Brands, Inc. (the "Company"), a Delaware corporation, operates in one
industry segment consisting of marketing and selling pre-packaged cookies,
crackers and related food products under the Delicious, Salerno, Mama's and
Frookie labels as well as licensed names. 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. All of
the Company's products are baked by independent food processors using the
Company's proprietary specifications and formulations.
The Company grants credit to its customers in the normal course of business.
Sales to one customer approximated 15%, 21% and 20% of total Company sales for
the years ended December 31, 1998, 1997, and 1996, respectively. No other
customer accounted for more than 10% of the Company's sales. Amounts due from
such customer represented approximately 16% and 20% of the Company's net trade
accounts receivable at December 31, 1998 and 1997, respectively. Approximately
41%, 52% and 49% of the Company's inventory purchases for the years ended
December 31, 1998, 1997, and 1996, respectively, were from two major vendors.
The Company has several customers and vendors who are also holders of the
Company's preferred and/or common stock. During the years ended December 31,
1998, 1997 and 1996, respectively, net sales to these customers were
approximately $5,920,000, $5,325,000 and $5,656,000 while purchases from such
vendors were approximately $589,000, $395,000 and $744,000. Management believes
all of these transactions were on terms at least as favorable as could be
obtained from unaffiliated parties.
During 1997, 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 and (c)
authorize 1,000,000 shares of $.01 par value preferred stock. On December 22,
1997, an initial closing of a private placement took place whereby the Company
sold 210,000 shares of common stock and received proceeds of $956,171 net of
expenses of $303,829. On February 6, 1998, a second closing of the private
placement took place whereby the Company sold 140,000 shares of common stock and
received proceeds of $695,610 net of expenses of $144,390. 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 3, 1998, the Company acquired substantially all of the assets of
Salerno Foods, L.L.C. (Note 12).
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern.
The Company has negative working capital, at December 31, 1998, of approximately
$7,228,000 and has suffered recurring losses since 1994. Additionally, the
Company has experienced a decline in sales, on a pro forma basis (Note 12),
during 1998 of 12% as compared to the prior period. The Company continued to
experience a decline in sales during the first quarter of 1999.
The Company has previously funded its operating losses through increases in
working capital deficits and proceeds received from private placements and an
initial public offering of common stock and issuances of subordinated debt.
Substantially all of the proceeds from the Company's 1998 private placement and
initial public offering were utilized to pay Salerno acquisition debt (Note 12)
and related fees and to fund certain working capital deficits.
F-8
<PAGE>
DELICIOUS BRANDS, INC.
Notes to the Financial Statements
NOTE 1--NATURE OF ACTIVITIES, CONTINUED
On April 12, 1999, the Company received net proceeds of $1,500,000 in a private
placement in exchange for 35,000 shares of Series B Preferred Stock (convertible
at any time into 175,000 shares of common stock) and a warrant (exercisable
through April 12, 2009) to purchase 700,000 shares of common stock for $0.01 per
share. Additionally, during 1999 the Company plans to convert $393,332 of the 9%
Convertible Subordinated Notes due April 27, 1999 into common stock. Management
believes that the Company is current with its obligations to vendors and, when
necessary, will be able to continue to obtain extended credit terms from
vendors.
The Company plans to improve operating results in 1999 by (a) reversing the
declining sales trend experienced during 1998 and through the first quarter of
1999, (b) increasing gross profits by introducing a reformulated Frookie brand,
(c) implementing cost reductions already negotiated with the Company's vendors
and (d) reducing redundant operating expenses that continue to be incurred
subsequent to the Salerno acquisition.
There can be no assurance that the Company will be able to successfully
implement its plans for improving operating results or, if such plans are
implemented, that the Company will achieve profitability and meet its
obligations when they become due. 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.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies 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.
INVENTORY--Inventory is stated at the lower of cost or market with
cost determined by the first-in, first-out (FIFO) method and consists
primarily of prepackaged products which are ready to be sold to
customers.
