SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-24941
Delicious Brands, Inc.
- --------------------------------------------------------------------------------
(Exact name of the registrant as specified in its charter)
Delaware 06-1255882
- ----------------------------------------- ------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2070 Maple Street, Des Plaines, Illinois 60018
- ----------------------------------------- --------------------------------
(Address of Principal executive offices) (Zip code)
Registrant's telephone number including area code: (847) 699-3200
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
4,666,085 shares of Common Stock were outstanding on October 29, 1999.
<PAGE>
DELICIOUS BRANDS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
I N D E X
Part I: Financial Information Page
Item 1. Financial Statements:
Balance Sheets as of September 30, 1999 and December 31, 1998 2
Statements of Operations, Three and Nine Months Ended 3
September 30, 1999 and 1998
Statements of Cash Flows, Nine Months Ended September 30, 4
1999 and 1998
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 12
Part II: Other Information
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
<PAGE>
<TABLE>
<CAPTION>
DELICIOUS BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
------------- ------------
1999 1998
---- ----
(unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 0 $ 981,646
Accounts receivable (including $738,894 and $324,070,
respectively, due from related parties, net of allowances of
$823,877 and $800,980, respectively)................................................ 6,144,020 5,108,747
Inventory 1,369,575 1,879,041
Due from distributors..................................................................... 99,317 99,317
Prepaid expenses and other current assets................................................. 378,518 327,964
------------- -------------
7,991,430 8,396,715
------------- -------------
Property and Equipment, Net of Accumulated Depreciation......................................... 299,282 381,185
------------- -------------
Other Assets:
Goodwill.................................................................................. 9,598,626 10,011,946
Other..................................................................................... 1,167,988 436,261
------------- -------------
10,766,614 10,448,207
------------- -------------
$ 19,057,326 $ 19,226,107
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank loan payable.........................................................................$ 3,277,845 $ 3,665,828
Notes Payable............................................................................. 5,250,000 0
Current portion of subordinated debt...................................................... 393,332 393,332
Accounts payable (including $60,455 and $82,040, respectively,
due to related parties)............................................................. 5,757,920 7,173,870
Due to distributors....................................................................... 541,626 532,769
Accrued expenses.......................................................................... 2,563,829 2,954,389
Current portion of long-term liabilities.................................................. 759,430 904,838
------------- -------------
18,543,982 15,625,026
Long-term Liabilities:
Restructuring liability................................................................... 379,121 544,679
Packaging loss liability.................................................................. 200,000 200,000
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579,121 744,679
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Stockholders' Deficit:
Preferred stock, $.01 par value 1,000,000 shares authorized:
Class A designated 245,000 shares with a liquidation value of
$8.00 per share, 189,584 and 195,834 shares issued and
outstanding in 1999 and 1998, respectively.......................................... 1,516,668 1,566,668
Class B, designated 35,000 shares issued and
outstanding in 1999................................................................. 350 0
Common Stock, $.01 par value, 25,000,000 shares authorized,
4,715,010 and 4,481,767 shares issued in 1999 and 1998,
respectively........................................................................ 47,150 44,818
Additional paid-in capital................................................................ 20,420,002 18,343,209
Accumulated deficit....................................................................... (21,888,898) (16,937,244)
------------- -------------
95,272 3,017,451
Less, common stock in treasury at cost.................................................... (161,049) (161,049)
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Total stockholders' equity (deficit)................................................ (65,777) 2,856,402
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$ 19,057,326 $ 19,226,107
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
DELICIOUS BRANDS, INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ---------------- --------------
1999 1998 1999 1998
----------------- --------- ------------- ---------------
<S> <C> <C> <C> <C>
Net Sales (including approximately
$1,356,000, $1,282,000, $3,634,000
and $5,050,000, respectively, to related
parties).......................................... $ 9,142,453 $17,491,396 $ 32,873,672 $39,822,411
Cost of Sales (including approximately
$2,000, $968,000, $19,000
and $2,881,000, respectively, from
related parties).................................. 6,935,195 13,241,731 25,252,463 30,688,685
----------- ----------- ----------- -----------
Gross Profit............................................ 2,207,258 4,249,665 7,621,209 9,133,726
