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 March 31, 2000
--------------------------------------------------
[ ] 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.
- --------------------------------------------------------------------------------
(Exact name of the registrant as specified in its charter)
Delaware 06-1255882
- ---------------------------------- ---------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2070 Maple Street, Des Plaines, Illinois 60018
- ----------------------------------------- --------------
(Address of Principal executive offices) (Zip code)
Registrant's telephone number including area code: (847) 699-3200
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
5,702,865 shares of Common Stock were outstanding on May 19, 2000.
<PAGE>
DELICIOUS BRANDS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
I N D E X
Part I: Financial Information Page
Item 1. Financial Statements:
Balance Sheets as of March 31, 2000 and December 31, 1999 2
Statements of Operations, Three Months Ended March 31, 2000 3
and 1999
Statements of Cash Flows, Three Months Ended March 31, 2000 4
and 1999
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 6
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 10
Part II: Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 4. Submission of Matters to Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
1
<PAGE>
DELICIOUS BRANDS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
2000 1999
---- ----
(unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash.................................................................................$ 0 $ 600,762
Accounts receivable including $119,920 and $213,040,
respectively, due from related parties, net of allowances of
$2,671,881 and $2,857,970, respectively........................................... 2,067,813 1,797,900
Inventory............................................................................ 851,840 1,043,400
Prepaid expenses and other current assets............................................ 165,094 247,761
------------ -------------
3,084,747 3,689,823
------------ -------------
Property and Equipment, Net of Accumulated Depreciation................................ 222,543 269,833
------------ -------------
Other Assets:
Goodwill............................................................................. 9,323,080 9,460,852
Other ............................................................................... 601,361 813,919
------------ -------------
9,924,441 10,274,771
------------ -------------
$ 13,231,731 $ 14,234,427
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Bank loan payable....................................................................$ 876,074 $ 1,326,033
Current portion of subordinated debt................................................. 5,643,332 5,643,332
Accounts payable including $64,404 and $60,460, respectively,
due to related parties............................................................ 2,516,145 3,839,756
Due to distributors.................................................................. 309,046 308,559
Accrued expenses..................................................................... 1,789,376 1,796,091
Current portion of long-term liabilities............................................. 724,971 791,354
------------ -------------
11,858,944 13,705,125
============ =============
Long-term Liabilities:
Restructuring liability.............................................................. 278,722 335,454
Stockholders' Equity:
Preferred stock, $.01 par value 1,000,000 shares authorized:
Series A, 183,334 shares issued and outstanding. 1,466,668 1,466,668
Series B, 35,000 shares issued and outstanding, liquidation
value equals stated value. 1,750,000 1,750,000
Series C, 253,663 shares and 170,038 shares issued and
outstanding in 2000 and 1999, respectively. Liquidation
value of $7,609,890 and $5,101,140, respectively.............................. 5,073,260 3,400,760
Series D, 50,000 shares issued and outstanding in 2000,
liquidation value of $1,500,000............................................... 1,000,000 0
Common Stock, $.01 par value, 25,000,000 shares authorized,
4,746,010 shares issued......................................................... 47,460 47,460
Additional paid-in capital............................................................ 18,127,559 18,335,918
Accumulated deficit.................................................................. (26,209,832) (24,645,909)
----------- -----------
1,255,115 354,897
----------- -----------
(161,049) (161,049)
----------- -----------
Less, common stock in treasury at cost.............................................. 1,094,066 193,848
----------- -----------
Total stockholders' equity.................................................... $13,231,732 $14,234,427
=========== ===========
</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 March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Net Sales (including approximately
$61,000 and $1,113,000,
respectively, to related parties).................... $ 6,364,855 $ 12,341,817
Cost of Sales (including approximately
$1,000 and $10,000, respectively,
from related parties)................................. 4,663,671 9,496,139
------------- ------------
Gross Profit................................................ 1,701,184 2,845,678
------------- ------------
Selling, general and administrative......................... 3,070,837 3,911,760
------------- ------------
Loss from Operations........................................ (1,369,653) (1,066,082)
------------- ------------
Other Income (Expense):
Interest expense...................................... (193,877) (166,475)
Other, net............................................ (396) 4,825
------------- ------------
(194,273) (161,650)
------------- ------------
Loss before Provision for Income Taxes (1,563,926) (1,227,732)
Provision for Income Taxes.................................. 0 0
------------- ------------