ADVERTISING AND PROMOTION--All costs associated with advertising,
promotion, marketing and slotting are charged to operations as
incurred. Such expenses are included in selling, general and
administrative expenses in the statement of operations and amounted to
$3,431,505, $2,227,242 and $2,184,433 for the years ended December 31,
1998, 1997 and 1996, respectively.
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.
F-9
<PAGE>
DELICIOUS BRANDS, INC.
Notes to the Financial Statements
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 $1,009,900 and $555,905 at December 31, 1998
and 1997, 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.
INCOME TAXES--Deferred income taxes are provided for temporary
differences between financial and income tax reporting (see Note 7).
STOCK OPTION PLANS--The Company has adopted only the disclosure
provisions of FAS 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.
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 computes "Basic Earnings per Share"
under Financial Accounting Standard (FAS) No. 128, "Earnings per
Share," 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, 1998, 1997
and 1996, 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.
F-10
<PAGE>
DELICIOUS BRANDS, INC.
Notes to the Financial Statements
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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) at December 31, 1998 is approximately $378,000, which is
$15,000 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.
RECLASSIFICATIONS--Certain amounts reported in the 1997 and 1996
financial statements have been reclassified to conform with the 1998
presentation without affecting previously reported net losses.
RECENT ACCOUNTING PRONOUNCEMENTS--In 1998, the Company adopted FAS No.
130, "Reporting Comprehensive Income," which requires the components
of comprehensive income to be disclosed in the financial statements,
and FAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which requires certain information to be
reported about operating segments on a basis consistent with the
Company's internal organizational structure. The adoption of these
standards had no impact on the Company's results of operations,
financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities",
which the Company is required to adopt effective January 1, 1999. FAS
No. 133 requires the recording of all derivatives on the balance sheet
at fair value. The adoption of this standard is expected to have no
impact on the Company's results of operations, financial position or
cash flows because the Company does not participate in derivative
transactions.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs
of Start-up Activities," which requires costs of start-up activities
and organization costs to be expensed as incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998.
Restatement of financial statements for earlier periods is not
permitted. The adoption of SOP 98-5 is expected to have no impact on
the Company's results of operations, financial position or cash flows.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, Estimated
1998 1997 Life
---- ---- ----
Office and warehouse equipment $570,439 $275,666 2 to 10 years
Molds and die 312,723 232,074 3 years
Promotion and display equipment 44,444 44,444 5 years
-------- --------
927,606 552,184
Less accumulated depreciation 546,421 374,332
-------- --------
$381,185 $177,852
======== ========
Depreciation expense amounted to $172,089, $158,578 and $152,378 for the years
ended December 31, 1998, 1997 and 1996, respectively.
F-11
<PAGE>
DELICIOUS BRANDS, INC.
Notes to the Financial Statements
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
above the reference rate of interest publicly announced by U.S. Bank National
Association (9.25% at December 31, 1998). 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, 1998
approximated $400,000. 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 10.0%,
11.7% and 10.5% for the years ended December 31, 1998, 1997, and, 1996
respectively.
NOTE 5--SUBORDINATED DEBT
The Company was obligated to noteholders of the Company's 9% Subordinated
Convertible Notes aggregating $393,332 at December 31, 1998 and $1,960,000 at
December 31, 1997. 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 purchase warrants were issued. The warrants are
exercisable at any time through April 27, 1999 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, 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 were 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, $1,566,668 at December 31, 1998, 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. No dividends have been declared as of December 31, 1998.
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.
F-12
<PAGE>
DELICIOUS BRANDS, INC.
Notes to the Financial Statements
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, 1998 and 1997, the Company has accrued $873,889 and
$1,701,186, respectively, to provide for future potential liability including
certain amounts already agreed to with certain suppliers (see below). Of this
amount, management estimates that $673,889 will be paid during 1999.