----------- ----------- ----------- -----------
Selling, general and administrative..................... 4,455,798 4,636,586 12,127,598 10,465,540
----------- ----------- ----------- -----------
Loss from Operations: (2,248,540) (386,921) (4,506,389) (1,331,814)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest Expense.................................. (142,158) (368,837) (484,234) (883,351)
Other, net........................................ (3,894) 2,611 117,303 40,416
----------- ----------- ----------- -----------
(146,052) (366,226) (366,931) (842,935)
----------- ----------- ----------- -----------
Loss before Provision for Income Taxes.................. (2,394,592) (753,147) (4,873,320) (2,174,749)
Provision for Income Taxes.............................. - - - -
----------- ----------- ------------ -----------
Net Loss ............................................ $(2,394,592) $ (753,147) $ (4,873,320) $(2,174,749)
=========== =========== ============ ===========
Earnings per Share:
Basic:
Net Loss per common share................... $ (.52) $ (.23) $ (1.10) $ (.67)
=========== =========== ============ ===========
Weighted average number of
common shares outstanding.................. 4,590,270 3,282,842 4,489,675 3,264,380
Diluted:
Net loss per common share.................. $ (.52) $ (.23) $ (1.10) $ (.67)
=========== =========== ============ ===========
Weighted average number of
common shares outstanding.................. 4,590,270 3,282,842 4,489,675 3,264,380
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
DELICIOUS BRANDS, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ............................................................$ (4,873,320) $ (2,174,749)
Adjustments to reconcile net loss to net cash used in
operating activities:
Common Stock issued for serviced rendered......................... 360,000 0
Depreciation and amortization..................................... 587,304 907,841
Provision for bad debts........................................... 334,547 317,144
Increase (Decrease) in cash from changes in:
Accounts receivable......................................... (1,369,820) (1,562,589)
Inventory................................................... 509,466 (999,139)
Due from distributors....................................... 0 112,378
Prepaid expenses and other current assets................... (50,554) 70,779
Other assets................................................ 84,577 (262,229)
Accounts payable and accrued expenses....................... (2,138,008) 3,850,969
Due to distributors......................................... 8,857 215,210
Accrued restructuring liabilities........................... (165,558) (146,777)
Other liabilities........................................... (145,408) (186,186)
------------- ---------------
Net cash provided by (used in) operating activities..................... (6,857,917) 142,652
------------- ---------------
Cash Flows from Investing Activities:
Payment for purchase of assets of Salerno Foods,
L.L.C. (net of cash acquired of $12,564).................... 0 (3,709,599)
Purchase of property and equipment...................................... (71,638) (69,539)
------------- ---------------
Net cash used in investing activities................................... (71,638) (3,779,138)
------------- ---------------
Cash Flows from Financing Activities:
Payments of long-term debt.............................................. 0 (15,498)
Proceeds (Payments) of bank loan payable, net........................... (387,983) (1,558,419)
Checks issued in excess of funds on deposit............................. 331,498 790,182
Proceeds from issuance of notes payable................................. 5,360,000 3,500,000
Payment of notes payable................................................ (110,000) 0
Payment of notes payable issuance costs................................. (836,747) 0
Proceeds from issuance of preferred stock............................... 1,750,000 0
Proceeds from issuance of common stock.................................. 243,191 840,000
Payment of preferred stock dividend..................................... (78,334) 0
Initial public offering costs........................................... 0 (583,738)
Payments of stock issuance costs........................................ (323,716) (144,390)
------------- ---------------
Net cash provided by financing activities............................... 5,947,909 2,828,137
------------- ---------------
Decrease in Cash.............................................................. (981,646) (808,349)
Cash, Beginning of Period..................................................... 981,646 808,349
------------- ---------------
Cash, End of Period...........................................................$ 0 $ 0
============= ===============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Income taxes......................................................$ 0 $ 0
============= ===============
Interest..........................................................$ 508,910 $ 663,640
============= ===============
</TABLE>
Supplemental Disclosure of Noncash Financing Activities:
On August 18, 1999 165,000 shares of common stock were issued upon the
exercise of outstanding options. The total consideration for the 165,000
shares, $360,000, was received in exchange for advisory consulting
services.
The accompanying notes are an integral part of this statement.
4
<PAGE>
DELICIOUS BRANDS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements included herein were prepared
pursuant to the rules and regulations for interim reporting under the Securities
Exchange Act of 1934, as amended. Accordingly, certain information and footnote
disclosures normally accompanying the annual financial statements were omitted.