Net Loss ................................................ $ (1,563,926) $ (1,227,732)
============= ============
Earnings per Share:
Basic:
Net loss per common share....................... $ (.33) $ (.28)
============= ============
Weighted average number of
common shares outstanding................. 4,697,085 4,435,509
Diluted:
Net loss per common share....................... $ (.33) $ (.28)
============= ============
Weighted average number of
common shares outstanding................. 4,697,085 4,435,509
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
DELICIOUS BRANDS, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
2000 1999
----- -----
Cash Flows from Operating Activities:
<S> <C> <C>
Net loss ............................................................ $ (1,563,926) $ (1,227,732)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization..................................... 396,297 196,286
Provision for bad debts........................................... 6,000 19,333
Increase (Decrease) in cash from changes in:
Accounts receivable......................................... (275,913) 144,937
Inventory................................................... 191,560 (368,595)
Prepaid expenses and other current assets................... 82,667 (328,294)
Other assets................................................ 3,248 32,062
Accounts payable and accrued expenses....................... (1,200,325) 710,126
Due to distributors......................................... 487 (68,303)
Accrued restructuring liabilities........................... (56,732) (33,831)
Other liabilities........................................... (66,383) (21,562)
------------- ------------
Net cash used in operating activities................................... (2,483,020) (945,573)
------------- ------------
Cash Flows from Investing Activities:
Purchase of property and equipment...................................... (1,924) (28,351)
------------- ------------
Net cash used in investing activities................................... (1,924) (28,351)
------------- ------------
Cash Flows from Financing Activities:
Proceeds from (payments of) bank loan payable, net...................... (449,958) 67,821
Proceeds from issuance of common stock.................................. 0 2,791
Proceeds from issuance of preferred stock............................... 2,500,000 0
Payment of preferred stock dividend..................................... 0 (78,334)
Payment of stock issuance costs......................................... (165,859) 0
------------- ------------
Net cash provided by (used in) financing activities..................... 1,884,183 (7,722)
------------- ------------
Decrease in Cash.............................................................. (600,762) (981,646)
Cash, Beginning of Period..................................................... 600,762 981,646
------------- ------------
Cash, End of Period........................................................... $ 0 $ 0
============= ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Income taxes...................................................... $ 0 $ 0
============= ============
Interest.......................................................... $ 94,890 $ 173,470
============= ============
</TABLE>
During 2000, 8,625 shares of Class C Preferred Stock were issued for payment of
$172,500 in placement fees.
At March 31, 2000 unpaid transaction costs of $130,000 were included in accrued
expense.
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 14, 2000. The
Company's auditors have questioned the ability of the Company to continue as a
going concern due to recurring losses from operations, a significant net working
capital deficit and the fact that the Company's existing revolving line of
credit will not be renewed beyond June 15, 2000. Although management believes
that the Company will continue operations until the pending asset sale is
completed, there is no guarantee that the Company can remain viable until the
conclusion of the pending transaction. (See "Recent History" for description of
pending sale). 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.
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 Common shares outstanding
during each period. All options and warrants were omitted from the computation
of diluted net income (loss) per share because the options and warrants are
antidilutive when net losses are reported.
3. Inventory
Inventory is stated at the lower of cost or market with cost determined by the
first-in, first-out (FIFO) method.
4. Recent Account Pronouncements
Effective January 1, 1999, the Company adopted FAS No. 133, "Accounting for
Derivatives Instruments and Hedging Activities," which required the recording of
all derivatives on the balance sheet at fair value, and Statement of Position
98-5 (SOP 98-5), "Reporting on the Cost of Start-up Activities," which requires
costs of start-up activities and organization costs to be expensed as incurred.
The adoption of FAS No. 133 and SOP 98-5 had no impact on the Company's results
of operations, financial position or cash flows.
5. Subordinated Debt
On April 27, 1999, the remaining outstanding 9% Subordinated Convertible
Promissory Notes (the "9% Notes") aggregate principal amount of approximately
$393,000, matured. The Company has not repaid the 9% Notes and currently does
not have funds to repay such amounts. The Company believes its credit facility
with U.S. Bancorp prohibits repayment of the principal portion of these
subordinated notes. One of the noteholders has filed a lawsuit against the
Company seeking repayment of his note.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. 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
The Company's failure to satisfy the Nasdaq SmallCap Market
maintenance requirements resulted in the Common Stock being delisted from the
Nasdaq SmallCap Market as of February 1, 2000. Trading of the Company's Common
Stock, if any, is now conducted in the Over-the-Counter Bulletin Board.