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 required the
Company to pay the supplier $1,400,000. The unpaid balance at December 31, 1998
of $780,000 is included in the above mentioned accrual. 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. At December 31, 1998,
the Company was in compliance with the agreement. Principal payments are
scheduled as follows:
1999 $ 580,000
2000 200,000
---------
$ 780,000
=========
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:
1998 1997 1996
-------- ---------- ----------
Current:
Federal $ 0 $ 0 $ 0
State 0 0 0
-------- ----------- ----------
0 0 0
-------- ----------- ----------
Deferred (net):
Federal (1,374,000) (1,223,800) (525,600)
State (243,000) (216,000) (92,700)
---------- ----------- ----------
(1,617,000) (1,439,800) (618,300)
-------- ----------- ----------
Increase in valuation
allowance 1,617,000 1,439,800 618,300
----------- ----------- ----------
$ 0 $ 0 $ 0
=========== =========== ==========
F-13
<PAGE>
DELICIOUS BRANDS, INC.
Notes to the Financial Statements
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>
1998 1997 1996
---- ---- ----
Computed income tax expense
<S> <C> <C> <C>
(benefit) at federal statutory rate $(1,804,000) $ (1,155,000) $ (305,000)
State income taxes (238,000) (156,000) (35,000)
Nondeductible amortization of
intangible assets 55,000 55,000 55,000
Adjustment to net operating loss
carryforward 370,000 (183,800) (333,300)
Increase in valuation allowance 1,617,000 1,439,800 618,300
----------- ------------ -----------
$ 0 $ 0 $ 0
=========== ============ ===========
</TABLE>
The Company's net deferred income tax asset consisted of the following:
1998 1997
---- ----
Gross deferred tax assets:
Net operating loss carryforwards $ 5,768,000 $4,155,000
Allowance for doubtful accounts 335,000 342,000
Amortization of goodwill 97,000 79,000
Restructuring liability 294,000 366,000
Other 200,000 136,000
----------- ----------
Total gross deferred tax assets 6,694,000 5,078,000
Less valuation allowance (6,664,000) (5,047,000)
----------- ----------
Net deferred tax assets 30,000 31,000
Gross deferred tax liabilities:
Depreciation and amortization expense 30,000 31,000
Net deferred taxes $ 0 $ 0
=========== ==========
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, 1998, the Company has available for tax reporting purposes
approximately $15,180,000 of net operating loss carryforwards expiring in
varying amounts through 2018.
NOTE 8--STOCK OPTIONS AND WARRANTS
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.
F-14
<PAGE>
DELICIOUS BRANDS, INC.
Notes to the Financial Statements
NOTE 8--STOCK OPTIONS AND WARRANTS, CONTINUED
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 the grant and on the first anniversary
of the grant. Following is a table indicating the activity during the years
1998, 1997, and 1996 for such plans:
Weighted
Average
Exercise
Shares Price
------ -----
Options outstanding at January 1, 1996 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 year 4,500 6.00
Exercised during year 0
Forfeited (5,334) 6.00
--------
Options outstanding at December 31, 1998 485,785 $6.20
=========== =========
F-15
<PAGE>
DELICIOUS BRANDS, INC.
Notes to the Financial Statements
NOTE 8--STOCK OPTIONS AND WARRANTS, CONTINUED
The following table summarizes information about outstanding and exercisable
stock options as of December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Range of Remaining Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Months) Price Exercisable Price
------ ----------- -------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$.40 to $1.60 57,105 7 $ 1.38 57,105 $ 1.38
$2.80 to $3.20 82,450 24 $ 2.80 82,450 $ 2.80
$6.00 263,500 84 $ 6.00 258,749 $ 6.00
$8.96 17,730 10 $ 8.96 17,730 $ 8.96
$12.00 50,000 115 $12.00 20,000 $12.00
$24.00 15,000 115 $24.00 6,000 $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, 1998 there were 443,750 of these
options outstanding, all of which are exercisable, with a weighted average
contractual life of 36 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 FAS No. 123, the reported net loss for 1998 and 1997 would
have been approximately $10,000 ($0.00 per share) and $133,000 ($0.04 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 FAS No. 123, the following assumptions were used:
Risk-free interest rate 5.71%
Expected option life 84 months
Expected volatility Not Applicable
Expected dividends None
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. (Note 12).