The interim financial statements and notes should be read in conjunction with
the annual audited financial statements and notes thereto contained in the Form
10-K of Delicious Brands, Inc. (the "Company") dated April 15, 1999. The
accompanying unaudited interim financial statements contain all adjustments,
consisting only of normal adjustments, which in the opinion of management were
necessary for a fair statement of the results for the interim periods. Results
for the interim periods are not necessarily indicative of results for the full
year.
MATTERS AFFECTING COMPARABILITY - ACQUISITION OF ASSETS
On April 3, 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Salerno Foods, L.L.C. ("Salerno"). Accordingly,
the Company's results of operations for the nine months ended September 30, 1999
include the operating results of Salerno whereas the comparable nine months
ended for the prior year include the operating results of Salerno beginning
April 3, 1998.
The following unaudited pro forma information has been prepared assuming the
acquisition had taken place at January 1, 1998. The unaudited pro forma
information includes adjustments for interest expense that would have been
incurred to finance the purchase, additional depreciation of the property and
equipment acquired, amortization of the goodwill arising from the acquisition
and the result of conforming Salerno's accounting policy for slotting fees to
the Company's policy. The unaudited pro forma results of operations are not
necessarily indicative of what the results that would have been had the Salerno
acquisition been effected on the assumed date.
Unaudited for the
Nine Months Ended
September 30, 1999
------------------
Net sales......................... $ 48,327,000
Loss before income taxes.......... $ (3,486,000)
Net loss.......................... $ (3,486,000)
Net loss per share:
Basic....................... $ (1.07)
Diluted..................... $ (1.07)
BUSINESS AND OWNERSHIP
During the fourth quarter of 1998, the Company issued 1,150,000 shares of its
Common Stock, at $12.00 per share, in an initial public offering. Proceeds of
the offering were $10,690,684 net of commissions and other related expenses
totaling $3,109,316.
On April 12, 1999, the Company consummated a private placement of 35,000 shares
of Series B Convertible Preferred Stock, $.01 par value per share, and a warrant
to purchase 700,000 shares of Common Stock, for an aggregate price of $1.75
million. Proceeds of the offering were $1,456,290, net of commissions and other
related expenses totaling $293,710. Each share of Series B Convertible Preferred
Stock is currently convertible into five shares of Common Stock, subject to
certain antidilution provisions. The warrant to purchase 700,000 shares of
Common Stock has an initial exercise price of $0.01 per share, subject to
certain antidilution provisions, for a term of ten years from the date of its
issuance.
5
<PAGE>
2. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share and diluted net income (loss) per share have
been calculated using the weighted average number of shares of Common Stock
outstanding during each period. Preferred stock dividends, totaling $78,334,
were paid during the three months ended March 31, 1999 and have been included in
both the basic and diluted net income (loss) per share calculations for the nine
months ended September 30, 1999. All options and warrants were omitted from the
computation of diluted net income (loss) per share because the options and
warrants are antidilutive when net losses are reported.
3. INVENTORY
Inventory is stated at the lower of cost or market with cost determined by the
first-in, first-out (FIFO) method.
4. RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1999, the Company adopted FAS No. 133, "Accounting for
Derivatives Instruments and Hedging Activities," which required the recording of
all derivatives on the balance sheet at fair value, and Statement of Position
98-5 (SOP 98-5), "Reporting on the Cost of Start-up Activities," which requires
costs of start-up activities and organization costs to be expensed as incurred.
The adoption of FAS No. 133 and SOP 98-5 had no impact on the Company's results
of operations, financial position or cash flows.
5. SUBORDINATED DEBT
On April 27, 1999, the remaining outstanding 9% Subordinated Convertible
Promissory Notes (the "9% Notes"), aggregate principal amount of approximately
$393,000, matured. The Company has not repaid the 9% Notes. The Company is
currently negotiating with the holders of the 9% Notes with regard to the
conversion of the 9% Notes to equity. As the Company failed to repay the 9%
Notes or to negotiate their conversion into equity on or before May 27, 1999,
the Company is in default of the terms of the 9% Notes.
6. BORROWINGS
On August 18, 1999, the Company issued $360,000 aggregate principal amount of
promissory notes (the "Notes"). Interest on the Notes accrued at a rate of 10%
per annum. A Note, $250,000 principal amount, was converted at the holder's
request to an 8% Note (as defined below) on August 30, 1999. The remaining Note,
$110,000 principal amount, along with all accrued interest on the Note was paid
on September 3, 1999.