As a result of the delisting of 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 purchaser of the Company's securities to sell
their securities in the secondary market.
On April 5, 2000, the Company entered into an Asset Purchase
Agreement (the "APA") with BF USB, Inc., a Delaware corporation and indirect
subsidiary of Parmalat Canada Ltd., who is affiliated with certain of the
Company's suppliers and customers and who has acquired businesses from and
entered into a consulting agreement with the Company's Chairman of the Board of
Directors. Under the terms of the APA, the Company will sell substantially all
of its assets for $26,680,000 less a $1,700,000 working capital adjustment, plus
(minus) actual working capital (deficit), delivered at closing, as defined, in
cash and the assumption of certain liabilities that are related to the ongoing
operations of the Company. The APA requires that $5,336,000 of the cash to be
delivered at
6
<PAGE>
Closing be deposited into an escrow account to satisfy indemnification
obligations (if any) of the Company which may arise under the APA. The
provisions of the escrow agreement provide for release of funds in varying
amounts on the six-, twelve- and eighteenth- month anniversary of the closing
date. After payment of all outstanding debt and redemption of its preferred
stock the Company believes the proceeds from the sale will not represent a
premium to current market capitalization. The purchase price is subject to
adjustments and indemnifications as provided in the APA. The APA requires the
Company to pay a break-up fee of $1,500,000 in the event this agreement is
terminated by the Company, if the Company were to accept a superior proposal for
the sale of the assets or otherwise. The Company has agreed not to compete in
the snack food industry without the consent of BF USB, and does not plan to
operate in the snack food industry after consummation of the asset sale. The
Company's Board of Directors is exploring its alternatives and opportunities and
may seek to enter into a new line of business after the closing of the asset
sale; however, the Board of Directors has not identified any new business at
present and if the Board of Directors does not successfully identify a new line
of business, it may seek to sell or liquidate the Company and pay out the net
cash to its shareholders.
Additionally, the sale is subject to regulatory approval. This
transaction is subject to satisfaction of various conditions, Hart Scott Rodino
Act approval, and other governmental approvals and the obtaining of all
necessary consents. Delicious has received an opinion from its financial
advisor, Valuemetrics, Inc., that the amount of consideration to be received by
the Company is fair from a financial perspective.
The transaction has been approved by a majority of the Company's
shareholders and an Information Statement as filed with the Securities and
Exchange Commission ("SEC") on Schedule 14C on May 3, 2000 was mailed to all
shareholders of record as of April 14, 2000 on or about May 5, 2000.
The Company's auditors have questioned the ability of the Company to
continue as a going concern due to recurring losses from operations, a
significant net working capital deficit and the fact that the Company's existing
revolving line of credit will not be renewed beyond June, 15, 2000. Although
management believes that the Company will continue operations until the pending
asset sale described above is completed, there is no guarantee that the Company
can remain viable until the conclusion of the pending transaction .
There can be no assurance that the Company will successfully
complete the transaction contemplated in the APA or, if such transaction is
completed, the Company will have funds sufficient to meet its obligations.
Should the Company be unable to complete the transaction discussed above, the
Company will likely need to seek another buyer, raise additional debt or equity
financing and/or curtail its operations.
Results of Operations
The Company's auditors have questioned the ability of the Company to
continue as a going concern due to recurring losses from operations, a
significant net working capital deficit and the fact that the Company's existing
revolving line of credit will not be renewed beyond June 15, 2000. Although
management believes that the Company will continue operations until the pending
asset sale is completed, there is no guarantee that the Company can remain
viable until the conclusion of the pending transaction. 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.
Net Sales. Net sales decreased 48% to $6.4 million for the three months ended
March 31, 2000. Delicious brand product sales decreased 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, lower volume sales and a higher gross
margin. Effective August 2, 1999 the Company terminated business with its
largest distributor of Delicious brand products due to poor performance. The
distributor represented approximately 15% of the Company's sales during 1998.