Management believes that the warrants had little to no value at the date of
issuance.
The underwriting agreement entered into in connection with the Company's initial
public offering granted the underwriter a warrant, expiring in November 2002, to
purchase 100,000 shares of common stock at 165% of the offering price ($19.80
per share).
F-16
<PAGE>
DELICIOUS BRANDS, INC.
Notes to the Financial Statements
NOTE 9--EMPLOYEE BENEFIT PLAN
The Company maintains 401(k) savings plans 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 plans.
Company contributions amounted to $28,450 in 1998. No Company contributions were
made in 1997 or 1996.
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 $141,082 for the year ended
December 31, 1998.
NOTE 10--COMMITMENTS AND CONTINGENCIES
The Company leases office and warehouse space, vehicles and office equipment
under various operating leases expiring through 2003. Minimum future rental
payments under noncancellable operating leases as of December 31, 1998, are as
follows:
Year Ending
December 31,
------------
1999 $ 799,000
2000 692,000
2001 648,000
2002 622,000
2003 258,000
-----------
$ 3,019,000
============
Total rent expense for the years ended December 31, 1998, 1997, and 1996 was
$676,989, $91,656 and $93,307, 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.
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.
F-17
<PAGE>
DELICIOUS BRANDS, INC.
Notes to the Financial Statements
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 required 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.
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. For the year ended December 31, 1998, the
Company recognized $150,382 as a restructuring benefit relating to the reversal
of excess accruals in 1997. The Company recognized $102,118 and $44,908 as
related interest expense for the years ended December 31, 1998 and 1997,
respectively. At December 31, 1998, and 1997, the balance sheet reflected a
liability of $773,709 and $1,148,907, respectively, of which $229,031 and
$268,334, respectively, was included in the current portion of long-term
liabilities.
Simultaneously with the initial closing of the private placement in 1997 (Note
1), the former executives 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 12--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") 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 was also a principal
member of Salerno. In connection therewith, the Company entered into a loan
agreement with APFC pursuant to which the Company borrowed $4,600,000 from APFC
(the "APFC Loan") consisting of $3,000,000 in cash used by the Company to fund a
portion of the cash purchase price for Salerno, $1,500,000 in the form of APFC
assuming primary liability under the Salerno Promissory Note and $100,000 as a
fee for the APFC Loan. The APFC Loan bears interest at 12% per annum through
August 3, 1998 and 15% per annum thereafter. In addition, the Company issued
APFC a 12% promissory note in the amount of $100,000 as a fee for assuming the
Salerno Promissory Note and agreed to pay an additional $150,000 fee for
extending the maturity date of the loan. The Company repaid the Salerno
Promissory Note and the APFC Loan with a portion of the net proceeds of the
initial public offering.
In anticipation of the above-mentioned acquisition, the Company borrowed
$500,000. Such indebtedness bears interest at the rate of 12% per annum and was
repaid with a portion of the net proceeds of the initial public offering.
F-18
<PAGE>
DELICIOUS BRANDS, INC.
Notes to the Financial Statements
NOTE 12--ACQUISITION OF ASSETS OF SALERNO FOODS, L.L.C., CONTINUED
The Salerno acquisition has been accounted for as a purchase. The total purchase
price and the fair value of liabilities assumed have been allocated to the
tangible and intangible assets of the Company based on their respective fair
values.