On August 30, 1999, the Company issued $5,250,000 aggregate principal amount of
8% Non-Negotiable Unsecured Convertible Promissory Notes (the "8% Notes"). The
8% Notes and accrued interest thereon are due and payable one year from the
issuance of the 8% Notes. The 8% Notes are convertible, at the option of the 8%
Note holder, into shares of the Company's common stock, $.01 par value per
share, at the rate of one share for each $5.00 of outstanding principal amount
of 8% Notes. No conversion can take place until the Company has obtained
approval of The Nasdaq Stock Market ("Nasdaq") of the Company's additional
listing application in respect of the shares of common stock to be issued upon
conversion.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MATTERS AFFECTING COMPARABILITY - ACQUISITION OF ASSETS
On April 3, 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Salerno Foods, L.L.C. ("Salerno"). Accordingly,
the Company's results of operations for the nine months ended September 30, 1999
include the operating results of Salerno whereas the comparable nine months
ended for the prior year include the results of Salerno beginning April 3, 1998.
RESULTS OF OPERATIONS
Net Sales. Net sales decreased 48% to $9.1 million for the three months ended
September 30, 1999. Delicious brand product sales decreased $3.6 million
partially as a result of changes in the buying habits of distributors as well as
increased competition from private label and national brands. Distributors
formerly visited retailers multiple times each week and relied on unit volume to
earn profits. Distributors currently rely on less visits per week, and lower
volume sales at a higher gross margin. Effective August 2, 1999, the Company
terminated business with its largest distributor of Delicious brand products due
to poor performance and replaced it with new distributors. The Company
experienced a decline in sales due to the start up process. Salerno brand
product sales as compared to 1998 decreased $4.6 million primarily as a result
of reduced sales to grocery chains, caused by increased competition, in two
regions of the country and lower volume sales to certain national accounts. Both
brands' sales were negatively affected by the Company's inability to obtain
inventory, as discussed in "Liquidity and Capital Resources" below. Net sales
decreased 17% to $32.9 million for the nine months ended September 30, 1999. The
net sales decrease, $6.9 million, resulted primarily from the sales reduction in
Delicious and Salerno discussed above, partially offset by the inclusion of
Salerno for the entire nine months in 1999.
Gross Profit. Gross profit decreased 48% to $2.2 million for the three months
ended September 30,1999. The gross profit decrease, $2.0 million, resulted
primarily from the sales reduction discussed above. Gross profit as a percentage
of sales remained constant for the three months ended September 30,1999 as
Frookie and Delicious gross margins increased 2.9% while Salerno's gross profit
decreased by 1.3%. The gross margin percentage increased for Frookie and
Delicious product lines as the Company concentrated on raising gross margins by
reducing promotion costs and obtaining lower supplier costs. Salerno's decrease
in gross margin percentage was a result of increased promotional allowances
caused by competitive pressures in the premium sector of the cookie market.
Gross profit decreased 17% to $7.6 million and gross profit as a percentage of
sales increased .3% for the nine months ended September 30, 1999. The gross
profit decrease, $1.5 million, resulted primarily from the reduced sales and the
gross margin variance discussed above, partially offset by the inclusion of
Salerno for the entire nine months in 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 4% to $4.5 million for the three months ended
September 30, 1999. The selling, general and administrative expense decrease,
$181,000, resulted primarily from lower selling expenses related to reduced
sales offset by higher advisory consulting fees and severance costs. Selling,
general and administrative expenses increased 16% to $12.1 million for the nine
months ended September 30, 1999. The selling, general and administrative expense
increase, $1.7 million, resulted from the inclusion of the April 3, 1998
acquisition of Salerno partially offset by decreases noted above.
Other Income (Expense). Other expenses decreased 60% to $146,000 and 56% to
$367,000 for the three and nine months ended September 30, 1999, respectively.
For the three and nine months ended September 30, 1999 interest expense declined
$227,000 and $399,000, respectively. This decrease was primarily due to
additional interest expense related to the April 3, 1998 acquisition of Salerno
incurred during the six months ended September 30, 1998.
Provision for Income Tax. The provision for income tax for the three and nine
months ended September 30, 1999 was zero as a result of there being a net
operating loss for the period for which a valuation allowance was provided
7
<PAGE>
to reduce the tax benefit of this loss. The valuation allowance for the three
and nine months ended September 30, 1999 increased $934,000 and $1,900,000,
respectively. The valuation allowance increases were primarily due to the
uncertainty of the future utilization of the net operating losses generated. The
variation of the Company's effective tax rate from the federal statutory tax
rate is principally due to non-deductible amortization of intangible assets and
the effect of the increase in the valuation allowance.