While the Company has replaced this distributor with new distributors, the
Company
7
<PAGE>
continues to experience a decline in sales. In response to the termination of
this distributor, the owner ceased carrying the Company's products in their
other divisions. Also during 1999, industry consolidation led to several major
customers being purchased by competitors and the loss of sales. Salerno brand
product sales declined primarily as a result of reduced sales to grocery chains,
caused by increased competition, in two regions of the country. Sales were
negatively affected by the Company's inability to obtain inventory, as discussed
in "Liquidity and Capital Resources" below.
Gross Profit. Gross profit decreased 39.3% to $1.7 million for the three months
ended March 31, 2000. The gross profit decrease, $1.1 million, resulted
primarily from the sales reduction discussed above. Gross profit as a percentage
of sales increased 3.6%, primarily as a result of Salerno's gross profit
increasing 6%. Salerno's gross profit increased as a result of a 3% price
increase effective in January and reduced promotional allowances. Delicious and
Frookie gross profit declined. Delicious gross profit declined 5% as competition
in promotionally priced cookies resulted in heavier promotional expenses.
Selling, General and Administrative Expenses. The selling, general and
administrative expenses decrease, $840,000, resulted primarily from lower
selling expenses related to reduced sales and lower promotional expenses.
Other Income (Expense) Other expenses increased 20.2% to $194,000 for the three
months ended March 31, 2000. This increase was primarily due to higher interest
expense related to increased borrowings.
Provision for Income Tax. The provision for income tax for the three months
ended March 31, 2000 was zero, as a result of there being a net operating loss
for the period for which a valuation allowance was provided to reduce the tax
benefit of this loss. The valuation allowance increase for the three months
ended March 31, 2000 was $610,000. The valuation allowance increase was
primarily due to the future 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 33.3% to $1.6 million for the three months ended
March 31, 2000 and was a result of the factors discussed above.
Liquidity and Capital Resources
Currently, the Company has insufficient funds for its needs. The
Company is seeking funds from the sale of certain assets and liabilities (see
"Recent History" for previous discussion); however, this transaction is subject
to satisfaction of various conditions, including the approval of a majority of
the shareholders of the Company, Hart Scott Rodino Act approval, other
governmental approvals and obtaining all necessary consents. There is no
assurance that this transaction will be completed and that an alternate source
of 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
or sell substantially all its assets, the Company's business will be materially
adversely affected.
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 1999.
Consequently, additions to property and equipment are not expected to be
material in future periods.
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 were applied by the Company to primarily reduce outstanding
trade payables balances.
8
<PAGE>
Each share of Series B Preferred Stock is currently convertible into
approximately seven 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 warrant
was exercised on April 7, 2000.
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, and expects to repay the notes as funds become available.
On August 18, 1999, the Company issued promissory notes in the
aggregate principal amount of $360,000 (the "Notes"). Interest on the Notes
accrues at a rate of 10% per annum. A Note in the principal amount of $250,000
was converted at the holder's request to an 8% Note (as defined below) on August
30, 1999. The remaining Note in the principal amount of $110,000, along with all
accrued interest on the Note, was paid on September 3, 1999.
On August 30, 1999, the Company issued an 8% non-negotiable
unsecured convertible promissory note in the principal amount of $5,250,000 (the
"8% Notes"). The 8% Notes and accrued interest thereon are due and payable one
year from 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.
On December 23, 1999, the Company consummated an initial closing of
a private placement to which it issued an aggregate of 170,038 share of 12%
Cumulative Series C Preferred Stock for an aggregate price of $3,401,000. The
net proceeds of $2,993,000 were applied by the Company to increase cash balances
and reduce outstanding trade payable balances.
On January 7, 2000, the Company consummated a second closing of a
private placement to which it issued an aggregate of 83,625 shares of 12%
Cumulative Series C Preferred Stock for an aggregate price of $1,673,000. The
net proceeds of $1,467,000 were applied by the Company to increase cash balances
and reduce outstanding trade payable balances.
On April 6, 2000, the Company consummated the closing of a private
placement to which it issued an aggregate 100,000 shares of 12% Cumulative
Series D Preferred Stock for an aggregate price of $2,000,000. The net proceeds
of $1,725,000 were used as follows: (1) $500,000 was deposited into a special
escrow reserve account related to the pending asset sale of the Company (see
"Recent History" for previous discussion), and (2) $1,225,000 to increase cash
balances, paydown the bank loan and reduce outstanding trade payable balances.
During January through March, the Company was unable to obtain all
the inventory needed to fill customer orders, due to many of its vendors
requiring C.O.D. terms. All vendors continue to ship inventory.