The following provides an allocation of the purchase price:
Purchase price, net of a purchase price adjustment
of $220,000 $ 4,780,000
Transaction costs 362,507
Liabilities assumed 8,304,627
------------
Total consideration 13,447,134
Less fair value of assets acquired
(including $12,564 of cash) 5,679,367
------------
Goodwill
$ 7,767,767
============
Results of operations for Salerno from April 3, 1998 to December 31, 1998 have
been included in the accompanying statement of operations for the year ended
December 31, 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 had the Salerno
acquisition been effected on the assumed date.
For the Years Ending
December 31, December 31,
1998 1997
----------- ------------
Net sales $61,534,856 $69,812,414
=========== ===========
Loss from operations $(4,452,138) $(3,504,723)
=========== ============
Net loss $(6,437,897) $(4,975,444)
=========== ============
Net loss per share:
Basic and Diluted $( 1.90) $( 1.70)
=========== ============
Weighted Average Shares Outstanding 3,389,993 2,933,623
=========== ============
F-19
<PAGE>
ADDITIONAL FINANCIAL DATA
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Board of Directors of
Delicious Brands, Inc.
In connection with our audit of the financial statements of DELICIOUS BRANDS,
INC. referred to in our report dated March 29, 1999 which is included in this
Form 10-K, we have also audited Schedule II as of and for the years ended
December 31, 1998, 1997 and 1996. In our opinion, this schedule presents fairly,
in all material respects, the information required to be set forth therein.
/s/ Altschuler, Melvoin and Glasser LLP
Chicago, Illinois
March 29, 1999
S-1
<PAGE>
SCHEDULE II
DELICIOUS BRANDS, INC.
Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Column B Column C
Balance at Charged Column E
Beginning to Costs Column D Balance at
of Period and Expense Writeoffs End of Period
--------- ----------- --------- -------------
1998:
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 575,000 $ 444,330 $ 218,350 $ 800,980
Reserve for inventory obsolesence $ 209,275 $ 0 $ 56,115 $ 153,160
Valuation allowance for deferred tax assets $5,047,000 $1,617,000 $ 0 $6,664,000
1997:
Allowance for doubtful accounts $ 572,872 $ 40,487 $ 38,359 $ 575,000
Reserve for inventory obsolesence $ 56,521 $ 152,754 $ 0 209,275
Valuation allowance for deferred tax assets $3,607,200 $1,439,800 $ 0 $5,047,000
1996:
Allowance for doubtful accounts $ 100,000 $ 583,337 $ 110,465 $ 572,872
Reserve for inventory obsolesence $ 65,000 $ 0 $ 8,479 $ 56,521
Valuation allowance for deferred tax assets $2,988,900 $ 618,300 $ 0 $3,607,200
</TABLE>
S-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS A SUMMARY OF FINANCIAL INFORMATION EXTRACTED FROM
DELICIOUS BRANDS, INC. FINANCIAL STATEMENT AS OF DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 981,646
<SECURITIES> 0
<RECEIVABLES> 5,909,727
<ALLOWANCES> 800,980
<INVENTORY> 1,879,041
<CURRENT-ASSETS> 8,396,715
<PP&E> 927,606
<DEPRECIATION> 546,421
<TOTAL-ASSETS> 19,226,107
<CURRENT-LIABILITIES> 15,625,026
<BONDS> 744,679
0
1,566,668
<COMMON> 44,818
<OTHER-SE> 1,244,916
<TOTAL-LIABILITY-AND-EQUITY> 19,226,107
<SALES> 53,030,115
<TOTAL-REVENUES> 53,030,115
<CGS> 41,855,211
<TOTAL-COSTS> 41,855,211
<OTHER-EXPENSES> 14,134,594
<LOSS-PROVISION> 444,330
<INTEREST-EXPENSE> 1,213,168
<INCOME-PRETAX> (5,308,108)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,308,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,308,108)
<EPS-PRIMARY> (1.57)
<EPS-DILUTED> (1.57)
</TABLE>