Net Loss. Net loss increased 218% to $2.4 million for the three months ended
September 30, 1999 and 124% to $4.9 million for the nine months ended September
30, 1999. The increased losses were a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
In recent periods, the Company has utilized its working capital and proceeds
from both private placements and the Company's initial public offering (the
"Initial Public Offering") of common stock, $.01 par value per share ("Common
Stock") to cover operating deficits. Because the Company purchases its products
from co-packers, it does not intend to invest in plant or equipment relating to
the manufacture of products for sale. Further, the Company believes that its
existing fleet of leased trucks is sufficient for the foreseeable future. In
addition, the Company's introduction of new products represents an immaterial
capital expenditure because co-packers are responsible for the research,
development and ingredients costs. The only costs incurred by the Company are
packaging design costs, which did not exceed $100,000 in 1998 and are not
expected to increase significantly in 1999. Consequently, additions to property
and equipment are not expected to be material in future periods.
On February 6, 1998, the Company consummated a second closing of a private
placement (the "Second Closing") pursuant to which it issued an aggregate of
140,000 shares of Common Stock for an aggregate price of $840,000. The net
proceeds of $695,610 from the Second Closing were applied by the Company to
increase cash balances and reduce outstanding trade payables balances.
On March 30, 1998, the Company borrowed $500,000 (the "Acquisition Loan"). Such
indebtedness bore interest at the rate of 12% per annum and matured on the
consummation of the Company's Initial Public Offering on November 17, 1998. The
Acquisition Loan and accrued interest thereon were repaid from the proceeds of
the Initial Public Offering.
On April 3, 1998, the Company entered into an amendment to a revolving credit
facility with U.S. Bancorp Republic Commercial Finance, Inc. ("Republic") for a
revolving line of credit of up to $7.0 million. Borrowings under the revolving
credit facility are due upon demand and bear interest at 1.50% per annum above
the reference rate of interest publicly announced from time to time by U.S. Bank
National Association (9.75% at September 30, 1999). Borrowings under the
revolving credit facility at September 30, 1999 were $3.3 million. Borrowings
under the revolving credit facility are collateralized by a first lien on
substantially all of the assets of the Company. The revolving credit facility
expires on November 30, 1999. Republic has notified the Company of its intention
not to renew the revolving credit facility, but have granted the Company a 60
day extension of the November 30, 1999 expiration date. The Company is currently
in negotiations with other lending organizations to establish a new revolving
credit facility. No assurance can be made that the Company will be able to enter
into a new facility on acceptable terms or at all. Failure to obtain a new
facility would have a material adverse effect on the Company's business and
financial condition.
On April 3, 1998, the Company consummated the acquisition of Salerno. The
purchase price for Salerno consisted of (i) $3.3 million in cash, (ii) a $1.5
million promissory note from the Company to Salerno (the "Salerno Promissory
Note"), bearing interest at a rate of 12% per annum, secured by a second lien on
substantially all of the Company's assets, and (iii) the assumption of
substantially all of the liabilities of Salerno. In connection therewith, the
Company entered into a loan agreement with American Pacific Financial
Corporation ("APFC") pursuant to which the Company borrowed $4.6 million,
bearing interest at a rate of 12% per annum through August 3, 1998 and 15% per
annum thereafter, from APFC (the "APFC Loan") consisting of $3.0 million in cash
used by the Company to fund a portion of the cash purchase price for Salerno,
$1.5 million in the form of APFC assuming the Salerno Promissory Note and
$100,000 as a fee for the APFC Loan. In addition, the Company issued to APFC a
promissory note in the principal amount of $100,000, bearing interest at a rate
of 12% per annum, as a fee for assuming the Salerno Promissory Note. The notes
and accrued interest thereon were repaid from the proceeds of the Initial Public
Offering.
8
<PAGE>
As of August 1, 1998, holders of approximately $1.6 million aggregate principal
amount of 9% Subordinated Convertible Promissory Notes (the "9% Notes")
exchanged such notes for an aggregate of 195,834 shares of Series A Convertible
Preferred Stock, $.01 par value per share ("Series A Preferred Stock"), pursuant
to an offer to exchange made by the Company. Annual dividends of 10% paid
semi-annually are payable on the shares of Series A Preferred Stock out of the
assets of the Company legally available for payment thereof. The expiration date
of warrants to purchase 107,730 shares of Common Stock collectively held by the
holders of the 9% Notes exchanged for the Series A Preferred Stock was extended
to April 27, 2001 from April 27, 1999.