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.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
9
<PAGE>
At March 31, 2000, 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.
10
<PAGE>
Part II: Other Information
Item 1: Legal Proceedings
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 and
currently does not have funds to repay such amounts. The Company believes its
credit facility with U.S. Bancorp prohibits repayment of the principal portion
of these subordinated notes. One of the noteholders has filed a lawsuit against
the Company seeking repayment of his note.
On October 9, 1999 one of the Company's suppliers filed suit against
the Company in the Circuit Court of Cook County, Illinois claiming breach of
contract and bad faith dealing. The Company answered the complaint and filed a
counterclaim for breach of contract due to poor quality of products. The Company
continues to do business with this supplier; however, the Company has terminated
its contract with this supplier. In the opinion of management, this suit is
without merit but unfavorable disposition could have a material effect on the
Company's financial position, results of operations or liquidity. In addition,
from time to time, the Company may be subject to claims and lawsuits arising in
the normal course of business.
Item 2: Changes in Securities and Use of Proceeds
(1.c.) The following unregistered securities were issued by the Company during
the three months ended March 31, 2000:
<TABLE>
<CAPTION>
Description of Number of Shares Exercise Price
Date of Issuance Securities Issued Issued or Subject to Options per Share
---------------- ----------------- ---------------------------- ---------
<S> <C> <C> <C> <C>
1/1/00 Common Stock Options 4,500 $1.50
1/7/00 Cumulative Series C Preferred Stock 83,625 $20.00
3/24/00 Cumulative Series D Preferred Stock 100,000 $20.00
</TABLE>
All of the above options were granted to non-employee directors
pursuant to the 1994 Formula Stock Option Plan. These options have a
vesting period of three years and a life of ten years.
Each share of Series C and Series D Preferred Stock is convertible into
ten shares of Common Stock and pays an annual dividend of 12%. A
commission of 26,163 shares of Series C Preferred Stock and $68,000
were paid to two placement agents in connection with the Series C
Cumulative Preferred Stock. A commission of $210,000 was paid to two
placement agents in connection with the Series D Cumulative Preferred
Stock.
The issuance of these securities is claimed to be exempt from
registration pursuant to Section 4(2) of the Securities of Act of 1933,
as amended, as transactions by an issuer not involving a public
offering.
Item 4: Submission of Matters to Vote of Security Holders:
The consent of a majority of Security Holders was obtained to enter
into the Asset Purchase Agreement, discussed herein and to change the Company's
name to Next Generation Technology Holdings, Inc. See the Company's Schedule 14C
filed with the SEC on May 3, 2000 incorporated herein by reference.
Item 6: Exhibits and reports on Form 8-K:
a) Exhibits: 27 - Financial Data Schedule
b) A Form 8-K was filed on February 1, 2000.
11
<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)
May 22, 2000 /s/ Thomas J. Guinan
- ------------------------ ----------------------------------------------
Date Thomas J. Guinan
President, Director and
Chief Executive Officer
May 22, 2000 /s/ Jeffry W. Weiner
- ------------------------ ----------------------------------------------
Date Jeffry W. Weiner
Executive Vice President and
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS A SUMMARY OF FINANCIAL INFORMATION EXTRACTED FROM
DELICIOUS BRANDS, INC. FINANCIAL STATEMENT AS OF MARCH 31, 2000 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,739,694
<ALLOWANCES> 2,671,881
<INVENTORY> 851,840
<CURRENT-ASSETS> 3,084,747
<PP&E> 1,020,735
<DEPRECIATION> 798,192
<TOTAL-ASSETS> 13,231,731
<CURRENT-LIABILITIES> 11,858,944
<BONDS> 0
0
9,289,928
<COMMON> 47,460
<OTHER-SE> (8,243,322)
<TOTAL-LIABILITY-AND-EQUITY> 13,231,731
<SALES> 6,364,855
<TOTAL-REVENUES> 6,364,855
<CGS> 4,663,671
<TOTAL-COSTS> 4,663,671
<OTHER-EXPENSES> 3,064,837
<LOSS-PROVISION> 18,000
<INTEREST-EXPENSE> 193,877
<INCOME-PRETAX> (1,563,926)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,563,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,563,926)
<EPS-BASIC> (.33)
<EPS-DILUTED> (.33)
</TABLE>