On November 17, 1998, the Company consummated the Initial Public Offering of
1,000,000 shares of Common Stock, at a price of $12.00 per share. On December
31, 1998, the Company consummated the sale of 150,000 shares of Common Stock, at
a price of $12.00 per share, pursuant to the underwriters' exercise of the
over-allotment option. After deducting underwriting discounts and expenses, the
Company received approximately $10.7 million of net proceeds from the Initial
Public Offering.
On April 12, 1999, the Company consummated a private placement of 35,000 shares
of Series B Convertible Preferred Stock, $.01 par value per share ("Series B
Preferred Stock"), and a warrant to purchase 700,000 shares of Common Stock, for
an aggregate price of $1.75 million. The net proceeds of $1.5 million were
applied by the Company primarily to reduce outstanding trade payables balances.
Each share of Series B Preferred Stock is currently convertible into five shares
of Common Stock, subject to certain antidilution provisions. The warrant to
purchase 700,000 shares of Common Stock has an initial exercise price of $0.01
per share, subject to certain antidilution provisions, for a term of ten years
from the date of its issuance.
On April 27, 1999, 9% promissory notes in the aggregate principal amount of
approximately $393,000 matured. The Company did not repay the promissory notes
and currently does not have funds to repay the promissory notes.
On August 18, 1999, the Company issued $360,000 aggregate principal amount
promissory notes (the "Notes"). Interest on the Notes accrued at a rate of 10%
per annum. A Note, $250,000 principal amount, was converted at the holder's
request to an 8% Note (as defined below) on August 30, 1999. The remaining Note,
$110,000 principal amount, along with all accrued interest on the Note was paid
on September 3, 1999.
On August 30, 1999, the Company issued $5,250,000 aggregate principal amount of
8% Non-Negotiable Unsecured Convertible Promissory Notes (the "8% Notes"). The
8% Notes and accrued interest thereon are due and payable one year from the
issuance of the 8% Notes. The 8% Notes are convertible, at the option of the 8%
Note holder, into shares of the Company's Common Stock at the rate of one share
for each $5.00 of outstanding principal amount of 8% Notes. No conversion can
take place until the Company has obtained approval of The Nasdaq Stock Market
("Nasdaq") of the Company's additional listing application in respect of the
shares of Common Stock to be issued upon conversion.
During July and August 1999, the Company was unable to obtain all the inventory
needed to fill customer orders, due to its inability to pay vendor obligations.
Certain vendors who refused to ship merchandise began to provide inventory
during September as the proceeds of the 8% Notes were applied to reduce trade
payables.
Currently, the Company has insufficient funds for its needs. The Company is
seeking additional debt and/or equity financing; however, there can be no
assurance that additional funds can be obtained on acceptable terms, if at all.
If the Company is unable to obtain additional financing or generate positive
cash flow, the Company's business will be materially adversely affected.
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
9
<PAGE>
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate and are dependent on certain risks and
uncertainties, and therefore, there can be no assurance that the forward-looking
statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved. Certain of these major risks and uncertainties
are described below.
YEAR 2000 PROGRAM
Many computer systems used in the current business environment were designed to
use only two digits in the date field and thus may experience difficulty
processing dates beyond the year 1999 and, as such, some computer hardware and
software will need to be modified prior to the Year 2000 to remain functional.
The Company's core internal systems that have been recently implemented are Year
2000 compliant. The Company has completed an assessment of Year 2000 issues,
including issues with third-party suppliers and warehouse communications. Based
on its evaluation, the Company does not believe that the cost of remedial
actions will have a material adverse effect on the Company's results of
operations, liquidity or financial condition. However, due to the general
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Company believes that, with
the implementation of new business systems and completion of projects as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
PREVIOUS DEFAULT ON REPAYMENT OF PROMISSORY NOTES
In April 1999, promissory notes in the aggregate principal amount of
approximately $393,000 matured. The Company did not repay the promissory notes
and currently does not have funds to repay the promissory notes and believes its
credit facility with Republic prohibits repayment of the principal portion of
these promissory notes. There can be no assurance that the noteholders will not
utilize any or all legal means necessary to recover the principal amount of the
promissory notes, including an action for judgment or the filing of an
involuntary petition for bankruptcy, which may have a material adverse effect on
the Company's business, results of operations and financial condition.
HISTORICAL AND PROJECTED FUTURE LOSSES; ACCUMULATED DEFICIT; NET WORKING CAPITAL
DEFICIT
Since 1994, the Company has not operated profitably and has incurred continued
net losses. Additionally, the Company's negative net working capital (the amount
by which current liabilities exceed current assets) continues to increase and is
currently insufficient to operate the Company. The Company expects to incur
additional net losses through 1999. Management of the Company is unable to
predict the extent of any future losses or the time required to achieve
profitability. Future operating results will depend on many factors, including
the demand for the Company's products, the level of product and price
competition, the Company's success in maintaining and expanding its distribution
channels, the ability of the Company to develop and market products and to
control costs and general economic conditions.
RELIANCE ON OUTSIDE PRODUCT MANUFACTURING
The Company relies exclusively on outside manufacturers to produce and deliver
its products to its distributors. The Company does not have any long-term
contracts with its manufacturers. Due to the Company's current negative net
working capital, many of the Company's outside manufacturers have restricted or
eliminated credit terms and currently require payment upon delivery of the
Company's products. During July and August, certain manufacturers refused to
ship product due to the Company's liquidity problems. Vendor shipments resumed
in September as the proceeds of the $5.25 million raised from the sale of the 8%
Notes was applied to reduce trade payables. One manufacturer has given written
notice to the Company and Republic of the Company's alleged breach of its
manufacturing agreement with that manufacturer for failure to timely pay its
invoices, but continues
10
<PAGE>
to ship product to the Company. No assurance can be given that if the Company
needed to change manufacturers, it would be able to do so on a timely or
effective basis. Additionally, production problems encountered by these outside
manufacturers could have a material adverse effect on the business, results of
operations and financial condition of the Company. Any such production problems
could have a greater adverse effect on the Company as a result of it
streamlining of its supplier base.
POTENTIAL NASDAQ DELISTING FOR VIOLATION OF MARKETPLACE RULE
In May 1999, the Company received a letter from The Nasdaq Stock Market
("Nasdaq") stating that the Company had violated a Nasdaq marketplace rule as a
result of the Company's sale and issuance of shares of Series B Convertible
Preferred Stock, $.01 par value per share, and warrants to purchase shares of
Common Stock (the "Violation Letter"). The Violation Letter stated that Nasdaq
would initiate its delisting procedure in respect of the Common Stock if the
Company failed to propose a satisfactory plan of compliance. In accordance with
Nasdaq's instructions, the Company submitted to Nasdaq a proposed plan of
compliance that the Company believed would cure the alleged violation of the
Nasdaq marketplace rule. The Company has received verbal approval of the revised
plan and is awaiting formal written approval. If Nasdaq determines that the
proposal is not satisfactory and that the Common Stock does not warrant
continued listing, Nasdaq will issue a formal notice of deficiency, and, pending
the outcome of a hearing, if one is requested by the Company, the Common Stock
may be delisted from Nasdaq. Moreover, Nasdaq has discretionary power to delist
companies from Nasdaq even if they satisfy the requirements for continued
listing. There can be no assurance that Nasdaq will approve of the Company's
proposal or, if a delisting hearing is conducted, that the Company will prevail
at the delisting hearing. If the Company's Common Stock is delisted from Nasdaq,
trading, if any, of the Common Stock would thereafter be conducted on the OTC
Bulletin Board. See "Potential Nasdaq Delisting for Failure to Meeting
Maintenance Requirements."
POTENTIAL NASDAQ DELISTING FOR FAILURE TO MEET MAINTENANCE REQUIREMENTS
The Company currently does not satisfy all of the Nasdaq SmallCap Market
maintenance criteria, and its continued failure may result in the Common Stock
no longer being eligible for quotation on the Nasdaq SmallCap Market and
trading, if any, of the Common Stock would thereafter be conducted in the
over-the-counter market. Under Nasdaq rules, in order for the Company to remain
eligible for listing on the Nasdaq SmallCap Market, among other things, (i) the
Company's Common Stock must have a minimum bid price of $1.00 and (ii) the
Company must have minimum tangible net assets of $2 million or a market
capitalization of $35 million or net income of $500,000 in two of the three
prior years. On August 18, 1999, Nasdaq notified the Company that the Company no
longer met the maintenance criteria described in (ii) above, and gave the
Company until September 1, 1999 to submit its plan to achieve compliance with
all of the maintenance criteria. The Company has not received Nasdaq's response
to such plan. If Nasdaq delists the Common Stock from the Nasdaq SmallCap
Market, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Common Stock. Furthermore,
the regulations of the Securities and Exchange Commission ("Commission")
promulgated under the Securities Exchange Act of 1934, as amended, require
additional disclosure relating to the market for penny stocks. Commission
regulations generally define a penny stock to be an equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. A
disclosure schedule explaining the penny stock market and the risks associated
therewith is required to be delivered to a purchaser and various sales practice
requirements are imposed on broker-dealers who sell penny stocks to persons
other than established customers and accredited investors (generally
institutions). In addition, the broker-dealer must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. If the Company's securities become subject to the regulations
applicable to penny stocks, the market liquidity for the Company's securities
could be severely affected. In such an event, the regulations on penny stock
could limit the ability of broker-dealers to sell the Company's securities and
thus the ability of purchasers of the Company's securities to sell their
securities in the secondary market.
11
<PAGE>
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 1999, the Company had no outstanding derivative financial
instruments. All of the Company's transactions occur in U.S. dollars. Therefore,
the Company is not subject to significant foreign currency exchange risk.
12
<PAGE>
Part II: OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds
(C) The following unregistered securities were issued by the Company
during the three months ended September 30, 1999:
Description of Number of
Date of Issuance Securities Issued Shares Issued
---------------- ----------------- -------------
8/18/99 Common Stock 225,000
All of the above shares were issued upon the exercise of outstanding
options. The options were not covered by a formal plan, and had
exercise prices of $2 and $4 per share for 150,000 shares and 75,000
shares, respectively. The total consideration for the 225,000 shares
was $600,000, of which the Company received $240,000 in cash and for
past advisory consulting services valued at $360,000.
Item 5: OTHER INFORMATION:
On August 18, 1999, Nasdaq notified the Company that the Company no longer met
the maintenance criteria described in (ii) above, and gave the Company until
September 1, 1999 to submit its plan to achieve compliance with all of the
maintenance criteria. The Company has not received Nasdaq's response to such
plan. If Nasdaq delists the Common Stock from the Nasdaq SmallCap Market, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Common Stock. Furthermore, the
regulations of the Securities and Exchange Commission ("Commission") promulgated
under the Securities Exchange Act of 1934, as amended, require additional
disclosure relating to the market for penny stocks. Commission regulations
generally define a penny stock to be an equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. A disclosure
schedule explaining the penny stock market and the risks associated therewith is
required to be delivered to a purchaser and various sales practice requirements
are imposed on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally institutions). In
addition, the broker-dealer must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. If the Company's
securities become subject to the regulations applicable to penny stocks, the
market liquidity for the Company's securities could be severely affected. In
such an event, the regulations on penny stock could limit the ability of
broker-dealers to sell the Company's securities and thus the ability of
purchasers of the Company's securities to sell their securities in the secondary
market.
Item 6: Exhibits and reports on Form 8-K:
a) Exhibits: 27 - Financial Data Schedule
b) Form 8-K: On September 15, 1999, the Company filed a Form 8-K
disclosing under Item 5 the sale and issuance of the 8% Notes and
the appointment of Thomas Guinan as the Company's Chief Executive
Officer and President and his election to the Board of Directors.
13
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DELICIOUS BRANDS, INC.
(Registrant)
November 12, 1999 /s/ Thomas J. Guinan
- ---------------------------------- ------------------------------
Date Thomas J. Guinan
President, Director and
Chief Executive Officer
November 12, 1999 /s/ Jeffry W. Weiner
- ---------------------------------- ------------------------------
Date Jeffry W. Weiner
Executive Vice President and
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains a summary of financial information extracted from
Delicious Brands, Inc. financial statements as of September 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
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<RECEIVABLES> 6,967,897
<ALLOWANCES> 823,877
<INVENTORY> 1,369,575
<CURRENT-ASSETS> 7,991,430
<PP&E> 999,245
<DEPRECIATION> 699,963
<TOTAL-ASSETS> 19,057,326
<CURRENT-LIABILITIES> 18,543,982
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1,516,668
<COMMON> 47,150
<OTHER-SE> (1,629,945)
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<SALES> 32,873,672
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<INCOME-CONTINUING> (4,873,320)
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